How blockchain can enhance transparency and accountability between participants

In previous papers in this series, we’ve looked at the broad challenges faced in the supply chain, and at how blockchain technology can address them. We’ve also looked specifically at traceability.

Damien de Chillaz, Head of Blockchain & B2B Platforms, Business Services

Edouard Morio de l’Isle
Edouard Morio de l’Isle, Blockchain & B2B Platforms Business Development, Capgemini’s Business Services

Bahar Gidwani
Bahar Gidwani, Co-founder, CTO, CSRHub

 

This time we’re focusing on the relationship between the buyers, their suppliers, and other participants in the supply chain. As the title of this paper says, we’re also looking at how blockchain can enhance transparency and accountability between all these players.

Know your supplier (KYS)

Major organizations these days maintain highly complex webs of suppliers. They may be in different tiers – organized, for example, by geography, or by the nature of the product or service they provide. They will also, almost certainly, be at different levels, too: an engine manufacturer doesn’t make its own steel, and a dressmaking supplier probably won’t make its own buttons.

All of this makes it hard for enterprises not only to reach and understand all these suppliers, in their many tiers and at their many levels, but to maintain up-to-date information about them. Creating and maintaining a supply chain map will improve control, and will help organizations to see potential problems early, react to them, assess their risk, and take decisions promptly. The COVID-19 outbreak has heightened the need. As the Harvard Business Review said recently, “A small minority of companies that invested in mapping their supply networks before the pandemic emerged better prepared. They have better visibility into the structure of their supply chains.”

Just as in consumer markets, the current mantra is “know your customer,” so in the supply chain, it’s more strategically important than ever for organizations to know their suppliers. This, however, can represent a significant data management challenge, and in two ways.

The first is supplier relationship management. Businesses need to have real-time processes in place for onboarding, for requesting updates, and for managing lifecycles and supplier performance.

The second is supplier risk management. Here, businesses need to establish alerts for key performance indicators (KPIs), and to monitor operational risks in areas such as disruption, quality, and creditworthiness. Possibly most critically of all, they need to be mindful of reputational risk, commonly termed ESG (environmental, social, and governance). Managing ESG is growing in strategic significance, sometimes to existential levels: for instance, revelations of slave labor or of habitat destruction in the supply chain could lead to the unmaking of a previously respected brand.

Addressing these two areas is a substantial data management challenge, because all this information must not only be gathered into comprehensive profiles of individual suppliers, but maintained and monitored in real time.

Know your supplier (KYS)

KYS – what’s needed

To manage supplier relationships, there are several prerequisites for data collection:

  • Privacy needs to be designed in, so as to earn suppliers’ trust
  • Outreach needs to be easy. Why make the task laborious?
  • Tools should be user-friendly
  • Processes should be designed so as to avoid the duplication of tasks. Suppliers have to fill out plenty of forms as it is
  • Updates to information should be pushed through from suppliers automatically.

But that’s not all. Everything on the list above needs to be replicable at scale. Major enterprises can have as many as 10,000 or 15,000 suppliers. In order to achieve widespread adoption, data should be pre-filled as much as possible from external sources. Anything that makes life easy increases the chances of it happening.

Also, there should be incentives for suppliers to collaborate. For instance, their profile with a buyer could be presented to them as a “passport.” This means not only that it can be easily used elsewhere, without starting again from the beginning, but also that it acts as a form of endorsement, building the supplier’s credibility, and possibly facilitating access to financing.

With all these supplier relationship management requirements satisfied, organizations will then be able to address their supplier risk management needs, putting real-time risk monitoring measures in place, including alerts and data visualization tools, so they can maintain insight and control.

KYS – what blockchain provides

As we’ve noted in previous papers in this series, blockchain technology is “an open, distributed ledger that can record transactions between two parties efficiently, and in a verifiable and permanent way.”[1] It addresses each of the main “know your supplier’” issues fairly comprehensively:

  • Privacy concerns – blockchain’s cryptography provides peace of mind, ownership and control
  • Manual processing – automation enables smart contracts and cuts down on paperwork
  • Lack of trust – blockchain provides full traceability, enabling an end-to-end audit trail
  • Accountability – blockchain establishes a trusted ID, so everyone can be certain of who is sending information, or requests for information. This facilitates the secure exchange of certificates and verified credentials
  • Lack of visibility – by providing an ecosystem of network connectivity, blockchain facilitates network mapping, and simplifies direct outreach.

KYS – what blockchain provides

Capgemini has developed a blockchain-based asset, called Trusted Data Exchange, designed to bring those benefits in the context of KYS. Trusted Data Exchange establishes private, peer-to-peer communications between buyers and suppliers, each of whom has its own secure and structured vault of data and documents. The identity of each party is firmly established, and the end-to-end, tamper-proof audit trail keeps track of any exchange of information.

In a supply chain environment such as this, processes are streamlined, cost efficiencies are possible, and decisions are actionable faster. All parties fully own their own data, and sharing is based on consent. It can be used to manage workflow traceability (with delivery notes and purchase orders, for example); to establish compliance (of participating businesses, and of their different locations and assets); and to support procurement (for instance, with supply chain financing).

An environment such as this makes supplier onboarding much more straightforward for all parties. Third-party information providers such as general business data sources and specialist certifiers can pre-fill some of the general information and ESG fields on a questionnaire, perhaps leaving for the new supplier’s completion only those fields it may not have been asked to fill by anyone else before. Similarly, certification can be much simpler: buyers can request certifications from their lower-level suppliers either directly or via their Level 1 suppliers in a completely secure and traceable communications channel. Here, too, third-party data specialists can provide statutory compliance and ESG information, reducing the inherent workload for all parties.

What emerges from all this is the goal of the supply chain map, with which this article began. Buyers gain control and oversight of their entire supply chain, across both tiers and levels, enabling them to manage operations and monitor risk. Suppliers gain by knowing they are ratified and trusted by their buyers, by knowing that they can return that trust, and by knowing, too, that remain in control of their own data.

These developments could not have come at a better time. For one thing, as we have noted, the pandemic has created new pressures on the supply chain; and for another, in recent years, major enterprises have grown more aware than ever of public expectations, and have been making significant commitments to sustainable development. It is therefore especially incumbent on supply chain management functions to demonstrate accountability against KPIs such as ESG metrics – and this is clearly something that blockchain can help them to deliver.

Industry focus – apparel

The clothing industry provides an interesting example of how increased supply chain transparency could benefit society.

The Sustainability Accounting Standards Board (SASB) is a US organization that assesses the applicability and reporting of metrics. SASB has indicated that certain aspects of sustainability are material to investors for apparel, accessories, and footwear companies. One of these material aspects is how well these companies monitor their supply chain.

Analysis conducted by CSRHub has shown that clothing companies are doing a good job of reporting several of the metrics SASB identified. However, based on data CSRHub aggregated from hundreds of private sector and public data sources, clothing company supply chain metrics are inconsistent and difficult to verify.

Apparel industry companies and their stakeholders are interested in improving this situation. While apparel companies hope to highlight areas of risk and improve quality and delivery performance, other stakeholders seek to eliminate child slavery, improve working conditions, and encourage participation in apparel supply chains by minority and women-owned businesses.

Recognizing the need to change, a consortium of apparel companies, not-for-profit organizations, government bodies and industry groups have established the Open Apparel Registry (OAR). The OAR’s map already comprises over a hundred buyers, and thousands of supply facilities. Its usefulness has already been demonstrated, even at this early stage, by the ability to log personal protective equipment (PPE) manufacturer data.

However, this effort does not yet incorporate or rely upon blockchain technology. One reason is that OAR data cannot track what buyers bought or what suppliers provided. It is not tied to specific standards. Buyers and suppliers are reluctant to share information that could be of advantage to their competitors.

Blockchain technology would directly address these issues, by establishing a framework that is consistent, comprehensive, and private, enabling individual buyers and the industry as a whole to manage supplier relationships, to manage risk – and to demonstrate to the outside world their determination to act responsibly.

In the next paper in this series, we’ll be considering in more detail how blockchain can automate procure-to-pay in the supply chain. In the meantime, watch a video on “How blockchain can enhance transparency and accountability between participants”.

[1] Iansiti, Marco; Lakhani, Karim R. (January 2017). “The Truth About Blockchain”. Harvard Business Review. Harvard University.