Top Supply Chain Trends

A new year sparks an influx of reflections and resolutions, always bringing two questions to the forefront: What did we learn and how can we make the next year better?

Businesses and their supply chains have undoubtedly faced unique challenges in 2022 that brought to light several gaps in responsible sourcing programs. These events, which will continue to evolve and shape the ESG landscape in the coming years, highlighted the need for agility and more strategic implementation.

In our work with more than 300 clients in the past year – from conceptualizing audit tools to designing grievance mechanisms – we have concluded that there were 10 themes that changed responsible sourcing in 2022. When reflecting on these global events and their impact on supply chain practices, we identify an overarching solution to take into next year’s strategy: know your supply chain and supplier.

Below you will find out how each trend shapes the future landscape for sourcing and how you can apply the lessons from 2022 to truly get to know your supplier.

Political Instability

This year showed us that the implications of civil unrest stretch far beyond the war in Ukraine: to other, less broadly covered conflict regions, like Myanmar, and even normally stable jurisdictions, like China and the United States.

The political instability from the past year makes credible on-the-ground engagement more difficult and heightens supply chain risk in areas like child labor, forced labor, and risk associated with migrant workers.

While we can’t control geopolitics, selecting the country and regional patterns of where we source from must consistently factor in the many types of geopolitical disruption that can lead to sourcing failure. These choices matter and can’t simply be made without rigorously stress testing them.

Covid-19

During the last year, we saw the world gradually shift to learning how to live with Covid-19. However, the return to a “new normal” was uneven and bumpy throughout different regions. The most notable distinction came from China, a country that imposed some of the most stringent Covid-19 measures, even as the rest of the world seemingly opened back up.

The disconnect wreaked havoc on many supply chain operations. Ad hoc city-wide lockdowns impacted travel and greatly reduced access to supplier facilities. It also limited international access, preventing buying teams from being able to visit local offices or suppliers for prolonged periods.

While China has started to abandon its Zero-Covid policy, the new wave of outbreaks will continue to have implications on operations throughout 2023.

What did we learn in 2022? From an operations standpoint, systemic illness must be factored into your supply chain planning processes – one day there will be another pandemic, likely when we least expect it. And we learned that in a challenging production environment, as we experienced beginning in early 2020, on the ground supplier engagement is vital and more important than ever.

Climate Change

Droughts and extreme weather events increasingly influenced the intersection of business and society. The climate change crisis, which continues to worsen, is expected to have a greater impact on your supply and has potential for financial impact.

Climate change affects supply chain policies as well. In 2022, we saw considerable pressure on governments and the private sector to continue to decarbonize operations, while taking steps to adapt their business and life to climate shifts and a warming planet.

Learnings? It has become increasingly more important that you look at the impact of climate change on your supply chain. Do what needs to be done to get confidence in your Scope 3 emissions, set science-based targets and communicate them. With greater action and passion, target Net Zero.

Our belief that environmental issues and social issues must now be considered together was reaffirmed in 2022. At ELEVATE and LRQA, we continue to believe that there is a long way to go, but we are convinced that we can help you turn this climate-change risk into an opportunity through program redesign.

Economic Disruption

Economic disruptions took shape in some of the worst forms this year through inflation, rising interest rates, supply chain disruptions, weaker demand and labor shortages. Rising prices most prominently impacted consumer behavior as buyers changed both how they manage their finances and their shopping habits.

What should we learn from this? McKinsey & Company recently asked business leaders what they are doing to prepare in the midst of economic disruption.

The lists include tracking five key items: (1) technological innovation; (2) energy and natural resource considerations; (3) financial and economic changes associated with debt, currency fluctuation; (4) new economic growth and where; and (5) demographic changes such as the aging population.

Added funding pressures mean proper risk assessment and program resilience has never been more crucial to avoid added financial burdens from risky suppliers or ESG violations.

Rising Legislation

Forced labor due diligence laws came into force in 2022, with a vengeance. The list of new laws is long and growing. As a result, certain sectors and companies have learned firsthand what happens when there is a perceived or real violation of the law. Goods are detained, excluded or seized.

These laws around the world have meaningful penalties that influence a company’s balance sheet, financial performance, and reputation amongst important stakeholders from shareholders to customers, activist organizations and to current and prospective employees.

These challenges mean that companies are now compelled to implement risk-based, segmented responsible sourcing program designs that are focused on visibility and transparency, (especially for the most material suppliers), and a more aggressive approach to understanding and managing suppliers. The need for more robust responsible sourcing programs is clear.

Suppliers Face Mounting Pressure

Increases in legislation have demanded further due diligence from the top down, creating mounting pressure on suppliers. Suppliers are feeling the heat to stay profitable and positive despite increased demands.

Supply chain disruptions, inflation, and the enhanced microscope on working conditions have challenged suppliers with currency fluctuations and added compliance costs. We find these challenges can lead to various social issues, specifically increased risk of lower wages and higher working hours for workers as suppliers try to compensate for increasing costs.

How can you stay ahead of potential supplier risks? We know first and foremost that the frequency at which managers monitor their programs must increase immensely; long gone are the days of once-a-year checks and surface-level assessments. We advise a complete mindset shift, from reactive to proactive and deepening your approach to risk identification and internal reporting.

Artificial Intelligence platforms like EiQ and media alert tools like Sentinel help close the gap between on-the-ground audits and allow for a more engaged approach to risk monitoring. Building more local knowledge from your production markets contribute to truly “knowing your supplier.”

Audit Transparency Takes a Hit

Transparency continues to be one of the most vital components of a resilient responsible sourcing program – and one of the biggest challenges. “Audit deception,” the term coined for misrepresentation of audit data, has been a persistent issue and is fueled further by this past year’s events.

With the pandemic and supply chain disruptions, the transparency rate from key supplier markets has seen a massive drop in the last three years. Factory managers often falsify data, do not disclose information, or coach their workers on how to answer questions during audits.

Factories falsifying records typically see 45% more critical violations (which include abuses, forced and child labor, structural integrity) than transparent factories, according to ELEVATE data. When transparency is low, retailers and brands are vulnerable to significant risks in their supply chain slipping under the radar.

Mitigating this risk requires intense scrutiny of on-site practices. Industry schemes and mutual recognition should be questioned and examined, as it is more difficult to ensure quality assessments are being conducted to the standard required. Companies need to think differently about buying practices and focus on ensuring objectivity during the assessment process.

Need for Expanded Scope

Traceability is no longer just a trendy word in the ESG space, but a specific end-to-end mandate required of your program.

Supply chain risks will continue to evolve and increase, and legislation will likely spread, calling into question the breadth of your suppliers and depth of your program. The trajectory of this trend could lead to needing to track down to the raw material source.

These expanded expectations may put your existing teams under pressure or go beyond skill sets. This trend will only continue as the use of artificial intelligence expands in the ESG world and legislation is rolled out.

The solution for this expanded scope lies in the quality of your data and use of external sources. ELEVATE’s program is centered around transparent, robust data, follow-up assessments for suppliers, monitoring and remediation efforts, and artificial intelligence programs.

Trying to do more due diligence with less support in these areas is no longer viable to meet the new requirements going into 2023.

Technology Takeover

There are more tools tailored to responsible sourcing than ever before and this development is making it easier to stay ahead of the complex ESG challenges rearing their fists at supply chains.

Risk-based program design with geographic, product and controversy analysis is now the new normal.

This shift requires a data-driven, integrated way of thinking with reporting and supplier management. We should go beyond the old scoring methods based on supplier non-compliances and instead plan for dynamic, near real-time supplier scoring based on all available data points.

Talent Exposition

This year has ultimately shown that a new level of rigor is required to implement, manage and enforce your program. Whereas ESG was previously seen as a “nice to have,” it has now become mainstream and continues to scale.

More legislation and regulation are expected in the coming years and will require independent assurance and external reporting,

Deeper levels of technical skills are required to manage platforms and implement traceability requirements, meaning responsible sourcing teams will need access to industry-specific supply chain technical knowledge.

The work you do will need to be data-generating, replicable and aligned with assurance protocols. This adjustment requires recruiting more talent, acquiring more assets, and building more expertise to develop a well-rounded, efficient team.

While the ESG and supply chain due diligence process looks vastly different as we head into 2023, the goal remains the same: coming together as an industry to work toward enhancing business-driven sustainability and ensuring a better future.

Read our full report on this year’s trends here.