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Sustainability

Firms will need the tools to test every link in supply chain

Published 23 March 2022 in Sustainability • 6 min read

Over the next decade, one of the most disruptive changes facing companies will be the need to take responsibility for every business in their supply chain, Vivek Ramachandran, CEO of Hong Kong-based digital B2B platform Serai, says in an I by IMD interview. 

 

The next 10 years are going to be revolutionary for global trade. Companies will find themselves having to take responsibility not just for their own actions, but also those of every business involved in the manufacture and movement of their products.  

Consumer pressure and new environmental, social and governance (ESG) regulations will force companies to not just know far more about, but also be held accountable for, what happens at every point in their supply chains. 

Global supply chains have evolved in complexity over decades to meet one primary objective: cost minimization. In meeting this objective, they have been amazingly successful. Products of all kinds can be shipped around the world with incredible efficiency.  

Yet efficiency has masked other shortcomings. One, of course, was a lack of resiliency, as the supply chain crises of the last years have shown all too clearly. But also hugely significant was that those cost savings came at the expense of transparency. Most companies have limited visibility into their supply chains and almost no way of proving the credentials of the partners they are, directly or indirectly, working with.  

Critically, many of the incumbent solution providers supporting global trade flows – among them sourcing agents, risk and financing providers, and logistics companies – have benefited from the markets’ lack of transparency. Newcomers wanting to offer better or different trade services have found it hard to gain access, slowing the pace of disruption.

Better partner knowledge  

Nonetheless, there was clearly an opportunity here to use technology to simplify trade. So along with several other colleagues at HSBC with backgrounds in trade finance and commercial banking I decided to launch a startup centered on helping businesses find and build trusted relationships with new trade partners. 

Trade, of course, has been central to HSBC’s DNA since the bank was established more than a century and a half ago. We saw Serai as being a natural extension of the financial services offered by the bank. The bank bought in, and the company was set up in 2019 in Hong Kong, with an initial focus on the apparel sector. 

We soon found that as well as wanting to know about new partners, businesses also needed help learning about their current trade partners. Most businesses were familiar with the businesses that supplied them directly (their Tier 1 suppliers) and some had reasonable knowledge about their Tier 2 suppliers (businesses that supplied Tier 1). Unfortunately, there was little information about subsequent tiers of suppliers and about their credentials. In fact, a recent survey we conducted confirmed that less than one in five businesses have visibility into their supply chains.  

CEO and founder of Serai
“The world will become a scary place for companies armed only with the information currently available to them.”
- Vivek Ramachandran

Having such information, however, is in the process of very rapidly moving from being “nice-to-have” to “must-have”. Activist consumers are increasingly demanding information on where the clothes they buy are made, the labor conditions under which they are made and the environmental credentials of their manufacturer. 

Officials also are starting to want to know a lot more. At the start of 2021, the US government demanded that importers prove the absence of cotton from Xinjiang in their products. Also last year, Germany passed its Supply Chain Due Diligence Act which will require all businesses with more than 3,000 employees to attest to the absence of forced labour in their supply chains.  

Because of such rules and pressures, businesses not only need to be aware of all the businesses involved in their supply chain, but also be required to prove their credentials and be held accountable for their practices. This pressure will only grow as issues around carbon emissions and water treatment receive the same attention that forced labour has had in the past two years. 

The world will become a scary place for companies armed only with the information about their supply chains they now have. To be able to operate responsibly, ethically and sustainably, as well as profitably, corporate decision makers need to see the full picture.  

This is where supply chain transparency comes in: the ability for businesses to have a good understanding of what is happening upstream in the supply chain and be able to communicate this information both internally and externally. 

Thankfully the technology to simplify this herculean task is available today and ready to use, which is where Serai comes in.

Disruption ahead 

The answer to these new requirements combines being able to gather high-quality data with being able to put that data to work using automated processes. The digital technologies now exist that can handle all the extra work such rules will entail. 

What might be harder to cope with is the business upheaval that will accompany their adoption. A taste of what is to come can be seen in the changes of business-to-consumer (B2C) commerce that have taken place in the last decade, thanks to the rise of platforms and applications that have made e-commerce available to anyone wanting to start a retail business. 

Business-to-business (B2B) trade will go through a similar revolution as collaboration tools are developed for suppliers that both generate more information and simplify the running of their business. 

New businesses will emerge built around using data, information and technology. Serai’s platform is one of these, offering ways to hold and share information with suppliers, customers, officials and other organizations in all parts of the world in whatever format is appropriate. 

With the world finally acknowledging the need to make economies carbon neutral, demands for information, certification and validation are going to become an inevitable part of trade

Old bottles, new wine 

As this happens, we don’t expect the overall pattern of global trade to change. Asia will remain the world’s manufacturing hub. Investment will continue to flow to factories in the region. And brands will continue to source their products from suppliers based there. 

What will change is the internal mechanics of supply chains, with a radical shift in the way they operate. Back in 2019, before the COVID-19 pandemic, when we spoke to companies about information and data, the response of most businesses was to say that they knew they could do better, but as the system wasn’t broken, change wasn’t the imperative. 

Nobody is telling us that today. For the supply chains of the near future, companies are going to have to engage with their suppliers in building transparency. Relationships previously based around in-person meetings that took place several times a year will be replaced with collaboration based around a massive sharing of data. 

Already, some forward-looking companies have taken these ideas on board and are digitizing their processes. Hong Kong-headquartered Epic Group is one such business, working with us to build traceability and prove who is in its cotton supply chain to ensure that every piece of apparel it sells is sourced ethically and sustainably. 

When substantiated with data, that will be an incredibly powerful claim to make to partners, governments, NGOs and consumers.  

No longer will the focus of supply chains be only on the physical movement of goods. Instead, it will also be on the gathering and handling of data and information, and the use that data and information is put to vetting and auditing suppliers, guiding profit-and-loss decision-making, and ensuring full compliance with all the rules governments are going to generate in the coming decades.

Issue 5

Current Issue

Inventory of change

The disruption of production from smartphones to furniture wrought by the COVID-19 pandemic has brought home the importance of global supply chains to every customer. But what have been the fundamental shifts and advancements in supply chain management over the period? Inflation, e-commerce and geopolitcal conflict are all driving change. In Issue V of I by IMD, we explore what is next for supply.

Explore issue VMore about Supply chain

Authors

CEO and founder of Serai

Vivek Ramachandran

CEO and founder of Serai

Vivek Ramachandran is CEO and founder of Serai. Before that, he was HSBC’s Global Head of Growth and Innovation. Educated at Shri Ram College of Commerce in India and Carnegie Mellon University in the US, his career has also included spells working at Lloyds TSB and Barclays. 

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