In our previous articles on navigating the complexities of EU sustainability legislation, we underscored the pivotal role of businesses in the global supply chain. We’ll now shift our attention from how the supply chain can embrace sustainability principles to the important related topics of transparency and traceability.
Even for small and medium-sized enterprises (SMEs), it is now becoming essential to understand and implement comprehensive transparency and traceability measures. As industries globally acknowledge the urgent need to reduce carbon emissions and mitigate climate change impacts, supply chain transparency is crucial in achieving sustainability as well as maintaining resilience and competitiveness in a constantly evolving marketplace. This article will delve into the significance of supply chain transparency, explain why it is crucial for SMEs to understand its implications, and provide actionable insights to navigate this terrain effectively.
Why is it important for SMEs to understand supply chain transparency?
To facilitate transparency in its supply chains, the European Union introduced the Digital Product Passport (DPP) initiative in 2019 as part of its Green Deal. DPPs provide a mechanism for collecting and sharing comprehensive product information to promote sustainable design, production, and a transition to a circular economy. Thanks to the EU’s incoming Ecodesign for Sustainable Products Regulation (ESPR), these measures are going to be required for supply chains to comply with the law. Its full implementation will affect all European companies and non-EU entities operating within the EU. Compliance will eventually be mandated for most physical products, but it is being rolled out in a staggered manner, first applying to batteries from 2025, then apparel, and consumer electronics in 2026. DPPs will eventually be required for roughly 30 product categories by 2030.
Proposed model of DPP for the textile industry by EPRS (European Parliamentary Research Service). Source: European Parliamentary Research Service, 2024.
Supply chain transparency is crucial because it is a prerequisite for achieving humanity’s shared sustainability goals in this globalised and hyper-networked age. In today’s business landscape, supply chain sustainability is paramount, driven by various stakeholders across the breadth of society, including consumers, governments, investors, non-governmental organisations, and other third parties. These stakeholders increasingly demand more significant social and environmental responsibility from businesses, with studies showing a willingness to pay premium prices for products from companies that demonstrate responsibility and sustainability. Credibly demonstrating these requires transparency about matters that businesses would previously have treated as confidential. Additionally, transparently sharing emissions data within the value chain is critical to the decarbonization process necessitated by the global effort to avoid catastrophic climate change, as codified in the Paris Agreement. International legislation such as the EU’s CBAM, CSRD, ESPR, and CSDDD are making it imperative for large businesses to optimise their supply chains, since those account for most of their emissions. The upside for your business is that taking the lead in sustainability and transparency will provide you a competitive advantage. Furthermore, consumers are willing to pay 2% to 10% more for products from companies that provide greater supply chain transparency, as confirmed by a study by the MIT Sloan School of Management.
As a study by the OECD underscores, engaging in transparent supply chains can offer other significant advantages for SMEs. SMEs can gain improved access to innovation assets, skills, and financial resources by participating in more resilient, sustainable, and circular supply chains. Additionally, they stand to benefit from increased exposure to international knowledge sharing and have the potential to capitalize on market opportunities within specialized segments of global value chains (GVCs).
Despite the benefits and growing importance of transparency, many companies, particularly SMEs, face challenges in adopting its principles, slowing down the transition. The Harvard Business Review revealed that supply chain transparency faces hurdles because traditional supply chains were not built for openness. Many companies worry that sharing too much information might harm their competitiveness or invite criticism. Also, collecting accurate data about upstream practices can be difficult.
What does supply chain transparency mean in practice?
The Harvard Business Review defines supply chain transparency as the practice of understanding and communicating information about a supply chain’s processes, origins, and conditions. It involves having visibility into sourcing, manufacturing, and distribution activities and sharing this information internally and externally. Increasing consumer demand and regulatory requirements make transparency crucial for businesses to mitigate risks and meet expectations. For SMEs, supply chain transparency may entail disclosing information about where products or services come from, how they’re made, and their effects on the environment and society from start to finish.
For example, a small clothing company looking to improve its supply chain transparency may disclose the following by creating a webpage detailing its sourcing and production practices:
- the origin of materials used;
- descriptions of production processes;
- guarantees of fair labour practices;
- quantified environmental impacts; and
- commitments to regular updates on sustainability efforts.
Transparency in the supply chain builds trust with consumers who value ethical and sustainable practices and empowers employees to make informed decisions aligned with the company’s values and goals.
What do SMEs need to do to achieve supply chain transparency?
As SMEs venture into the realm of achieving supply chain transparency, they face key milestones crucial for nurturing ethical and sustainable practices. The following are some recommended actions suitable for SMEs that can foster openness, help make informed decisions, and cultivate trust within their networks.
- Enable understanding: Ensure that everyone involved understands the environmental, social, and economic aspects of your products, enabling them to make better decisions. For example, a small food manufacturer could conduct training sessions covering…
- reducing carbon emissions;
- ensuring fair labour practices; and
- optimizing supply chain efficiency.
- Know your own supply chain: Understand what’s happening at every production stage, even before materials or goods are received, and document and track this information effectively. For example, a small electronics company could implement a supply chain management system to track production stages from raw materials to finished products, using it to…
- assess suppliers against quality and ethical standards;
- provide traceability for inventory;
- monitor real-time processes; and
- analyse data for optimisation.
- Understand related legislation: Legislation related to supply chain transparency aim to ensure fair practices, ethical sourcing, and accountability throughout the supply chain. For SMEs, these laws provide a framework for conducting business responsibly, which is increasingly importing for accessing regulated markets and capital. By understanding and complying with legislation, SMEs enhance their credibility, attract socially conscious consumers, avoid fines for non-compliance, and mitigate risks associated with unethical practices. Additionally, such legislation fosters collaboration and trust among supply chain partners, leading to greater overall transparency, efficiency, and sustainability in the global marketplace.
- Communicate clearly: Share this knowledge clearly and transparently within the company and with external partners and customers to ensure everyone understands how products are sourced and made. For example: A small clothing company communicates transparently within the company and with external partners and customers about how its products are sourced and made, including clear information on material origins, production processes, and sustainability practices.
- Select and adopt appropriate technology for collaboration: There are many digital technological solutions and providers available to help ensure supply chain transparency. These range from established ERP and procurement management systems to emerging technologies based on IoT (“the Internet of Things”), digital twins, and blockchain. All businesses, including SMEs, can benefit from data analytics solutions that streamline data sharing and communication between suppliers, manufacturers, and retailers. For example, a small electronics manufacturer could utilize IoT sensors to enable real-time monitoring of goods and track the movement and conditions of their products as well as blockchain to log secure, immutable records of their supply chain transactions.
Final Notes
- Embracing supply chain transparency is essential for SMEs to comply with regulations, mitigate risks, and maintain competitiveness in the emerging sustainable business landscape.
- Despite challenges, SMEs can benefit significantly from engaging in transparent supply chains and gaining access to innovation assets, skills, and financial resources while simultaneously building trust, enhancing brand reputation, and gaining a competitive edge in the marketplace.
- Supply chain transparency for SMEs entails disclosing information about sourcing, production practices, and environmental and social impacts to build consumer trust and empower informed decision-making.
- To achieve supply chain transparency, SMEs should focus on enabling understanding, knowing their supply chain and relevant legislation, communicating clearly, and adopting and collaborating via technological solutions that automates the collection and provision of necessary data.
If you feel that you have not yet fully understood the implications of supply chain transparency for your business, we encourage you to reach out to us. Join us on this transformative journey. Together, we can create a world where businesses thrive, communities prosper, and our planet flourishes.