Most apparel executives agree that mapping their supply chains is critical to the success of their sustainability efforts. Yet “good intentions” have not resulted in “tangible transparency outcomes,” a new study says.
In a recent survey of more than 200 brands, retailers, suppliers, manufacturers and sourcing agents in the Asia Pacific, North America and Europe, only 19 percent of respondents claimed to have full visibility of all stakeholders operating across their entire supply chain. An even smaller fraction—15 percent—claimed full traceability of the materials used to create their products.
This is worrisome, particularly when a “tsunami of external forces” is pushing the fashion industry to shape up its social and environmental profile like never before, Vivek Ramachandran, CEO of supply-chain management platform Serai, said at the virtual launch of the report with KPMG last month.
Consumers, for one, are taking an increasing interest in how their clothing is made. Regulatory pressure, in the form of trade sanctions and mandatory due-diligence laws, is also mounting. Then there are the investors and financial institutions that are “skewing their portfolios” toward businesses that can prove their environmental, social and governance—better known as ESG—credentials. These include Serai parent HSBC, which pledged in July to earmark $1 trillion for sustainable loans. “I’m not sure if financing will dry up for non-sustainable sources, but it definitely will become more expensive and it will become less easy to access,” Ramachandran said.
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It’s in these unprecedented times that transparency tools are not going to be a “nice to have” but a “must have” for companies planning to rise to these challenges. Indeed, transparency is a “prerequisite for sustainability” because what you can’t measure can’t be managed, and what you can’t manage can’t be improved on, Ramachandran said.
And if companies don’t nip this in the bud now, they’re going to have to do so “in the near future but just to somebody else’s requirements,” he added. “Forced labor transparency isn’t distinct from carbon transparency. Carbon transparency should not be distinct from water transparency. These issues will conflate; these issues will become one.”
Transparency can also give companies an edge over their competition. Research indicates that businesses with higher sustainability scores have lower capital costs, and improved risk management stemming from greater transparency can lower both insurance rates and the risk of being fined or subjected to other regulatory penalties. According to an analysis by KPMG, the average sustainable apparel business can expect to increase its net profit by up to 1.5 percent if it’s a brand and 2.5 percent for a supplier.
Most fashion executives intuitively know this. Of the companies Serai and KPMG polled, 37.5 percent cited operational excellence as one of the main motivations for improving supply-chain transparency, while 36 percent said it will help them accelerate business goals. Another 30.5 percent said that greater visibility will boost customer engagement, 29 percent said it will shore up internal risk management and 25 percent said it will help them meet demands from shareholders and investors.
The No. 1 reason why fashion companies want to engage with transparency, however? Corporate reputation, which 59 percent of brands and retailers and 52 percent of suppliers singled out as their top motivation, since negative reports can significantly undermine revenues and brand value.
But deeply rooted operating habits, a “fixation” on squeezing margins and the high degree of complexity in today’s apparel supply chains mean that more than half of respondents still employ manual processes to track both visibility and traceability.
“Literally less than one in six companies are adopting fully automated systems with no manual intervention,” Ramachandran said. “And that for me as someone who works in a technology company is quite surprising because we are in 2021 and the technology to solve these problems exists today.”
Serai and KPMG provided four recommendations, foremost of which is internal alignment, meaning that the entire organization needs to be on the same page when setting enterprise-wide transparency goals and the “pursuit of sustainable growth.”
“When we talk to large global brands, the head of sourcing, head of CSR, the head of sustainability, the head of investor relations, the C-suite of the company—everyone has a different definition on why this is important to them and what it means,” he said. “So [a lack of] internal alignment can actually lead to trouble because everyone expects a different outcome and has a different set of outcomes.”
Equally important are collaborative, partnership-driven relationships. These should be established across the entire supply chain and not just with a few stakeholders. “If you are a brand or retailer, collaborating with your suppliers is mandatory because you are not going to get the information you want by just demanding it,” Ramachandran said. “You’re going to have to incentivize; you’re going to have to put it in your suppliers’ best interest. Because if you don’t, suppliers will give you the minimum information that you require.”
All supply-chain stakeholders also need to ensure consistency in the way data is collected, shared and consolidated. This is where Serai can come in. “The industry has evolved with a multitude of data standards,” he said. “Now we are under no illusion that this is going to be standardized anytime soon. But clarity in terms of what data you want, how it’s going to be collected, how it’s going to be shared is the ethos of how Serai has been built: to make it easier to have data coming in from different places, effectively building a universal adapter.”
Finally, fashion companies need to abolish manual processes, replacing them instead with dedicated, scalable systems that collect and disburse information. “The technology to do this exists today,” Ramachandran said. “You don’t need futuristic tech. You don’t need AI that hasn’t been invented. You don’t need an NFT, as cool as those might be.”
“There’s a lot of emphasis on sustainability and transparency now,” he added. “The call of the day [is] we need to do something about it today.”