- The COVID-19 pandemic highlighted the fragility of global trade and supply chains.
- Supply chains must become more resilient, but they also need to be adapted to help with issues such as climate change, unfair labor practices and gender inequality.
- That change must start with making trade and supply chains digital so that they can be measured and monitored.
Before the COVID-19 pandemic, few consumers gave much thought to the global manufacturing and delivery system that brought them the goods on store shelves, at gas pumps, or stocked in hospitals and pharmacies. Most of the time, from the consumer perspective, they just worked.
But shortages of key medical goods early in the pandemic, followed by troubles with supply chains that have persisted across a range of items ever since, have left everyone hyper aware of the importance of these global networks. Multiple problems facing people in their daily lives are being explained by “supply chain issues.”
Those responsible for the various industries that rely on or operate within global supply chains were already aware of the fragility of the global trading system before the pandemic. Efforts to offset those deficiencies had been ongoing before the first COVID-19 case was recognized.
The spotlight that the pandemic shone on supply chains has now added to the urgency of those efforts. What’s more, it has highlighted the opportunity to use trade and supply chains to improve a range of vitally important challenges.
The pandemic is like a line in time, with a clear “before” and “after” the changes it wrought, changes which continue today. Now that we are hopefully emerging on the other side of that line in time, the pandemic can be a marker for the moment we started to get serious about the list of challenges we face.
Supply chains must help fight climate change
Many would rank climate change at the top of that list. A 2016 study by McKinsey estimated that more than 80% of greenhouse-gas emissions and more than 90% of the impact of the operations of consumer goods companies on air, land, water, biodiversity, and geological resources came from their supply chains.
It is clear that supply chains need to be a focus for any serious climate change alleviation. But other globally important issues need to be addressed through supply chains too. Better run and more transparent supply chains will also help guarantee that unfair labor practices are weeded out of the global trading system, for example.
One of the first and most important steps in using supply chains to deliver progress on such issues is to learn more about how they work.
No grand scheme led to the creation of global trade. While there are rules and regulations, no one organization controls supply chains and even the multi-national companies at the top of supply chains don’t really fully understand them.
A study on environmental and social standards within supply chains by Verónica H. Villena and and Dennis A. Gioia in the Harvard Business Review in 2020 highlighted that need. It pointed out that while large companies at the top of supply chains may have committed to sustainability in their operations, they can find it virtually impossible to extend that commitment to the outer reaches of their supply chains.
Small supply chain companies are often unaware of standards
And the suppliers at the edge of supply chains are also often in the dark too, in part because they don’t necessarily have the expertise or resources to adhere to whatever standards are expected by consumers and agencies looking at final products. Many may be in countries where regulations are lax, or even non-existent.
A corporation at the consumer end of a supply chain may have committed to being as green as possible in its operations, to equitable gender policies and proper use of labor, but that commitment is somewhat hollow if it doesn’t know what is going on down the length of the chain.
Increasing the transparency of supply chains is key to improving them. We need to know more about who is involved and what is going on at all points in the process.
Improving trade and supply chains was the goal for the Asian Development Bank’s Trade and Supply Chain Finance Program before the pandemic arrived. The program is deeply involved in digitalization, in making trade and supply chains greener and more socially responsible, and in using them as a tool for a wide range of issues.
But as it has for many, the pandemic triggered a re-think of the program’s priorities.
“It isn’t a shifting of gears so much as it is a different way of looking at what we do,” said Trade and Supply Chain Finance Program Head Steven Beck. “Until recently we mostly measured our success in numbers, counting how many transactions we supported and how much they are worth. That is important and that part of our business has expanded rapidly since the pandemic started. Helping to make trade happen in developing Asia means growth for the countries involved. It means more jobs and less poverty.”
But Beck said the opportunity to help shape trade and supply chains into tools for progress across a range of issues can’t be missed.
Supply chains as a vehicle for change on key issues
“We need to highlight the importance of trade and supply chains as a vehicle for substantive change for the environment, and for inclusive workplaces where social and governance issues are respected. Just counting the number of deals we support isn’t enough. That’s why we decided to label what we do in reference to the priorities that need to be addressed, whether our efforts help environmental progress, support better labor standards or whatever. As much as possible, we need to broadcast the reasons for what we do and how those moves line up with the longer-term goals we support at ADB.”
People tend to think of supply chains as a high-tech modern invention. They think of elements such as just-in-time inventory systems and assume entire chains run like that. But in reality, global trade still reflects the practices instituted when the ships that carried goods were powered by sail. Global trade is still mostly analog.
Trade digitalization needs to happen. Shift trade and supply chains into the digital world, away from the ponderous process of paper documentation that exists now, and you have a system that can be better measured, monitored and regulated.
Digitalization will transform trade and supply chains but it won’t be an easy task. All participants in the trade eco-system – exporters, shippers, ports, customs, warehousing/logistics, and importers – need to agree on the standards and protocols to underpin digitalization. The Digital Standards Initiative, created by ADB, Government of Singapore and the International Chamber of Commerce, is working on this now, in partnership with all stakeholders. Common standards are essential and governments need to adopt laws recognizing digital trade documents before we can move the needle materially on digitalization.
To that end, ADB is also involved with a new advisory board formed as part of the Digital Standards Initiative, the Legal Reform Advisory Board. It is bringing together stakeholders to promote and explain the measures that are needed, such as a model digitalization law designed by the United Nations. An industry advisory board under the Digital Standards Initiative is leading the way with private sector stakeholders.
Replacing paper trails with digital ledgers and QR codes rich in information will transform trade by enabling transparency deep into supply chains to make sure they are resilient and ready to handle future challenges.
“We have a range of initiatives to help bring trade and supply chains into the digital world,” said Beck. “We have pilot projects underway helping governments make sure their laws allow for digital documents. Our work with the Digital Standards Initiative is having an impact and we are helping to get environmental and sustainability standards embedded into the entirety of supply chains.”
Trade and supply chains can be tools to combat the challenges of the future, but they first need to be made more transparent, robust and resilient.