Covid-19 and advances in digitisation have accelerated the move towards more planet- and people-friendly procurement practices that will outlive the immediate crisis, reports Oliver Balch
Supply and demand. As basic tenets of business go, it doesn’t get more basic. One party wants to buy something – a car, a carrot, a crowbar, whatever – and another provides it. So the world of trade and commerce goes round.
Or so it did before Covid-19, when border closures, travel restrictions and all manner of other lockdown measures threw the world’s global supply chains into near total disorder.
Initial fears that shelves would run dry have, for the most part, been avoided. But the impact on suppliers, particularly small and medium-sized enterprises (SMEs), has been devastating.
The pandemic has exposed the fragility of a model characterised by high interdependencies globally between leading firms and suppliers
A new report from insurance firm Simply Business estimates the total cost of the pandemic to small UK firms at £69bn. Already, 234,000 have stopped trading, with around one in six (17%) fearing they won’t make it to the end of the year.
The wider outlook is equally grim. Despite spending on durable goods bouncing back “relatively quickly”, the OECD maintains its general prognosis that business is facing the worst economic crisis for over a century.
Its latest monthly assessment sets out the situation starkly: a 15% drop in global trade in the first half of 2020, average industrial output down by more than 20% (over 50% in the case of India), and a projected decrease in global annual GDP of 4.5%.
The effects on suppliers in developing countries have been particularly profound. Global value chains were already fragile prior to the pandemic, given their reliance on offshoring low-value and wage-sensitive activities to poorer countries.
Covid-19 has merely amplified the “profound fault lines” already in the system, observes Piergiuseppe Fortunato, economic affairs officer at Unctad, the United Nations body for trade and development.
The pandemic, he clarifies, has “exposed the fragility of a model characterised by high interdependencies between leading firms and suppliers located across several continents”.
“Fragility” is a term echoed by the Fairtrade Foundation in the UK, which reports devastating effects from the virus on the lives and livelihoods of farmers and other small producers in the Global South. The Kenyan flower industry was dumping 50 tonnes of flowers at the height of the lockdown, resulting in 50,000 workers being sent home without pay.
One of the most vocal supporters of suppliers throughout the crisis has been the International Chamber of Commerce (ICC), which represents more than 45m companies ‒ mostly SMEs ‒ in more than 100 countries.
Now is the time, the ICC suggests, for global supply chain leaders to deliver on more inclusive capitalism
At the outset of the crisis, the ICC launched a campaign to Save Our SMEs, warning that 40-60% of SMEs were at risk of permanent closure. Comprising around 80% of the world’s total businesses and employing 2.8 billion people, SMEs are the backbone of the world economy. The stakes, in short, could not be higher.
In an open letter to large corporations, the ICC pointed out that prior to Covid-19, big business was increasingly talking of the “pressing need” to embrace a more inclusive capitalism. Now is the time, the ICC suggests, for “global supply chain leaders to deliver on this purpose”.
It is a message echoed by Christian Ewert, president of the Belgium-based sustainable trade network, Amfori. According to its own survey of 400 producers in 10 top sourcing countries, 75% of firms have seen demand drop during Covid, and a further 72% has seen buyers cancel orders, often at the last minute.
“Responsible business conduct is the only route that will ensure business relations can be strengthened during a time of crisis. This will not only ensure business continuity where possible, but safeguard human rights and enable human prosperity across global value chains,” he argues.
But, what does responsible business mean in the face of a potential meltdown in global supply chains?
It is a question that the World Business Council for Sustainable Development (WBCSD) posed early on. As part of its Covid-19 Response Project on Vital Supply Chains, it drew up a series of principles by way of a guide to buyers.
Targeted primarily at the food sector, but applicable to all fast-moving consumer goods (FMCG) companies, the list runs from the very specific, such as protecting workers, adapting production facilities, and ensuring cash flow, through to the more general, like encouraging collective leadership, forging partnerships, and “building back better”.
As The Ethical Corporation has been reporting throughout the pandemic, large corporations have evidenced an impressive array of emergency responses to suppliers’ needs.
For small suppliers, the problem is not only whether they receive the cash owed to them, but when they receive it
French food manufacturer Danone, for instance, drew on its own cash flow to provide €300m in financial support to SMEs, farmers and small customers in its value chain. Anglo-Dutch FMCG Unilever earmarked €500m in a similar move.
For small suppliers, the problem is not only whether they receive the cash owed to them, but when; arrive late and it might as well never arrive at all for some.
In response, many FMGCs committed to make payments early or to extend credit to suppliers. Innovations in digital payments have helped considerably here.
Early in the crisis, Danone contracted a specialist digital payment provider to expedite automated payments to its suppliers. The C2FO system, which is also used by the likes of Costco, Air France and Siemens, sees payments accelerated with no changes to the existing settlement process.
Commodity broker Olam operates a similar mobile-based payment system that permits it to get cash into the hands of small, often remotely located farmers. The Olam Direct platform, which counts over 70,000 users in a dozen countries, also comprises digital procurement, digital warehousing, traceability and digital origination services.
Managed through a proprietary app, Olam Direct is also giving the commodity trader a direct means of communicating with its tens of thousands of suppliers about safety issues, another key aspect of companies’ supply-side responses to Covid-19.
“We have been able to issue health advisories and raise awareness about the virus through in-app notifications and news in the farmers’ local language,” notes Siddharth Satpute, Olam head of digital.
Similarly, Zurich-headquartered Barry Callebaut has overhauled its supplier training programme during Covid-19 to focus on hygiene and other safety matters. As with many other big buyers, it also donated personal protection equipment and a range of hygiene products to vulnerable suppliers.
Having clarity on contracts means suppliers can go to banks and show that the L’Oréal contract is going to last for one year or two years
In a neat instance of circularity, the chocolate manufacturer ended up distributing soap to its workforce that it bought from community groups in cocoa-growing areas, formerly part of an income diversification scheme that Barry Callebaut had set up prior to the pandemic.
But the most significant support measures buyers can offer their suppliers is to keep buying from them.
In some case, this has meant offering contract guarantees for the months ahead. French cosmetics giant L’Oréal took just such a step (in addition to “drastically reducing” payment terms).
“Having clarity on contracts [means] that they can go to banks and show that the L’Oréal contract is going to last for one year or two years. This is very important for them,” says Regine Lucas, the firm’s chief procurement officer.
"Pivoting" has also become a very much the in-vogue term, with many FMCG firms (L’Oréal included), switching their own factories to produce sanitising gels and other emergency equipment, and helping their suppliers do likewise.
“We’ve seen companies pivot almost overnight to keep production lines open, to retool factories and then to step in to support employees and suppliers and beyond,” says Euan Murray, chief executive of the Sustainability Consortium.
Not all business responses have been so exemplary. Abrupt cancellation of orders left many suppliers reeling.
In Bangladesh, local garment manufacturers were left with a €5bn hole in their pocket as clothing brands slashed or postponed orders and generally reneged on contract commitments. The result: 348 factories forced to close between April-May 2020 and more than one million people left without work.
The emergence of powerful regional value chains is also a strong probability as developing countries seek to diversify risk
Concerns have also been raised around a potential rise in corruption and other illicit practices as buyers take advantage of market confusion and weaker regulatory oversight. Usurious lending to struggling suppliers, trade-based money laundering and straight bribery are some of the risks flagged by the ICC.
Broadly positive as the report card of consumer goods companies has been to date, the future remains to be written.
What is certain is that global supply chains are going to look very different in the near future, with Covid-19 accelerating existing trends and introducing new ones, and an emphasis by both buyers and suppliers on the notion of resilience.
For starters, expect growth in automation and digitalisation to reverse today’s reliance on offshoring (so-called "reshoring"), says Unctad. The emergence of powerful regional value chains is also a strong probability as developing countries seek to diversify risk and foster their own industrial development. Stricter state regulations aimed at guaranteeing “spillover” benefits for supplier countries could also be on the cards, the UN body warns.
If Covid-19 has taught us anything, it is the need to prepare against endogenous shocks. And not just those related to health. Disruptive events related to everything from climate change and inequality, to race relations and political populism, are driving companies to reconsider their risk matrices.
The Covid boost for ideas of resilience is playing into the hands of those emphasising the importance of sustainable procurement. For years, such advocates have been pointing out the need to factor in threats such as sea-level rises or breakdowns in labour relations, often with little traction. Now, post-Covid, such arguments have an attentive audience.
What is clear is that those in the vanguard of the movement are doubling down on their commitments. Take L’Oréal, which recently set a raft of 2030 targets linked to procurement, including the provision of access to 78,000 people from underprivileged communities through its supply chain.
“Covid has shown us that proximity with suppliers is absolutely key. But it also taught us that we have to invent together the next models in order to face future crises,” says Régine Lucas, the company’s procurement chief.
It would have been the easiest thing to say, ‘let’s pedal back on this, let’s pedal back on that'
A similar reassertion of its supply-related sustainability goals has also occurred at Unilever. Back in June, with Covid turmoil still raging, the Anglo-Dutch FMCG giant released a series of supply chain commitments, including a pledge to reach net-zero emissions from all its products by 2039, “from sourcing to sale”.
It has introduced a regenerative agriculture code for all suppliers, plus a €1bn fund for climate and nature-related investments, among other measures.
As in corporate boardrooms the world over, the Covid outbreak sparked a “big discussion” in Unilever about whether to pause or accelerate its strategic goals, explains Marc Engel, the company’s chief supply chain officer.
“It would have been the easiest thing to say, ‘let’s pedal back on this, let’s pedal back on that',” says Engel. Instead, the company pressed on. Why? “Because it is important to stay focused on the bigger picture, which is the climate and biodiversity crisis and social crises that we are continuing to see.”
US retailer Walmart clearly got the same memo, recently releasing a series of its own ambitious sustainability targets in which regenerative supply chains figure highly. Accompanying the new strategy, which includes a net-zero supply chain by 2040, was the announcement of an extension of its Gigaton PPA programme to all its suppliers. The programme, which is run in conjunction with Schneider Electric, helps Walmart’s supply partners aggregate demand for renewable energy and thus reduce costs. Since 2017, 2,300 suppliers from 50 countries have reported a cumulative saving of 230m metric tonnes of emissions through the initiative.
New, industry-wide supplier initiatives show the extent to which such thinking is breaking through. A notable recent example is the Forest Positive Coalition of Action, launched by the Consumer Goods Forum during the recent Climate Week.
The initiative, which counts the likes of Mars, Nestlé, P&G and Carrefour among its 17 members, sets out to eliminate deforestation once and for all from controversial commodity supply chains such as palm oil and soy. Of the initiative’s four main areas of action, “engage with suppliers” is number one.
Companies embarking on a resilience-based supply chain strategy would do well to acquaint themselves with a recent paper by HSBC and the Sustainability Consortium which focuses on this topic through the prism of climate risks.
Almost no company has planned for the extent to which Covid-19 has caused such extensive disruptions
The 22-page practitioner-oriented report sets out two basic approaches: “bridging”, whereby buyers work collaboratively with suppliers to help increase their capacity to withstand risk events and recover quickly; and “buffering”, which sees buyers employ inventory buffers, lead-time buffers, and similar measures to increase supplier resilience.
“Almost no company has planned for the extent to which Covid-19 has caused such extensive disruptions to daily life around the world, but companies that were thinking more strategically, in the resilient, long-term framework will be the companies that survive,” the report concludes.
One of those “disruption-ready” organisations is the Fairtrade Foundation, whose equitable approach sees, among other benefits, a price premium passed to farmers, leaving them better-placed than many of their peers.
Michael Gidney, the foundation’s chief executive, points to multiple cases where social investments financed through the premium, such as water and hygiene facilities, have helped supplier communities reduce the risk of infection.
This month Fairtrade secured €80,000 from German development agency GIZ to provide food and income security for smallholder cotton farmers fighting the impact of Covid-19 in India.
Gidney argues that future supply chain strategies must tackle the causes behind suppliers’ lack of resilience rather than the symptoms.
“There is a principle here about planning for these kinds of shocks across the long-term and making sure that there is enough investment at the weakest part of the supply chain to build that kind of resilience,” he adds.
His observation makes it clear that "fixing" the supply chain post-Covid will require more than clever management techniques and smarter procurement technologies.
The lesson for me is that when we all actually work together to try and solve something at speed, then we can definitely do it
Insights from the initial stage of the pandemic help here. Companies with close, trust-based relationships with their suppliers have proved infinitely more capable of responding flexibly and acting collaboratively in the face of Covid-19.
Perhaps the most encouraging lesson to have emerged from the Covid crisis is the speed at which radical transformation can occur.
As Pablo Perversi, chief innovation, sustainability and quality officer at Barry Callebaut, reflects: “The lesson for me is that when we all actually work together to try and solve something at speed, then we can definitely do it.”
Building a sustainable supply chain is a social, economic and moral imperative. Success will require companies to remain at emergency levels of energy and attention.
If initial efforts were in response to disaster, let’s hope future efforts can be dictated by design.
Oliver Balch is an independent journalist and writer, specialising on business’s role in society. He has been a regular contributor to The Ethical Corporation since 2004. He also writes for The Guardian among other UK and international media. OIiver recently completed a PhD at Cambridge University, focusing on corporate ethics in foreign investment.
This article is part of the October issue of The Ethical Corporation, on the future of work. To download the digital pdf for free click on the cover below.