Enhanced Value Chain Transparency: Managing risks and considering environmental and societal implications for a resilient future
Value chain transparency aims to quantify and drive customer value from upstream supply chain actors. This requires a company to be transparent in their supply chain activities and performance and to be able to communicate the information to downstream stakeholders both internally and externally. Many life sciences companies have good reasons to improve transparency along their value chain. Learn in this article what you should consider and how to proceed with Enhanced Value Chain Transparency.
Historically, supply chains especially in Life Sciences were never designed to be transparent due to the concern by companies that sharing too much information would undermine their competitive advantage. A considerable time gap has ensured the disconnect of a company’s upstream activities with their suppliers and its downstream stakeholders and customers. Globalization has further compounded the complexity as supply chains span more legal jurisdictions and different business practices.
The Life Sciences industry is facing additional challenges due the regulatory environment and the rise of new technologies such as cell & gene and mRNA therapies causing a fragmentation of technologies and the need of new supply chains and new approaches in the product life cycle management. Inflation has risen in the last recent months, leading to higher costs for raw materials, transportation, and labor. This is adding to the price pressure the pharmaceutical industry is already facing and it is unlikely that payers will absorb these cost increases. In the face of these challenges will need to revise their operating model centered around the originator to an end-to-end ecosystem of strategic partners. This will require transparency along the value chain to ensure innovations are delivered to the patient.
To dive deeply into the benefits of increased transparency along the value chain and potential technology support, some key questions need to be covered.
Why is value chain transparency a business imperative?
These days, news about environmental damage, business misconduct, slavery and other human rights violations matter more to consumers. This has led to increased demand for detailed information on organizations’ business practices including the sourcing of raw materials, the commitment to safety, environmental and quality standards. This change in consumption behavior brings supply chain risks much closer to customers and patients.
Shareholders and investors are even more sensitive to this information and may modify their investment decisions to account for the impact on the environment, health, communities, and the world at large.
Regulators are increasing their pressure on corporates to take more responsibility for slavery and other human right abuses and environmental damage along their entire value chain. Some regulations are incentive based and thus voluntary, while others have already doled out massive fines for non-compliance and greenwashing.
Not responding to demands for information regarding environmental impacts, working conditions and company’s purchases imposes major reputational and financial risk on a company.
How does supply chain transparency benefit organizations?
Supply chain transparency becomes an essential process in wholistic risk management of a life science company to ensure resilience and operational excellence in the value chain.
Improving risk management: Greater visibility into supply chain activities supports a company in the identification, capturing or prediction of risks and in the mitigation and remediation of risk events. These risks include environmental disasters and social turmoil such as labor disputes, health crises etc. causing transportation delays, product quality issues and other disruptions. A data-driven approach aimed at increasing transparency can help to protect a company’s ability to deliver products and to safeguard its reputation.
Supporting compliance: New ESG regulations have already been adopted or will be in the near future by many countries and an evolving regulatory environment that’s increasingly stringent can be expected. Proactively approaching requests for better ESG data and hence more detailed information about the value chain has a positive effect on a company’s reputation as a trustworthy partner with a commitment to ethical business conduct. It drives consumer loyalty, improves supplier relationships and access to capital markets focused on ESG investments.
How to generate transparency and identify risk in your supply chain?
Transparency goes beyond gaining visibility into the supply chain. It is a process by which a life science company acts on the insights gained to derive value for customers, patients and partners.
There is not one system or solution which provides supply chain transparency, it is a combination of solutions, approaches, and culture. To generate a value-driven supply chain, one requires robust data, governed by strong stewardship and a trusted partnership of all actors. Efforts to create more transparency can be differentiated into those which aim for compliance, those that focus on capability building to generate transparency and finally those which drive value for the customer, the company, its partners and society at large.
Figure 1: Tools, approaches and technologies used to capture supply chain data and to generate insights and transparency.
Collaboration with suppliers for more transparency is very often limited to compliance. The supplier completes an initial assessment across various risk areas and sustainability expectations. Compliance with these initial commitments is monitored by regular audits. To close the feedback process in case of non-compliance, the supplier needs to provide a mitigation action plan. The audit process is sometimes supplemented with occasional surveys and interviews of the workforce to cover social issues such as work conditions. While audits bring valuable insights, they are mostly limited to Tier 1 suppliers, meaning supply partners with direct business conduct, and even then, they can only deliver snapshots.
The audit process is one avenue to convey feedback to supply partners and is primarily focused on compliance. However, for a frequent data-based exchange, capabilities to share a standardized set of indicators should be established. Accurate real-time data and feedback to suppliers enables suppliers to act and to improve their operations, processes, work conditions, environmental performance, and product quality to reduce costs and ensure ethical business conduct. Good master data quality and governance is a pre-requisite to build a capability to generate and share accurate information on suppliers, inventory levels, production schedules and logistics. With the utilization of supplier relationship management tools, purchasing behavior can be analyzed and forecasted to shorten procurement cycles, and to interact with partners in real time.
How to generate value for customers and patients?
True value for customers and patients is generated when information beyond Tier 1 suppliers is provided. With the integration of Internet of Things (IoT) devices and blockchain capabilities to capture real-time data from the supply chain, such as the condition and location of goods or origin of raw materials, the depth of transparency can be increased beyond Tier 1. By embedding this information into predictive analytics processes; risks, potential issues and disruptors can be identified before they impact the supply chain and downstream stakeholders.
The environmental performance of the supply chain can be elevated by integrating emission data from a company’s supply chain, the so-called Scope 3. The most precise data is of course, direct data from suppliers and ideally on product level. Standards and platforms to exchange environmental information along the supply chain are ever arising. However, current calculations of Scope 3 emissions are largely based on industry averages and other approximations, which can be a roadblock for the decarbonization of the supply chain. All data exchange and calculations are still very much focused on environmental issues. Addressing the regulatory requirements to report on material risks and the impact of the company’s business activities and that of their supply chain on the environment and society will require the same due diligence for social performance.
To understand and measure the business value of societal and environmental impact of companies and their global supply chain, an impact valuation can help to reveal potential risks and exposures. Impact valuation links company spending patterns with macroeconomic and human rights data. This way potential environmental risks and human rights issues can be identified along with where they are most likely to occur, which tier in the supply chain and in which industry sector.
What does the future hold for us?
Enhanced value chain transparency is but one showcase of the many opportunities sustainability can offer to a company if compliance is not the only driver but when it is part of the strategic direction and embedded in operative excellence. This way it can drive value for all actors up- and downstream, foster innovation and help to create a sustainable and resilient supply chain with a culture of trust in a business network of like-minded suppliers, partners, and investors.
A digitally linked supply chain with real-time feedback loops, advanced and predictive analytics and the ability to exchange ESG data and value the impact on environment and society can withstand the domino effects of changes and issues with any supply chain actor. These supply chains are more agile in mitigation and remediation of risk events.