Supply chains: only as strong as the weakest link

In this month’s video and blog Investment Specialist, Kirsty Clark comments on the hidden costs of complex global supply chains, increasing awareness of the social and environmental costs, and growing calls for greater transparency.  

 

Despite the growth in new coronavirus cases globally, optimism surrounding vaccine progress buoyed investor sentiment in July. A raft of economic and earnings data also surprised to the upside, leaving global equities up more than 40% from their March lows.

The MSCI AC World Index delivered solid returns, up 5.3%, in US dollar terms. On a regional basis, Emerging Markets continued to lead the gains. Asia ex Japan also outperformed as stronger export and PMI data pointed to a continued pick-up in activity. Despite weaker GDP data, US equities outperformed, as the FAANG stocks continued to soar. The UK, Europe and Japan were the regional laggards in July.

Gold rallied to a new high as the US Fed left interest rates unchanged while also warning of the ongoing impact of the virus on the pace of economic recovery. US 10-year treasuries gained ground, while the dollar weakened versus a basket of currencies. Elsewhere, German and Italian 10-year government bonds rallied, and high yield bonds also performed well.

At a sector level, consumer discretionary and materials were the strongest performers. Tech stocks also outperformed, with industry heavyweights leading the charge. The US tech giants, in particular, raised eyebrows after reporting sizeable quarterly earnings beats a day after appearing at a congressional antitrust hearing, and despite a shrinking US economy.

Energy stocks were the relative laggards over the month, as companies registered steep second-quarter losses. Financials were also weak.

While investors will welcome the more positive earnings data, we may see these figures rolling over in the coming months if sentiment remains fragile and further localised virus outbreaks derail phased re-openings.

With our high streets struggling to attract visitors, due to reduced footfall amid lockdowns and stringent re-opening measures, many companies are having to innovate to survive.

Companies with an improved online presence have benefited to date but, beyond this growth in ‘e-commerce’, has COVID-19 reignited ESG concerns among consumers, and have supply-chain transparency issues prompted a broader shift in consumer preferences?

Recent coverage of labour exploitation and unregulated working practices has highlighted the ongoing issues with transparency in global supply chains.

From allegations of labour abuses at Leicester-based factories in the UK, to the death of over 1,000 workers in a garment factory collapse in Bangladesh, to a Europe-wide ‘horsemeat scandal’ – these examples point to the need for greater transparency – across industries – to monitor standards and provide adequate oversight.

While consumers are becoming increasingly aware of the potential social and environmental impacts of their purchasing habits, does this awareness translate into meaningful action?

A recent study by researchers at MIT Sloan School of Management suggests that ‘consumer trust’ improves with increased supply-chain visibility, and that consumers may be willing to pay 2% to 10% more for products from companies providing greater supply-chain transparency. [1]

Examples of companies leading the way include outdoor apparel retailer Patagonia; with its ‘Footprint Chronicles’ it maps the raw materials, mills and factories that make Patagonia products, and drills down into details about suppliers’ operations and staff.

In the UK, Marks & Spencer is also an early mover; with its interactive map showing detailed information about factories, employees, engagement initiatives and traceability of food products – such as beef, for example, where DNA-tracing technology is employed.

Collaboration is also crucial. Patagonia is well known for its engagement efforts, not least with suppliers in fabric mills in Asia to improve conditions for foreign migrant workers [2].

In the UK, the business-led ‘Stronger Together’ initiative brings together 11 of the country’s largest supermarkets and retailers [3] in a bid to eradicate labour exploitation and modern slavery.

So a number of firms are taking action to foster best practice and improve supply-chain transparency, but the landscape remains challenging. A 2016 Hult Research study found that 77% of leading retail brands (when interviewed anonymously) thought it likely that modern slavery occurred in their supply chains [4].

Global supply chains are complex, and many companies speak to the time and resources required to effectively trace their supply chains. To help reduce costs, rather than conducting on-site and third-party audits of suppliers, for instance, some companies are now using mobile-enabled data gathering techniques, which are more cost effective and offer the advantage of real-time data and confidentiality. Indeed, companies are increasingly employing or developing technologies to improve transparency and help mitigate future risk.

While challenges remain, as demand for greater visibility grows, so too does the reputational risk for companies falling foul of consumer and stakeholder expectations.

Regulation has had some impact, with companies in the same study confirming that actions have been taken in response to evolving regulations, but enforcement remains weak and more needs to be done.

The route to healthier business practices and greater visibility in supply chains relies on action from multiple stakeholders including consumers, governments, NGOs, investors, and the companies themselves.

The return on company efforts to improve supply-chain transparency will vary with each business model and industry, but there are broad benefits that most companies should be able to capture, not least – keeping pace with regulations, reducing reputational risk, engendering consumer and stakeholder trust, and fostering employee loyalty.


[1] https://hbr.org/2019/08/what-supply-chain-transparency-really-means

[2] https://www.patagonia.com/our-footprint/migrant-workers.html

[3] Aldi, Asda, Co-op, Lidl, Marks & Spencer, Morrisons, Ocado, Sainsbury’s, Selfridges, Tesco and Waitrose & Partners.

[4] The Ethical Trading Initiative and Ashridge Hult Business School (2016)


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