Supply chain mapping and n-tier visibility for sustainability: Circulor — To reach the deeper parts of the OEM supply chain that previously had little visibility

As we explained in the first post in our series on what sustainability really means to heads of procurement and the supply chain, this summer Spend Matters is exploring the topic of ESG and sustainability and how it relates to sourcing, the supply market and procurement generally. Having talked to the people driving sustainability in their organizations, we are now talking to a number of experts who are facilitating those efforts through supply chain mapping (SCM) technology.

If you are looking at a tech selection for your supply chain visibility needs, you can get a provider shortlist fast with TechMatch℠.

In general, tracing a product right back to its source and along any nodes of contact through to the consumer means a company can validate its claims of provenance. This is focal to the ESG and sustainability agenda because it highlights all the hands that touched the product on its journey — but it doesn’t work unless all tiers of the supply chain can be made visible.

To understand more fully why SCM is so important to the greater ESG agenda, we spoke with Luise Müller-Hofstede, Client Partner at Circulor, which provides traceability-as-a-service for the parts of complex industrial supply chains that can otherwise be inaccessible. Circulor, originally focused on creating an immutable chain of custody record for materials and battery components, the need for which has skyrocketed of late, has broadened its horizons to customers outside of automotive. We asked her:

Why has it taken so long for n-tier visibility to be taken more seriously and why do we have this dynamic now?

“We can best explain that by using the ‘onion’ metaphor,” she said. “The ‘onion’ has always been there. There have always been questions around sustainability and traceability, maybe shown through a company’s KPIs. Organizations were always aware of their actions towards these goals within their own house and within their own capabilities.

“But now, while slowly peeling back the layers of the onion, we realize there are still more layers underneath. Organizations understand that there are massive opportunities within the supply chain because the bigger impact sits beyond their own four walls.

“They have to look at their entire supply chains because that’s where the real potential to make a difference lies. We must remember that issues around human rights expectations and other ESG-related areas are not the premise of just the big organizations. The challenges lie with the firms that sit in the very upstream part of the supply chain, whose names we may not even know.

“To the second part of that question, ‘why the dynamic has changed,’ I see the answer as twofold:

• Our planet needs us now — the time has come for us to act. People can see the effects of climate change all too readily, take the recent floods in China and Western Europe as one example. The difference now is that we do have the technology to do things we couldn’t do five or 10 years ago. So the need and the opportunity to tackle the challenges are here.
• From a technology point of view, blockchain can play a big part. Now that it has emerged from its birth ties with bitcoin and cryptocurrencies, and all the fog around IPOs, it’s seen very much as a useful technology in aspects of supply chain mapping and visibility. It is tamper-proof in that whatever you record is there forever; to which the downside is that if something was incorrectly recorded that can’t be changed either. And it can handle permissions, dates and data access, which is very important when we are enabling sustainable value chains and visibility. Some firms get very nervous about transparency, so it’s good to have these control mechanisms in place. It means two parties can exchange information without needing to know or even trust each other, because the technology handles the verification of the data for them.”

But can blockchain technology reach inside the practices of the organizations it is linking?

“No it can’t, and I agree that it is not the full answer to n-tier visibility,” she said. “It’s a portion of the requirement. It needs to be used alongside other mechanisms, like machine learning and AI to name the most obvious ones. Audits and certificates have an important role, but they don’t show the whole picture, just the specifics about locations at a particular point of time. It’s traceability that offers end-to-end visibility at any point in time, and once you have that you have a more informed basis on which to place your decision over where to audit, and direct your audits to where they are most necessary and where certification is most needed. The key thing is that we are able to optimize what we did in the past, enable better visibility through technology, and exchange information from the upstream to the downstream.”

So what are the key ingredients to enabling n-tier visibility and collaboration?

“Digitizing documentation or transaction papers doesn’t help sustainability, it just makes other people’s lives easier. So digitization as a proxy for materials traceability is not a key ingredient. What we need is more than a track-and-trace solution. What we do at Circulor is follow the actual materials, with a unique digital identity, as they flow through the supply chain and as they change state through processing and manufacture.

“For us our key ingredient is not tracking, but our geologists and chemists who really understand the recipe and the steps of every part of the supply chain. By knowing what’s supposed to happen at each stage with each participant, and with the help of those organizations, we can determine how a material is flowing through those facilities and at which points they cross, and at these points we install data entry points and collect data that is needed to trace the material. We use other control mechanisms too, such as time tracking, to understand whether the material in fact flows through those data points as it’s supposed to.”

She gives a real example to set the scene: “Let’s take cobalt. If we know that 1 ton of cobalt ore is entering the process at the refinery, we then know that 500kg of cobalt hydroxide is supposed to leave that facility. By understanding that very simple equation, we can add other mechanisms in order to control it. So, if we know the time actually needed to transform that cobalt into cobalt hydroxide, let’s say that’s two days, and we know at which location that is supposed to happen, we then know what is to be expected. So if volume x goes in at any time, and volume y doesn’t appear when and where it’s supposed to, in the right quantities, we can flag that as an anomaly, because it’s impossible that the output material is not in line with the input material that has been recorded. And that would normally mean that part of the supply chain is of unknown provenance, and as we know, if we don’t know fully where our material is coming from, then there’s a fair chance of breaches in human and environmental exploitation.”

What’s driving the demand for this technology now and what engages the supplier to use it?

“Demand is driven from many angles: legislation, the stakeholders themselves, the wish to do the right thing. But the answer is more complex, because on the downstream path of the supply chain it’s mostly used and relevant for procurement, because it gives you control over your materials. But when we go upstream and higher upstream, there is less visibility, because the supply chain starts from where you are sitting. So these people would use our tool to help position themselves as sustainable, to show they are meeting the demands of the buyers with tangible proof.

“In our specific case at Circulor, we create a network, so we are not only looking at supply chains one by one, we are looking at a network of interlinked supply chains. So several producers of the same product might be on our system supplying several OEMs but for different outputs, and the production process might lead onto another OEM, but because the source is mapped, it’s an incentive for the midstream supplier to be part of that system to show that it is involved in that process. They get visibility in front of their indirect buyers and gain reputational value from that.”

And what can organizations do to make it easier for suppliers upstream to get on board?

“Well, that’s a very good question, because what we are seeing in the midstream at the moment is that information sharing is a very passive role,” she said. “There is little incentive for those suppliers to want to position themselves, as most of them are in regions of the world where their understanding of sustainability is not as mature as in other more developed regions.

“But in the end, it goes back to the onion. We have to find the easiest path to get started. Start at the edges and slowly move along until we see the whole picture. And it’s a journey I believe we will have to travel for quite some time.

“We have to be realistic about what is the right time to target people who aren’t yet ready, maybe in countries that as yet have no legislation around sustainability. They might not have the luxury of a sustainability team in their organizations to encourage them, and we are not yet at the point where we can honestly state that sustainability is cost-efficient for them, because that’s just not true. But legislation will come in, like the very recent EU CO2 tax border announcement, and some firms will consider that it’s going to be more expensive to pay the penalties than to have sustainable practices in place or to change the way they are working with their suppliers. Then it becomes a business case.”

What’s the future for n-tier visibility?

“Legislation is and will be the biggest driver of n-tier visibility, because if people want to sell their products, they will have to comply. That will eventually drive a change of mindset.”

“But it’s also true to say that it will come from the people themselves. We have raw material producers on our platform who came to us because they want to be doing the right thing, and they want to be ready for this future. However, we must never forget that sustainability is still a topic about luxury for some people: whether they are eating from a plastic bowl or a recycled materials one is not their main worry. We must remember that and be sensitive to the pace of evolution in other countries.”

Read our ESG summer series here.