For downstream OEMs, understanding the origins of products and services is no longer a luxury, but a necessity for making informed decisions, complying with regulations, and managing risks. The complexity of the challenge lies in the fact that since the end of the second world war, supply chains were left largely unregulated and out of sight. Downstream participants previously had little motivation to map their supply chains; in fact, abstaining from such efforts allowed them to circumvent any association with potential harm occurring in the midstream or upstream segments.
In other blogs, we have discussed how this started to change with the emergence of the Dodd-Frank Act in 2011, which looked specifically at mapping mines/smelters. The regulation proved highly challenging to the industry, with potentially negative unintended consequences for upstream, as well. Mapping the whole value chain presents an entirely new challenge for the downstream as downstream companies rarely know their supply chain participants beyond the first tier. When you consider that the number of first tiers could be in the tens of thousands, it is not an exaggeration to estimate that there may be hundreds of thousands of suppliers in the different value chains of one company.
Where do we start?
Based on our experience, an additional big challenge that OEMs face is simply knowing where and how to start. This is complicated by an additional fear of running into stumbling blocks or in other words, participants who do not want to communicate or be found. We have discovered that suppliers are generally deterred from engaging, primarily due to cost concerns, potential antitrust restrictions, or the required effort. It is not uncommon for upstream or midstream companies to see little value in additional reporting, especially as some European legislation does not directly require assurances from them. In the case of some participants, such as traders, there is a fear that transparency may also harm their overall business model.
To tackle these challenges, we have found the following best practices:
First, it is to embrace stumbling blocks. Although reaching dead-ends in the supply chain can be frustrating, the flipside is that reaching a dead-end highlights where risk needs to be managed. Put simply, a lack of transparency raises red flags and the OEM can decide between trying to switch supply chains to avoid potential issues completely or to try and bring onboard the supply chain. In our projects we have helped companies take both directions. We have introduced suppliers that can provide transparent minerals and we have also provided tools that can incentivize unwilling participants to join transparency requests. In the case of the latter, we have found it particularly important to develop tools that provide efficiencies for suppliers, such as helping them to comply with auditing requirements. It is much easier for a supplier to share information if they see benefits for themselves beyond just helping the downstream.
Second, take comfort in economies of scale. The more that is known about individual value chains, the easier it will be to repeat mappings. Similarly, the more experienced a project management team is, the easier it will be for them to complete complex mapping. It will not be uncommon for mid-stream participants to be involved in several supply chains, especially if they are traders. In this sense, it is important not to feel discouraged by the slow pace of initial supply chain mappings - as mapping supply chains 50 to 100 will be a lot faster and easier than mapping supply chain 0-50.
Third, start with the low-hanging fruit and make it as simple as possible. Mapping from a willing Tier One, who also has high transparency standards, makes everyone’s lives easier. Internal expertise can be built up and then scaled to less cooperative supply chains. Complementing this, we have found that the process is easier when the first mapping exercise is just mapping. Although it is tempting to consider all the different data points that can be entered, consider sending questionnaires that are no more than 3-5 questions to suppliers during mapping. It is important not to overburden participants with information requests. Once a relationship is established and once mapping gets repeated then it will be easier to collect more information.
Fourthly, offer constant help. Participants will need hand-holding at the start. The more involved an OEM is, the easier it will be to onboard suppliers. Patience will be key as different suppliers will navigate the information requests at different paces. We have found that companies who take an active interest and role in mapping, instead of simply handing over the responsibility to a third party, achieve much better results.
Lastly, embrace that mapping is more art than science. There are many unknown unknowns in the mapping process. The sheer number of suppliers and supply chains means that different endpoints will require different solutions to achieve transparency. OEMs in some aspects behave like investigative journalists to try and figure out where different supply chains go. Although we have had significant success in mapping, including results such as mapping 75% of supply chains for one metal in batteries for an OEM within six months, no results are guaranteed. The supply chains of each company are unique and there is no better way to understand what results are possible without being halfway through the process.
In the end, there is a significant advantage - beyond regulatory compliance - to supply chain mapping. The analytics for business and the ability to switch suppliers are one example. But it also means that companies will be able to directly invest into their supply chains, to strengthen relationships, secure supply lines, or help them on their journeys to become more sustainable.