MNCs need to increase sourcing transparency with growing focus on global supply chains’ carbon footprint: Dan A. Iancu

Dan A. Iancu teaches at Stanford University’s Graduate School of Business (GSB). Speaking to Srijana Mitra Das, he discusses ways to improve the environmental and social impacts of global supply chains:

Q. What is the core of your research?

A. Some of my recent research has been on understanding how to improve sourcing and financing in global supply chains and particularly in agricultural supply chains. These improvements refer both to the productivity and welfare of producers — who are often smallholder fa r mers i n d e v e l o pi n g economies — and social and environmental metrics like eliminating deforestation or the use of child labour.

Our work leverages field data and analytics to design better financial incentives for such smallholder suppliers and formulate requirements to attach to such incentives — these requirements could, for instance, be related to protecting natural resources like forests. We also work to devise ways enabling monitoring and checking that these requirements are met. The hope is that by doing this, both the efficiency in supply chains can increase and smallholder farmers as well as the natural environment can benefit.

Q. What are the biggest challenges in global supply chains now?

A. We’ve seen a lot of supply chain disruptions recently, primarily due to the Covid-19 pandemic. Alongside, there is a growing sense that we need to develop a much better understanding of the carbon footprint in global supply chains, quantifying and allocating the associated emissions and developing incentives to improve specific segments. Supply chains might not be owned by the same companies all the way through, so ascribing responsibility is more difficult when there is no clear chain of custody.

However, in the coming years, we will likely see more discussion and policies around such issues — the EU is already considering legislation forbidding the sale of products sourced from areas where deforestation has recently occurred. This will set a very powerful precedent and it could make multinational corporations and their supply chain parties significantly increase the transparency of their sourcing practices and develop better mechanisms to monitor the production and transfer of goods.

Novel remote sensing technology and ledger technologies such as Blockchain can help but traceability all the way to the producer is a huge challenge. Massive investments will be required towards this — these will be in technology but also in supporting stronger relationships like direct sourcing partnerships that avoid commodity markets where everything gets blended and distinctions are lost.

Importantly, blanket regulations that prevent sourcing from certain parts of the world are also not ideal because they risk pushing suppliers into poverty and don’t directly address the environmental problems that have already occurred. These issues are very complex and require combined interventions. But at least the EU has acknowledged the problem and this is a step in the right direction.

Q. Have companies started tackling these challenges in their supply chains?

A. Some companies are real leaders in acknowledging these issues and starting to address them. Unilever is a good example — it is sourcing commodities like palm oil and cocoa more sustainably as well as implementing various programs to improve the welfare of its own suppliers. Unilever has also been quite candid about some of the problems within its own supply chains and it is to be admired for this.

Some of the smaller companies are also significantly raising awareness about these environmental and social issues. In the chocolate space, for instance, Tony’s Chocolonely has been speaking out about both slave labour and child labour in cocoa. It has also been working closely with the cooperatives that supply its beans to develop improved practices.

Q. What is your concept of dynamic optimisation in this context?

A. Dynamic optimisation refers to a set of analytical tools and techniques that deal with decisions that are taken repeatedly, with the gain of new knowledge over time. It considers long-term objectives and it allows us to develop plans or policies that can accommodate information acquired over time.

Many decisions taken by actors in commodity supply chains have such features — for example, crops like cocoa or palm oil are perennial, taking several years to become productive and then producing fruit for many years thereafter.

While these processes can have environmental impacts like deforestation, the farm yields themselves depend both on how the plantations are managed and weather conditions. So, growing such crops involves both upfront decisions — like farmers expanding their plantation or purchasing equipment or lenders offering them credit to do so or buyers offering them a purchase contract — but also many ongoing decisions in response to new information such as changed prices, improved seeds, etc.

Dynamic optimisation is a methodology that helps to capture such decisions and characterise the best possible course of action for both producers and the environment.

Views expressed are personal

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