Ethical Sourcing is Becoming Mandatory - Can Blockchain Make It Possible?

Emphasizing ethical sourcing requires enhanced transparency and communication with the vendors in a company’s supply chain.

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For any company that operates within the European Union, ethical sourcing will become mandatory for all conflict materials as of January 2021. Even for global companies not affected by this mandate, the forecast suggests that it’s worth making ethical sourcing a priority.

Companies actually benefit from ethical sourcing. It’s viewed as a responsible, enlightened characteristic, which improves a brand’s reputation and its ability to attract customers. It also impacts how the company operates and interacts with its partners.

Emphasizing ethical sourcing requires enhanced transparency and communication with the vendors in a company’s supply chain. Better communication equals deeper relationships between manufacturers and vendors, a stronger manufacturing supply chain, and a reduced risk of adverse events putting the supply chain at risk.

Ethical Sourcing Matters More Than Ever

Many serious considerations that go beyond any brand’s image are behind ethical sourcing. The goal of regulations mandating the practice is to ensure that the purchases of materials like tin, tungsten, cobalt, and gold don’t finance war atrocities and human-rights abuses around the globe. They also aim to promote sustainability practices along manufacturing supply chains.

By focusing on conservation and sustainable sourcing to improve supply chains, companies can help ensure that those resources will still be available in the future. Essentially, ethical sourcing is a critical step for companies that want to be more socially conscious and connected with their consumers and the world around them.

For employees who work for such companies, the positivity, pride, and satisfaction of working for a socially conscious employer is key to the joy they feel in their careers. It makes sense for companies to promote ethical sourcing — among other socially responsible practices — to help recruit, develop, and maintain a cohesive, effective workforce.

It also makes financial sense overall. The changes needed to ensure ethically sourced products strengthen a company’s supply chain and help ensure that the economics of certain products are predictable and lighten the burden of producing those products. The effort enables a company to put a premium price on ethically sourced products, attracts customers to the product, and ensures a solid revenue stream.

Why Blockchain Is the Key to Ethical Sourcing

To achieve the level of transparency, communication, and trust that manufacturers need to have with their suppliers, companies need a new way to structure and run their supply chains. Because they have the ability to improve real-time visibility across the entire supply chain, blockchain networks are proving an apt solution.

One of the most important features of a blockchain network is that it allows companies to ensure their suppliers meet the standards set forth in their contracts. Companies can more easily manage third-party suppliers to ensure that obligations regarding worker treatment and conditions, human rights, and other ethical sourcing practices are being maintained.

That’s especially important for manufacturers who use sensitive products in their supply chains. Blockchain documents the provenance of parts, ingredients, and other elements that go into their manufacturing processes. This lets manufacturers see a complete and immutable audit trail that encompasses each stage of the materials’ journey through the supply chain.

As conscious consumers join the call for greater social responsibility and environmental protection from manufacturers, blockchain helps companies answer that call. With a blockchain-powered supply chain, companies can share that immutable proof to show consumers (and regulation authorities) that they’re meeting the demand for ethical and sustainable practices.

How to Run an Ethically Sourced Supply Chain

All of the factors that go into ethical sourcing also augment a company’s overall financial risk profile, which ultimately attracts investment in the company and makes expanding the supply chain easier. Implementing blockchain, a technology that provides the transparency and security to enable a stronger, ethically sourced supply chain, is a viable approach — a task that many companies are already undertaking.

These are just a few of the ways in which companies are successfully using blockchain to ensure ethical sourcing:

1. Develop a blockchain consortium

This strategy is used by like-minded companies, possibly even competitors, who join forces to make ethical sourcing of materials the standard for their industries. They make a pact to use blockchain to enable provenance and traceability of all materials that go into the manufacturing of parts and products. IBM, Ford, LG Chem, Huayou Cobalt, and RCS Global have used the consortium strategy to implement ethical sourcing of cobalt through a mine-to-end-user blockchain network.

This strategy involves key high-level activities, including forming a consortium, adopting a governance framework, and deploying a blockchain network. Often, the company with a significant pain point will take the lead and fund the core blockchain development; others in the network can then agree to participate in the design and integrate their systems as needed to add or use data. The consortium can then use a services provider to help grow the use of the network within their own supply chains.

Once the blockchain solution is in place and demonstrating value, consortium members can advocate for their other supply chains to join the system. In these cases, a fee model can be used that would increase the return on investment for the initial development.

2. Join an existing blockchain consortium

Not every company can start a consortium, but many can — and do — join existing initiatives. They can start by identifying blockchain networks that have useful data. Several networks have gained traction and will allow access to their data for a single subscription fee. If a network supports the company’s procurement needs and industry-specific regulatory requirements, can validate verifiers on the network, and can integrate data with the company’s existing records, then this may be the company’s optimal strategy.

The Trust Your Supplier network is one such consortium. It shares trusted data with companies in the network to help them with supplier onboarding and life-cycle management. IBM and several other prominent manufacturers have committed to joining this network in efforts to streamline their supplier procurement processes.

3. Kick off a blockchain pilot project

For companies that don’t feel ready to jump in with both feet, initiating a pilot program can validate the idea and provide proof of concept. Companies with limited blockchain knowledge should work with a blockchain consulting service to identify the best use cases within their supply chains and should work with stakeholders to develop a program that can run as a shadow to existing systems.

Taking this approach should demonstrate how forecast data can be shared efficiently and securely. At that point, a company may begin sharing its own inventory data onto an existing blockchain network. With an infrastructure and network in place, this should be a simple process of building an integration to the enterprise resource planning system that queries for the relevant product tracking information. The ERP system will then record any changes that have occurred. Down the line, a company can track the inventory directly in the blockchain instead of the ERP, but just providing and getting visibility is valuable.

Many companies use this approach to test blockchain without committing to a full-blown consortium before they’re ready. For example, Mercedes-Benz has initiated a pilot blockchain program to vet third-party suppliers. It’s part of Daimler’s greater effort to ensure its entire supply chain adheres to ethical sourcing practices.

The EU’s impending regulations aren’t the only motivating factor in the growing push for ethical sourcing. Besides the sustainability that comes with ethical sourcing, companies can also show their customers that they care. By making the process transparent, blockchain can help keep supply chains properly aligned with that goal while also enabling better top-line revenue and margins.