Regulation’s Impact on ESG and Supply Chain Risk Management—Part Two

Requirements for Multi-Tier Supply Chain Mapping and Traceability

Abstract

Global ESG and supply chain regulations are driving companies to implement multi-tier supply chain mapping and traceability within certain industries. Here we discuss some impacts of those regulatory requirements on companies’ processes and systems.

Article

We have observed a marked increase in interest in and implementation of ESG and supply chain risk management solutions by manufacturers, distributors, and retailers over the past few years. We postulate seven key drivers behind this trend (see sidebar). On the top of the list of drivers (tied with recent disrupting events such as the pandemic) is the wave of ESG and supply chain-related legislation and regulations enacted over the past decade or so.

To understand this phenomenon better, we examined 75 different regulations applied to supply chains, products, and corporate responsibility around the world. In Part One of this series, we looked at the various goals of those regulations, such as anti-counterfeiting, recall efficiency, anti-slavery, GHG emissions reduction, defunding conflicts, restricting harmful substances in products, biodiversity, circular economy, and anti-corruption. Here in part two, we discuss the implications of those regulations on companies’ processes and policies: specifically mandating the need for greater visibility in multi-tier supply chains and locations of production, and requirements for end-to-end traceability.

Multi-Tier Supplier/Supply Chain Mapping

UFLPA is Forcing Many Companies to Quickly Start Mapping Their Multi-Tier Supply Chain

Source: rawpixel, CC0 1.0 Universal

The passage of the UFLPA (Uyghur Forced Labor Prevention Act) is forcing many companies in certain sectors (solar panels, apparel, automotive, electronics, and others)1 to rapidly gain much more visibility into their multi-tier supply chain. The UFLPA aims to curb the use of forced labor imposed on the Uyghur population living in the Xinjiang province of China. It directs the Customs and Border Protection (CBP) to presume that anything produced in the Xinjiang province was produced with forced labor, unless the CBP commissioner certifies that a particular shipment of goods has not been made with forced labor. This puts the onus on the importer to produce documentation proving that none of the materials or components in the product being imported came from Xinjiang, or that any components that were manufactured or sourced from Xinjiang were not produced with forced labor.

Proof of Location of Production Required, All the Way to Raw Materials

Source: World Bank on Flickr, (CC BY-NC-ND 2.0)

This requires visibility and documentary proof about the origin of the components of the product. This documentation is not just about location of production by the direct tier 1 supplier, but location of production through the multiple tiers of the supply chain, all the way back to the raw materials, such as where the cotton in a garment was grown and processed, or where the aluminum in a machine was originally processed. Most manufacturers do not have in place the systems and processes to easily and methodically provide this documentation.

Rapid Pace of Enforcement is Forcing Rapid Changes to Processes and Systems

The speed with which the UFLPA is being enforced stands in contrast to the extended (some would say much more reasonable) period of time allowed for adoption of past supply chain regulations. For example, the DSCSA (Drug Supply Chain Security Act) was enacted by Congress in 2013. The FDA is responsible for enforcement of the DSCSA. Working closely with industry, the FDA subsequently recognized the complexity of the problem. Eventually they ended up providing a 10-year roadmap and set of milestones for compliance (the first milestone being for manufacturers only in 2017). This allowed the step-by-step progression to reach full end-to-end traceability by 2023.

In contrast, the UFLPA was enacted on December 23, 2021, with enforcement beginning a mere six months later on June 21, 2022. Thus, the time from passage of the UFLPA legislation to enforcement of it was only about 1/20th of the time allotted for full adoption of the DSCSA end-to-end traceability. As of this writing, the U.S. Customs and Border Protection (CBP) has detained 6,045 shipments, valued at $2.1B, according to the CBP’s UFLPA Statistics Dashboard. For each of those shipments, importers are required to provide proof of compliance with UFLPA. More shipments have been denied than have been released (2,598 denied vs. 2,464 released). The CBP is serious about enforcement of this Act.

Thus, the UFLPA is forcing companies to fast-track systems and processes to be able to comply. Right now, most companies are in reactive mode, dealing with detained shipments one at a time, doing a lot of heavy-lift manual interventions to try and pull together the right documentation and proof. There is help on the way, as system vendors have been rapidly responding to this need, largely by building on existing capabilities.

A Roadmap: Dealing with the Immediate Demands to a More Long-Term Solution

The need to map out multiple tiers of the supply chain is only one step in the process. The maturity model shown below (courtesy of Infor Nexus) is one way to view a roadmap to more automated compliance.

Source: Infor Nexus
Figure 1 – UFLPA Maturity Model

Leveraging Existing Data and Capabilities

A number of companies already provide tools for step 2 above, mapping out the end-to-end supply chain. But very few provide tools for step 3, using an n-tier map of suppliers and production locations to take action to address customs attestations and detention at the point of importation. This generally requires integrating an existing planning and execution platform with the multi-tier map. As an example, Infor Nexus is leveraging their existing platform, which already provides robust and mature multi-enterprise visibility and management of purchase orders, bills of lading, and other documents throughout the entire procure-to-pay cycle across global supply chains. This includes data correlating specific P.O.s to each specific shipment. Knowing the P.O.s on the shipment for which proof has been requested, the system requests documentation from the immediate tier 1 supplier regarding the location of production for those POs for this shipment. Further they request the tier 1 suppliers to identify which tier 2 suppliers provided any inputs into production of the items in the shipment.

Requests are then sent in a cascading fashion to tier 2, tier 3, and beyond, creating a documentary record of the end-to-end chain-of-materials that went into producing the items in the shipment. This includes not just the name of each supplier, but the exact address of each factory producing materials and components within that end-to-end chain-of-materials. These will be documents such as purchase orders, bills of materials, and descriptions (or visualizations) of the linkages between them all. This set of documents is then packaged up for presentation to the CBP to prove compliance.

Source: Infor Nexus
Figure 2 – Example Screenshot of Graphical Representation Summarizing Multi-Tier Documentary Record to Present to CBP for UFLPA Compliance

Evolving to More Automated and Proactive Compliance/Clearance Processes

We expect these kinds of capabilities to become critical to dealing with the current enforcement. The capabilities will likely be rapidly improved to make the process more automated and to produce documentation that is reliably accepted by the CBP. Ultimately, it will be done more preemptively to produce the documentation and gain approval by the time the shipment arrives at customs. Eventually, traceability can be implemented for all products, to proactively find and eliminate any non-compliance in the upstream supply chain.

Proposed EU Forced Labor Ban Could Dramatically Broaden the Sectors and Products Impacted

Several other countries have existing legislation addressing the use of forced labor in supply chains. The UK’s Modern Slavery Act of 2015 simply requires companies to describe the steps they are taking to ensure slavery and human trafficking are not occurring their supply chain, or alternatively declare they are not taking any steps. The EU’s proposal for a ban on goods made using forced labor is considerably more proactive. The original draft says that customs officials have the burden of proof to show that goods were made with forced labor before they can deny entry for those shipments. Amendments to the proposed legislation, made in October 2023, would require the European Commission to create a list of high-risk geographic and economic sectors for which the burden of proof shifts to the importer (more like the UFLPA model). This has the potential to broaden (possibly dramatically) the set of products for which such documentary proof is required—showing that no forced labor was used throughout the multi-tier supply chain—well beyond those products and industries currently impacted by the UFLPA.

Source: Image by 19661338 from Pixabay

End-to-end Traceability

Regulations, such as the DSCSA and FSMA, are requiring some industries—such as pharma and some food sectors—to migrate from their traditional 1-up/1-back traceability at a batch/lot level to end-to-end traceability at an individual salable unit2 level. In pharmaceuticals, the manufacturers have to assign and apply a serial number to each individual salable unit. For most manufacturers, this has required an upgrade to packaging lines (and often a label redesign) to be able to print a different serial number on each unit, as well as implementing backend serialization systems and databases to generate, assign, and keep track of the serial numbers.

1-Up/1-Back Traceability
Vs. End-To-End Traceability

Further, the move from 1-up/1-back traceability to end-to-end traceability entails a significant change for most companies. Previously manufacturers and distributors only needed to keep records associating the inputs with the outputs for their own factories and distribution centers.3 Now, they must provide access to the full end-to-end traceability record, from the point of manufacturing all the way to the point of dispensing. This has spawned a new generation of multi-enterprise end-to-end tracking platforms.

Regulations requiring various degrees of end-to-end traceability of pharmaceuticals have also been passed in a number of other countries, such as in the EU, China, India, Brazil, Nigeria, Saudi Arabia, UAE, Kazakhstan, Uzbekistan, and others. In some countries, the manufacturing and chain-of-custody transfers of drugs needs to be recorded in a national database. Furthermore, as discussed above, the Uyghur Forced Labor Prevention Act (UFLPA) is also forcing many companies to implement shipment-level traceability upstream through multiple tiers, all the way to the raw material source factories and farms.

Other Process Changes Being Driven by Supply Chain Regulations

There are a number of other changes to processes being driven by supply chain regulations, such as product content tracking, factory labor condition monitoring (audits, certifications, etc.), reporting and disclosure for social and environmental responsibility, denied parties screening, and greenhouse gas emissions tracking. We discuss these impacts in Part Three of this series.


[1] The UFLPA explicitly lists cotton, tomatoes, and polysilicon as priorities for enforcement. Any products containing those are thus affected. The impact on apparel, in particular seasonal items and fast fashion, has been particularly onerous because the typical detention lasts a few months, causing the value of those items to plummet or disappear altogether. Polysilicon is used in many types of semiconductors, thereby impacting all kinds of high-tech products—not just computers and phones, but automobiles, aircraft, appliances, and other machines. In that list, solar panels have been particularly affected. Aluminum has been added to the priorities list, because China produces about 60% of the world’s aluminum, much of it processed in Xinjiang (see Forced Labor Risks in China’s Aluminum Sector, from Horizon Advisory).  This means any product using aluminum becomes a possible target for detention. Recently, China has been sending Uyghurs to factories outside of Xinjiang province to do work (often under coercion) such as processing fish (see The Uyghurs Forced to Process the World’s Fish). These could be efforts to sidestep the UFLPA, since the work occurs outside Xinjiang. It remains to be seen if the application of the UFLPA will be broadened to industries such as the fish processing supply chain. — Return to article text above

[2] Traceability under DSCSA must be done at the level of the individual package or unit dispensed and sold at the pharmacy. — Return to article text above

[3] 1-up/1-back traceability has been part of most manufacturing systems for decades. The MES (manufacturing execution system) or materials management system keeps track of the source of each batch of input ingredients, which output batch/products those inputs went into, and where/who those products were sent/sold to. — Return to article text above

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