As I wrote before, there has been a big push for transparency in supply chains over the past few years. However, supplier transparency is hard to come by in China and very few buyers get visibility beyond their tier-1 suppliers.
Actually, if you purchase standard off-the-shelf products, or even a product that was customised based on an existing ODM product, the chances of getting adequate visibility are near zero. Except if you are a very large company, of course.
The question, more and more, is ‘how to ensure supplier transparency when developing a new product to receive compliant products?‘ As I’ll explain below, it will become an increasingly important factor if you sell products in the European Union. And also in the USA in some cases.
In addition, transparency over your suppliers and key sub-suppliers allows you to identify risks more quickly and maintain control over your manufacturing.
If a company starts to develop a new product from scratch, what should it do regarding supplier transparency? There are a couple of steps to follow and numerous actions to take that will help you achieve transparency goals and comply with regulations, including regulations that will be in place in a few years.
Step 1. Be aware of compliance requirements
You need to be aware of applicable regulations from the very start as they are starting to demand information that you will not get without full supplier transparency!
Let’s take three examples
1) The EU Packaging and Packaging Waste Directive (PPWD – Directive 94/62/EC) is changing soon and will require a certain amount of recycled material and/or sustainably grown wood, for instance, to be used in packaging and that it can be ‘recycled or reused in an economically feasible way’ by 2030. You will probably need to be able to provide information about the materials used in your packaging as detailed as even the exact plot of land where the wood, rubber, etc, used in it was grown!
But if you purchase your packaging from an intermediary who in turn purchases it from another trader, how can you get detailed information like this that you need to comply with this directive from that web of suppliers, each of whom may not have access to the actual manufacturer and therefore may not be able to tell you anything helpful? You probably won’t be able to get that information at all!
In this case, it would be better to:
- Select the packaging, component, or material supplier yourself in order to have transparency rather than leaving it to your assembly supplier
- Demand full visibility over the key sub-suppliers from the start of your project by putting this requirement into your manufacturing contract
- Avoid using intermediaries like trading companies as they are not manufacturing the product unless they help you gain more transparency overall
- Make sure that the supplier has the information that you need from the start and explains what they will do
2) Another example is the forthcoming EU batteries and waste batteries regulation which covers many of the Li-ion batteries used in consumer products today. This regulation will demand transparency from you over where the battery’s elements such as the packaging and cells were made and the Lithium and Cobalt were mined, for example. So if your battery supplier cannot or is not prepared to provide information as deep as this about the battery’s supply chain, you will eventually run into compliance problems when importing the product.
3) The same can be said for modern slavery, too, as we have seen in the USA’s Uyghur Forced Labor Prevention Act (Public Law No. 117-78) or UFLPA. So for EU and American importers, new and forthcoming regulations will force you to provide more transparent supply chain information to be compliant. This particularly affects a key solar panel material called polysilicon, which is commonly produced in Xinjiang, West China, but any products with links to that region will be scrutinized and probably blocked by the US authorities. (Forced labor and social compliance standard violations are also a concern in many other countries, but they are not subject to as much scrutiny.)
What are the implications of all this and where does supplier transparency come into it?
As these examples indicate, new regulations coming in will place a lot more responsibility on the importer’s shoulders to provide proof of the origin of materials, components, etc, so that they comply with their environmental and safety demands.
Therefore, you will have to do due diligence early and map the supply chain where elements affected by compliance issues are concerned, collect information diligently, audit them on-site, and have reports in hand that you can provide as needed. Keep that in mind for the next step, in which you’ll have to pick suppliers and components.
I should also mention another point here. Making the product’s intended use clear, including who it is used by, how, and where, at this early stage is very helpful, as this can be the difference between it being classed as a ‘fitness product’ or ‘medical device’, for instance… with vastly different implications when it comes to compliance.
Step 2. Perform risk analysis and other due diligence actions
If you are still at an early point in the new product introduction process, you will be writing down your key product requirements, putting together a rough proof of concept to verify that the technology works as required, picking the design architecture, etc. However, the supplier transparency aspect comes in when you start selecting the key materials and components.
How to assess compliance-related risk? Two criteria.
Performing a risk analysis to clarify which components and materials are (1) safety-critical and (2) sustainability-sensitive is a great start. Remember, most of the current requirements are related to safety, but a lot of upcoming requirements deal with sustainability.
If you assess that some of your components or materials may be risky, take action to reduce the risks by outlining your requirements clearly when sourcing the suppliers of those specific parts.
For example, if you know you will be including lithium-ion batteries in the product, you will need to select a supplier who is capable of and willing to provide the necessary information about their supply chain bearing in mind that you must satisfy the sustainability and safety regulations. If your assembly supplier, for example, is sourcing the batteries, can they obtain the information for you and will they consent to sharing their supply chain with you, or will they consider it a business secret and refuse to open up even if they know how important transparency is for you now?
This also applies to RoHs, California Prop 65, and REACH. You need to also do a risk analysis and then make sure that restricted substances aren’t likely to be used by suppliers, for example, phthalates used to soften a plastic material. We recently researched common chemical compliance recall risks in the EU and wrote and spoke about them here: EU Product Chemical Compliance and Tips for Buyers.
On the manufacturing side, do you know what goes into the product and the most sustainability-sensitive steps of the whole manufacturing process? For example, if a part includes material like Cotton from China, US authorities suspect that it may originate in Xinjiang. They will usually ask for a mapping representation of the supply chain showing the key nodes that, hopefully, do not include Xinjiang suppliers. They will want to see that you know who is in the supply chain down to tier 2 or, preferably, even tier 3 suppliers, especially for materials and components of concern.
The level of supplier transparency required will be your ability to provide the name of the supplier and where their facility is and proof that it was where the products or materials came from. If your product is likely to be scrutinized by the authorities due to its contents, you can request your suppliers to keep track of the payments they make for different components and modules, shipping records, delivery notes, etc, as these can all be used to prove that the material or components in question did legitimately come from a specific supplier and their facility as stated, not potentially from a non-compliant factory.
Needless to say, gathering this information is very difficult in China, but for products that are in ‘high-risk’ industries and categories you simply will not have a choice if you want to sell on certain markets.
Social compliance audits
Performing social compliance audits through an independent agency that you pick and that you pay, will help allay fears of forced labor and social compliance standard violations in the supply chain, but these must be organized by yourself and the factory should have no say to assure impartiality. Accepting reports from a platform like BSCI may not be accepted in certain situations (for example, I was told the US Customs & Border Protection agency recently indicated that they don’t see it as independent).
For very sensitive situations, a law firm can do an audit based on the SA8000 standard and report back on their findings. This is in line with our understanding of the demands of the Corporate Sustainability Reporting Directive, namely that a professional services firm needs to confirm the data reported.
Investigating how a supplier governs ESG (Environmental, Social, and Governance) will be helpful as you will ascertain if they have systems in place to protect the environment and workers’ rights, and reduce the risks of bribery and other social compliance problems. It should also be noted if they have a code of conduct that is enforced, a tender process that is followed for awarding large contracts, and more, all of which provide you with good evidence of a supplier’s competence and reliability when you’re performing due diligence.
What if the supplier won’t hand over supply chain information to you?
Some Chinese suppliers consider their supply chain information to be a very valuable secret, so they will not want to provide the identities of their sub-suppliers. The best scenario is to source a supplier who will agree to provide this information and be transparent from the start.
Lifecycle assessment (LCA)
In certain industries, such as building materials, pressure has been increasing for quantification of the product’s impact on the environment, typically focused on energy consumption, greenhouse gas emissions, etc. The upcoming EU Ecodesign regulation, for example, is going to be a key driver on this front. If (or perhaps we should write “when”) this affects you, you will need a lot of cooperation from your suppliers and their own key suppliers.
Doing an LCA is quite time-consuming. Chinese manufacturers need time to understand what data is required and to collect it. In our experience, it will take approximately 20 hours of work per product (but not necessarily per model) to guide them through what is required and provide feedback. Initially, they may provide you with a lot of rough approximations. These will need to be refined until you get a clearer and more accurate picture of the product’s impact. For example, they will need to be able to attribute a percentage of their production facility’s energy usage to a specific product or product family being manufactured and quantify it in kWh. We explain how one is done here: How To Do an LCA? (Lifecycle Assessment)
The LCA will collect information including mining or growing and harvesting raw materials, logistics impact, manufacturing and its use of resources, emissions created, etc, and then logistics like shipping or air freight to get the product to where it needs to go, energy-use by the product by consumers, and when it is disposed of (such as ease of recycling).
Further information that will also need to be collected will be packaging use with types and amounts, ancillary resources used in the manufacturing process such as lubricants, water, etc, and the nature of energy used which can be estimated based on the country’s energy generation mix and even specifically stated if the supplier has their own solar panels, diesel generator, etc, and waste management and data on how much waste goes to landfill, wastewater is emitted by the facility, and so on. Go deeper into the LCA and EPD requirements here: Lifecycle Assessment (LCA) and Environmental Product Declaration (EPD) Requirements: What Manufacturers need to know
Most companies that sell in the EU are feeling overwhelmed by all those regulatory requirements and the need for far more supplier transparency. Those above a certain size will probably need both a safety compliance specialist and a sustainability compliance specialist. Gathering all the necessary data will require help from the sourcing & purchasing people. They probably won’t have the resources to cross all the Ts and dot all the Is. My best advice is to start now and let a risk analysis guide you so that you work on the important topics first. If you wait until market surveillance authorities or customs officers ask for evidence, it may be too late.