Blockchain can transform manufacturing supply chains

By Isobel Rechter
Bangladeshi_women_sewing_clothes
Bangladeshi women sewing clothes.

The proposed Australian Modern Slavery Act is a step forward but one of its practical weaknesses will be the traceability of supply chains. Blockchain, the technology underpinning Bitcoin and other cryptocurrencies, represents a significant opportunity to give the new anti-slavery regime teeth.

In 2017, a number of international retail giants including Wal-Mart and Unilever collaborated with big tech companies to run pilot programs testing the efficacy of blockchain technology in monitoring their supply chain logistics. These pilots represent an exciting innovation in supply chain traceability and, if successful, could have significant implications for holding large manufacturers accountable for slavery and exploitation in their complex supply chains.

The federal government’s Joint Standing Committee (Committee) held an inquiry in 2017 into the possibility of introducing a legislative regime to combat modern slavery in the supply chains of Australian corporations. The inquiry received strong industry support, with submissions being received from business leaders such as Wesfarmers, BHP, Rio Tinto and Nestle. The Committee published its final report in December 2017, recommending, among other things, mandatory reporting requirements on Australian companies with more than $50 million in revenue in relation to the presence of slavery in their supply chains.

The Committee also recommended establishing a legislated and government-funded repository containing the mandated slavery statements. This repository would be publicly available, allowing consumers to make informed purchasing decisions and educate themselves on the practices of their favourite retailers.

But one key impediment to holding companies accountable via the proposed regime will be the ability to “stress test” these statements, or prove that they truly represent a company’s manufacturing processes, from raw material to the finished product.

Supply chains of large manufacturing companies are invariably difficult to trace. It is common practice, for instance, for the supply chain of a large multinational fashion outlet to span several countries and consist of 4 or 5 “tiers”, each tier itself consisting of multiple factories. Tracing the provenance of a particular item in these complex webs of production becomes increasingly difficult further down the chain.

By way of example, the lifecycle of an average cotton t-shirt begins at a tier 4 supplier where the raw cotton is manufactured, then moves through a tier 3 factory where the material is processed into fabric, then a tier 2 factory where the raw fabric is printed or coloured, and finally a tier 1 factory where the pieces of fabric are cut and another tier 1 factory where the fabric pieces are sewn together into the finished product, or a tag is stitched on. Segregating production in this way allows companies to maximise profit.

But as a result, a retailer may only have a direct relationship with their tier 1 and tier 2 suppliers, if at all. A recent report by Baptist World Aid found that 61 per cent of Australian companies did not know where their garments were made and 93 per cent did not know where the raw fibre was produced.

In a positive move, bigger consumer-facing manufacturers are now adopting more transparent practices in response to customer pressure for “cleaner” supply chains. For example, Adidas publishes its entire supplier list including tier 3 and 4 suppliers.

Blockchain and supply chain traceability

The recent blockchain pilots represent an exciting advancement in supply chain traceability. Blockchain has largely attracted media attention through cryptocurrencies such as Bitcoin and Ethereum, but these currencies are just a few applications of a much broader and more transformative technology.

A blockchain is an open and distributed ledger in which transactions or “blocks” are recorded and confirmed anonymously and added to the chain of previous transactions. What distinguishes block chain technology from more traditional ledgers is the immutability of all transactions in the ledger, from the genesis block to the latest recorded transaction. Cryptography and timestamping of each block renders transaction records virtually impossible to corrupt or hack without alerting one of the members of the shared network.

In the last couple of years, tech giants such as IBM have been building a new generation of transactional blockchain applications that guarantee trust and accountability, including a number of pilot deployments of the technology by manufacturing companies. For example, in the first quarter of 2017, Walmart collaborated with IBM on a pilot program aimed at tracking and tracing pork in China, and produce in the United States. Walmart reported that the results of these tests were “very encouraging”. They have since launched the Blockchain Food Safety Alliance in China, in partnership with IBM.

Unilever is the latest company to participate in a blockchain trial, funded in part by the UK Department for International Development. The pilot was reported in December 2017 and will test the ability of distributed ledger technology to record metrics related to sustainability of Malawian tea farms, which supply Unilever and British supermarket conglomerate Sainsbury’s.

If these pilots continue to generate positive results, the implications for slavery in supply chains could be significant. The indelibility of the distributed ledger means that it would be possible to hold large fashion or consumer goods outlets accountable for slavery or exploitation which occurs in the lower tiers of their supply networks. The technology has already been used by Australian start-up Everledger to track the provenance of diamonds in order to eradicate “blood diamonds”.

The application of these technologies to supply chains of large fashion outlets could be championed by NGOs in the “clean clothes” space or industry best practice leaders such as Adidas or ASOS. Alternatively, the technologies could be developed and implemented alongside the federal government’s anti-slavery regime as a means of auditing the slavery statements to be held within the proposed repository.

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