Huge bottlenecks and chaotic developments affecting almost all global supply chains mirror the importance of tracking a product’s path from its start all the way to the end consumer. This is not a fundamentally new insight but has been exacerbated by the enormous market developments of recent years. Examples here include disruptions in supply chains caused by the COVID-19 pandemic, the lack of availability of certain materials, as well as rising energy costs which have been further intensified by the Ukraine conflict. At the same time, companies have also been struggling for years due to a shortage of skilled workers which is even impacting the transport sector, and together with rising energy prices, this in turn leads to higher transportation costs – provided that transportation is at all available in a timely manner. Climate change is also more visible than ever, influencing consumers’ behavior, to which companies must adapt yet which also steps up regulation. This highlights the significant challenges that currently exist in corporate supply chains and urgently calls for new approaches to solving them.
Transparency within the supply chain is an important tool to increase resilience: it refers to the sharing and availability of information and data within and between companies, as well as between companies and stakeholders. An important aspect of this approach is tracking and tracing the supply chain and deciding with whom to share this information. This allows managers to identify critical supply chain pathways and work on solutions or financial and operational buffers. Other benefits include increased supply chain availability, flexibility and control, as well as improved risk management and visibility. Properly applied, supply chain visibility leads to supply chain resilience, which may result in a competitive lead. According to a McKinsey research paper, 93% of global supply chain executives plan to increase resilience along the supply chain.
Although supply chain visibility seems to be the focus of many efforts, there are still a number of major and minor challenges that need to be addressed. In particular, the lack of technological readiness of many infrastructures as well as incomplete or poor data quality support or complicate this development. Supply chain operations also still lack proper planning, and the various interconnections are incoherent. Most companies will confine any information to the respective department producing it. The sales department has its own forecasts and budgets, production has its own schedules, and buyers have data on suppliers’ costs and delivery schedules. Such fragmented data tend to serve the individual departments within an organization rather than the bigger picture – in this case: the entire supply chain. In addition, each supplier and each customer has their own information which they usually do not share at all with other partners in the supply chain. Everyone lives in their own bubble with their own information, barely networking – if at all – with the other partners. Given this tendency, networking is key and must therefore be the goal. As supply chain-related costs are believed to account for 30-80% of turnover, bringing together data from all departments is critical to success.
Looking closer, the percentage of companies experiencing ten or more supply chain disruptions has increased from 4.8% in 2019 to 27.8% in 2020, a fivefold increase. Supply chain disruptions such as pandemics, natural disasters or cyberattacks are very costly. McKinsey has calculated that companies can lose 42% of a year’s EBITDA over a ten-year period. The number of companies using supply chain mapping support has doubled from 22.5% in 2019 to 40.6% in 2021. More than half of those companies (57.6%) said COVID-19 was the reason for investing in supply chain visibility solutions.
The main difficulty in planning the supply chain is what are still very volatile prices for raw materials and resources, including logistical services and capital goods. However, highly fluctuating prices are currently not only affecting the B2B sector but have even already reached the B2C sector. Walmart currently has an inventory that is 32% higher than usual. Hasbro has seen an increase of its inventory by 75% (= 0.75bn USD). This shows that even large retailers are currently prevented from managing their supply chain effectively. According to the Economist, 5% inventory increases in the US require an additional 45m sqm of warehouse space at the same time. In addition to the pure delivery time and the capital tied up in inventory, this also shows the resulting cost pressure on margins. To ensure greater reliability and plannability and to create more security for production while simultaneously saving on the cost of transportation, there is a strong trend towards shortening supply chains. This is already being done through onshoring or back shoring measures when selecting suppliers. It remains to be seen whether this trend will be of a short- to medium-term nature or whether it will also change production and supply chains in the long run.
Supply chain transparency creates awareness of existing risks; reducing and avoiding supply chain risks creates more stability within the supply chain, thus avoiding supply bottlenecks; and in the broadest sense, lower margins or the loss of company revenue due to unfulfilled contractual obligations or customer dissatisfaction.
However, in addition to the companies’ own need for information and control, there is also increasing pressure from outside. Particularly in food retailing or in the fashion sector, it is clear that customers are becoming more aware of the need to choose sustainable products. In recent years, there has been an increasing demand for vegetarian and vegan food, food without certain additives, fish from sustainable sources, organic meat, and so on. In the fashion sector, too, the trend is leaning clearly towards sustainability and sustainably produced garments. Consumers are questioning the origin of the materials as well as the general conditions of production, such as whether child labor is referred to or raw materials are sourced under forced labor conditions. Sustainable action and the demand for sustainable products is a consumer trend that will spread to all product areas in the coming years. This comes with consumers’ strong desire for evidence demonstrating, if not certifying such promised sustainability. This extends the transparency of the supply chain all the way to the end consumer. For brands, the challenge is to trace the supply chain back to its origin and, in the medium term, to make the whole thing visible to the consumer. This adds another level of complexity to the challenges of supply chain transparency as already described.
How can technology support this and everything else that is needed? The goal must be a complete digitalization of the supply chain in order to create absolute transparency. Additional software modules that make parts of the market that have not yet been digitalized digitally accessible, are important. There is potential here especially in the area of SME software, as smaller market participants in particular are still struggling with digitalization and the necessary investments in this area. Approaches are also conceivable e.g., in the area of AI, which automate and optimize processes on the basis of existing software and make emerging risks recognizable at an early stage and thus controllable. In order to view the logistics chains from end to end, higher-level software layers would be helpful that allow the existing, very complex system landscape to communicate with each other, either through integration or, as a first step, collaboration tools. Further potential exists both in the area of basic technology and for deep tech features. The complex, very fragmented and partly non-existent system landscape is currently often a hurdle to market entry; the growing pressure on supply chains will increasingly reduce this hurdle.
The third aspect to consider is the increasing regulation. The Supply Chain Act, which will come into force in 2023, legally binds companies and their suppliers to comply with minimum social standards. The law will apply to companies with more than 3,000 employees from 2023 onwards, and to companies with more than 1,000 employees one year later. As of 2024, 2,891 companies (approx. 0.1% of all companies) in Germany would be affected by the amendment. The law obliges companies to carefully examine the working conditions of their direct suppliers in order to identify human rights violations at an early stage, report them in a transparent manner, and take remedial action. The Federal Office for Economic Affairs and Export Control is the central contact point and decides on the amount of the fine in the case of violations. Companies face fines of up to two percent of their total annual turnover as well as a three-year exclusion from public contracts. However, it can be assumed that these legal regulations will become even stricter in the future. A uniform European regulation is also being considered at EU level which, as things stand, could be more general than the German Supply Chain Act. The Supply Chain Act meets with broad approval in Germany: according to a representative survey by the research institute infratest dimap, 75% of the population is in favor of stricter legal controls along the supply chain, thus also demonstrating the growing awareness and demand for sustainable products on the part of consumers.
Companies are also subject to further regulation as a result of the EU taxonomy, which has been in force since the end of 2021. The EU Taxonomy Regulation describes a framework to classify “green” or “sustainable” economic activities within the EU in a generally applicable manner. By complying with these criteria, businesses should positively differentiate themselves from their competitors and thus benefit from greater investment. The legislation therefore aims to reward and promote environmentally friendly business activities and technologies through an investment focus. The focus is on six environmental objectives. To be classified as a sustainable economic activity under the EU Taxonomy Regulation, a company must not only contribute to at least one environmental objective, but moreover, must not violate the others. The sustainability of each company’s overall operations must be reported annually as from the end of 2021. This applies to all companies that sell financial products in the EU as well as large companies (>500 employees) that fall under the non-financial reporting directive (NFRD). In each case, the EU taxonomy-compliant share of turnover, capital expenditure (CapEx) and operating expenditure (OpEx) for the company must be reported. It is expected that the number of affected companies will increase significantly in the future.
Overall, it is clear that the need for transparent and sustainable supply chains is not only driven by companies’ own process and cost optimization or end customer demand. Rather, in the future, investments will also be increasingly influenced by sustainable management and companies will have to take this into account when it comes to their financing requirements.
This is already clearly noticeable in the venture capital sector. More and more investors are looking at the area of sustainability and business models that pay attention to it. As a result, an increasing number of venture capital funds with a focus on sustainability can be observed in the market. Moreover, generalist venture capital funds include sustainability requirements and ESG aspects (Environmental Social Governance) in their investment criteria. In addition to the growing global awareness of the necessity of these topics for sensible economic action, the attractiveness for fund investors also plays an increasing role here. Thus, the described effect on capital and investment flows is already clearly evident in the venture capital market.
Whereas in the past, startups dealing with the sustainability or circular economy sector were still viewed critically by investors because they had the stigma of focusing more on ethnic targets than on strong business growth or exit targets, today there is increased investor interest. There is now general awareness that sustainable business practices have become increasingly important in recent years. Resources are scarce, consumer behavior is changing towards greener product or service choices, technologies are evolving rapidly, and regulatory requirements are tightening. Society wants a green transition, and businesses are having to live up to this demand. They are adapting their strategies or even developing new business models to meet their customers’ needs and reduce their environmental footprint – especially in the logistics sector. Sustainability and profitability no longer limit each other but go hand in hand. Issues need to be completely rethought, not only the first or the last mile, but the entire chain. It takes courage for big, capital-intensive ideas that completely redefine logistics.
For startups and investors in these areas, there will be considerable opportunities in the coming years to occupy the relevant market share, because one thing is clear: companies cannot meet these challenges alone, but only with the help of new technologies and service offerings. The need for transparency and resilience of supply chains is thus at the same time the basis for creating more sustainability in the economic activities of companies and thus goes hand in hand in the long term – the trinity of the supply chain: transparency, resilience and sustainability!
About the Author
Managing Director at F-LOG Ventures
Since 2011, Tanja has headed the Tech & Digital team of NRW.BANK Venture Fonds and was responsible for the seed and series A investments in this area. At the same time, Tanja helped set up Gründerfonds Ruhr and was its managing director until 2017.Until November 2019, Tanja Rosendahl worked at Network Corporate Finance, an M&A consultancy, advising companies with a focus on technology & digital as well as start-ups on financing and capital transactions. Since December 2019, Tanja has established F-LOG Ventures as Managing Director. F-LOG Ventures is an independent venture capital fund with a focus on the field of LogTech and finances start-ups in the context of seed and Series A financing rounds not only with capital but also with logistics know-how from its own industry network or via access to the anchor investor FIEGE Logistik. Contact: firstname.lastname@example.org