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Improving Supply Chain Traceability and Transparency Can Improve Financial Performance

Jan 02, 2023
Improving Supply Chain Traceability and Transparency Can Improve Financial Performance

Fashion has always dictated trends with a certain ease – no other medium has quite as much power and potential to make ‘sustainability’, in all its nuance, desirable. This, however, can only be achieved by effective communication, which can give impetus to a new era of sustainability – one in which everyone has influence, knowledge and can act accordingly.

Traceability is in increasingly strong demand, particularly when it comes to a brand’s value proposition, reporting on targets, strategies, progress and actions.

The demand for information

With EU legislation impacting transparency including the Sustainable Products Policy Initiative set announced in March 2022, the industry will have to adapt. The Policy Hub – Circularity for Apparel and Footwear, believe that engaging, comparable, and trustworthy sustainability communication at the product level is key to driving more sustainable customer behaviour and operational change within businesses.

Due to a generation of savvy citizens attuned to the likes of greenwashing, these changes are also in high demand from the wider public.

An overall trust deficit – a 2021 Drapers report revealed that 69% of people do not always trust brands and retailers when they say they are sustainable.

ESG and legislative compliance are directly aligned to a business’s finances. Apparel retailers need a cost-effective, efficient and flexible way of reporting into their own business operations, but also into their complex supply chains.

In order to report effectively, information required for ESG and legislation needs to be combined and consolidated to reduce duplication and fatigue. Retailers require a full view of their suppliers, their practices and locations. Big data and the solutions used to capture, communicate and consolidate will be critical to success. Without this, retailers will be forced to manually check and consolidate their data across their supply chain and own business. This will likely increase duplication and be subject to human error.

The growing body of research indicates that good traceability can improve financial performance across a range of metrics such as higher return on equity (RoE), lower operating costs and higher net profit margins (NPM). However, the research is fragmented, in part as measuring traceability is not easy – there is no unit of measurement associated with it and it permeates across all business practices and supply chains.

A study by Medcalfe and Miro(2021) found that individual sustainable practices improve Return on Equity (RoE) in fashion firms by 3% to 4% for transparency and traceability, 2% to 3% for audit and supplier relationships, and 2% for worker empowerment. Their study suggests shareholders may actually demand better sustainable practices because such practices increaseprofit. Yet importantly, improving sustainability is also in a firm’s best interest as those exhibiting strong sustainable practices may profitably deliver industry transformation in supply chain and environmental management while achieving a competitive advantage. Interestingly, this study also revealed that the only sustainable practice that impacts net profit margin (NPM) isenvironmental management, where a one-point increase in a firm’s environmental management grade corresponded with a 0.4% point increase in NPM.

Meanwhile, analysis by KPMG found that investment in sustainability and transparency could provide a number of financial benefits to apparel companies, including lower costs of capital and reduced insurance rates. According to their analysis, a sustainable apparel business can expect to have an average increase in their net profit of 1-1.5% for brands and by 1.5-2.5% for suppliers.

These analyses show the financial and economic benefits arising from better traceability and transparency in the apparel industry. However, there are no studies purely focusing on the financialbenefits of better traceability. This is understandable, as measuring traceability is a challengebecause it is a systems-wide metric consisting of a number of factors and requiring and producinga variety of information. Therefore, comparing companies on their internal traceability visibility and competency is impossible without verifiable disclosure.

For non-apparel companies traceability has been shown to be an investment in the reputation of a company which has paid off in the long run. Across a number of industries, high levels of supplychain traceability have been found to be particularly beneficial for operating cost performance.

The textiles and apparel industry currently faces rising pressure to adopt traceability measures and disclose the information gained. Doing so reveals environmental and social issues as well as risks in the supply chain while holding all stakeholders accountable.

1. Global Fashion Agenda (2021). Fashion CEO Agenda 2021.

2. UNEP (2021). Communication must play a critical role in fashion’s climate response.

3. Drapers (2021). Sustainability and the Consumer 2021.

4. Radley Yadler (2021). Words that work: effective language in sustainability communications.

5. Vogue Business (2021). Sustainable fashion communication: The new rules.

Posted by Abiteks

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