‘Chain of custody’ for materials
The approach when mapping your organisation’s supply chains is to typically start with relationships between your business and its Tier 1 suppliers; then, as data and information become available, map suppliers at Tier 2 and below. But, if organisations that provide the raw materials map their supply chains the process is reversed.
Using the apparel industry as an example, the raw materials are fibres: shorn from animals e.g. wool; harvested from crops e.g. cotton or man-made e.g. rayon. However, for the majority of producers, once their material is purchased directly or auctioned, all trace is lost. The result is that producers of higher quality fibres are not aware if and when substitution occurs at international spinning mills, so the added value of their product is lost.
To address the problem, a solution has been developed whereby the raw materials are impregnated at source with a luminescent rare earth pigment (similar to that used to verify bank notes and passports), which bonds to the fibres for life, including when they are recycled. The pigment cannot be seen, but is detected by a reader, so the material can be digitally and physically tracked through its supply chain.
The solution is provided as a ‘freemium’ application, with the base product a ‘free to use’ blockchain that records regulatory compliance at each stage through the supply chain. Handheld ‘Bluetooth scanners’ can be added to the verification process that provides ‘irrefutable traceability’, enabling a visual map to be built of customer details (including location) through the ‘chain of custody’ for materials. This information also becomes input for companies in each supply chain to build their Supply Chains Network Design Map for finished and intermediate products.
Digital Product Passport
As the fibres travel across borders and between businesses in the supply chains, the technology provides a ‘product passport’. But why is this an important development? The DPP or Digital Product Passport, will be legislated in 2024 for use on products imported into the EU.
The DPP will commence with apparel and electronics, but eventually cover most products under the EUs Green Deal aim of a ‘climate neutral continent’. To allow importers time to implement systems and train people, the legislation is due to come into force in 2026-27. This will bring the DPP regulations for importing companies in line with the requirements for EU registered business, under the EU Corporate Sustainability Reporting Directive (CSRD).
To achieve a Circular Economy, by which products can be repurposed many times, information is required in a product’s Bill of Materials about the travels of each input item through its supply chain. Currently, insufficient information is available to enable a quick decision about whether an item should be re-used, re-cycled, repaired, re-furbished or re-manufactured. The aim of DPP is to overcome this problem using digital technology.
Working with the DPP
Under the DPP regime, every item will have an attached QR code. When scanned, a digital document will open that contains sustainability details of (at least): the materials and items used, maintenance and repair data, and how to repurpose the items at the end of the product’s initial life. In addition there could be limited access details of the supplier’s name and location at each Tier in the supply chain and details of audits, certifications and reporting for import and compliance purposes.
The technology for this to happen is Blockchain, introduced in 2009 and applied in supply chains mainly in ‘proof of concept’ projects. The research firm Gartner identified in its Hype Cycle that Blockchain would not be commercially accepted until 2028 – which is about right, because the tool must then start to be deployed to achieve a specific outcome.
Blockchain solutions are best suited to address problems in supply chains involving multiple parties that have a well defined and understood functionality, which is not likely to change in design for an extended period of time. Examples being food traceability and reverse logistics for the repurposing of items. An example of the latter is a DPP for the world’s first ‘battery passport’ from the Global Battery Alliance (GBA), which has been accepted by the EU. The ‘battery passport’ is a cloud-hosted digital representation of a physical battery, which provides data concerning each material item’s sustainability. This is is the result of a three-year collaboration as a ‘proof of concept’ project involving more than 140 parties.
Challenges of a DPP
The challenges from using the Blockchain technology remain those that have been found in the ‘proof of concept’ projects. The most critical is that data entry errors will happen, but Blockchain contains terms such as ‘irrefutable traceability’ and ‘immutable truth’. This means that when a data record is committed to a Bluetooth based ledger, such as an incorrect country of origin, it cannot be changed, except with the approval of all participants. Other challenges are:
- willingness of parties to supply data;
- difficulty and timing to obtain data;
- parties supplying wrong data;
- ownership of data when it is in a Blockchain
- cost to maintain Blockchain for smaller businesses, such as costs of independent audits and certifications and
- interoperability challenges between different models of Blockchain
However, not allowing products to be sold in the EU without a DPP will be a big enough reason for companies to initiate projects that ensure compliance and co-operation between Sales at the seller and Procurement at the buyer.
In addition to meeting compliance obligations, Procurement professionals will have an urgency to build the Supply Chains Network Design Map for their organisation. Therefore, within the negotiation process, Procurement should provide incentives for the seller, based on the provision of accurate data. These can be financial, such as shorter payment terms and longer contract terms, or non-financial, such as co-branding to promote the tracing technology in marketing campaigns or provide knowledge that helps suppliers to upskill their workforce.
Introducing the DPP in Europe is just one of the steps that governments around the world will take to require improved information that enables a Circular Economy. Some industry organisations and companies will most likely provide products with ‘digital passports’ early, as part of their brand’s core value proposition. This will provide a competitive advantage and implementation knowledge so, as with all passport queues, it is better for your organisation to be at the front.