How to clean up your supply chain- with Martin Kotula

Martin Kotula [preview]:

In the food industry, the consumer is really willing to pay, I think, around ten percent more on the price only if they know where, for example, the meat is coming from. They would even pay more if they know, “Okay, now this is the farmer which is maybe next to my home city.”

Tim Coldwell:

Most of us don’t put much thought into where things come from: our food, our technology, our building materials. For the most part, how and where it’s made is a mystery. But once that information is put in front of us, as consumers, we care. And we care a lot. Truly understanding a supply chain isn’t really a simple concept either.

Let’s say you want to build a deck at your house. You hire a contractor and they build you a deck. And bam, you have your beautiful, new, outdoor dining space. In reality it’s a little different. Your deck is going along a supply chain: from forest, to manufacturer, to warehouse, to contractor. And each of these steps along the way can be pretty far removed from you, the person grilling a turkey burger on that brand new deck.

How are you supposed to know if the wood was produced sustainably? What about the nails; were they produced in a factory with decent working conditions? In a world that is fraught with industries exploiting child labour, plagued by climate change, and, oh yeah, a global pandemic, it’s more important than ever for industries to be transparent about how they’re doing things. And the words “ethical” and “supply chain” don’t always feel like they belong in the same sentence.

But an ethical supply chain is necessary, and it is possible. Technology that helps us track materials is out there, being developed and put into use right now. And I’m talking to one of the people behind it.

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Tim Coldwell:

Martin Kotula is the man behind an ambition to take ethical supply chains global. And in his role at SAP, he is using some really fascinating technology to do so. To say that Martin has put in serious time studying this topic would be an understatement. After getting his Bachelor’s degree and an MBA in Germany, he went on to do his PhD in Sourcing and Procurement—trying to understand how the construction and electronics manufacturing industries are behaving with their suppliers, and what’s a priority for them. Because if they don’t care, who will?

Martin Kotula:

In my view everyone should care. A lot of attention is going on sustainability, on behaviour, on climate change, so there is a huge increase of attention from consumers. They want to understand where—where stuff comes from, and what is the CO2 footprint.

I mean, would you buy anything where you know that there is child labour affected in it. I mean, I went through this crisis already with some breaks in China through human labour laws. And if that becomes recognized it’s a huge impact to reputation. And it becomes more and more important for every one of us. And therefore supply chain transparency, it should be the top of everybody’s mind.

Tim Coldwell:

There’s kind of an alarming stat out there that a significant quantity of materials in the North American construction industry were produced with what is, could be characterized as child labour. And so the general contractor, you know, I think we are pretty good at knowing where we’re buying stuff from, but then we’ve got the next level down is our subcontractors, and then they buy from a regional distributor, who buys from a national, who buys from a global, who goes straight to the manufacturer. And that visibility all the way up through that supply chain is pretty opaque. I can speak, from personal experience, that it’s difficult to figure out where the stuff exactly comes from and how it was produced.

You know, I think technology might have a part to play here. And you know, you work with a technology company, of course. How should we start to think about documenting that entire supply chain, back to the manufacturer?

Martin Kotula:

I think this is a topic where, from a technology standpoint, I think everyone would basically tell you, “Well, you should adopt blockchain, and you can you track it, and everything is easy-going.” Yeah. So technology is here; technology is there. And the main challenge is really to get all the different players in the supply chain to make it transparent and to open the books, basically.

And that’s a very, very tough endeavour, because you may have a good relationship with your first-tier suppliers, but if you go the second-tier, third-tier, or fourth-tier supplier, then it becomes a very critical issue getting the documentation. Are you really sure that the Country of Origin is the same like in the documents? Can you make sure that there is no child labour?

So I mean, in my consulting life, we also made audits at the supplier side. And in some cases, you even can’t discover whether this is really child labour or not. Every company needs to really look on sustainability goals to make sure that we may not source at the cheapest price; we may need to think about local-local funds, or we need to improve the working environment. But if we look, really, around the globe, very few people are really talking about this issue but it’s a serious issue.

Tim Coldwell:

Given the size of the global supply chain with materials, do you think that any one contractor could really get down to the end of that supply chain and really get what we’re looking for? Or do you think there’s a role for government in legislation in order to really make that happen, inside of the country that’s buying? What’s your take on the balance between the role of industry and government in this whole endeavour?

Martin Kotula:

I think in the end it’s really the first-mover approach, yeah—where the company needs to take on the responsibility. You can build a coalition across the supply chains, and you can come up with a certificate where everybody is really making sure that’s their own responsibility.

I think laws may help in a certain way. But, I mean, it’s like with speed limits, yeah. You need to make sure that there are controls. And I mean, in the end, if somebody doesn’t care about the speed limit and they go fast, then they go fast. Right? It must be self-driven responsibility from a company. Technology can help. The technology is an enabler, but in the end it’s really the social responsibility.

And I look in, on my research, sustainability was identified as the top trend for one-third of the companies only. And that’s already almost ten years back. Now, did it change remarkably? Yes, it is on top of everybody’s agenda. But when we then compare—when I compared how companies then finally behaved in the sourcing decision, sustainability wasn’t mentioned at all.

I think we need to re-evaluate our sustainability agenda. And in the old days, we were really talking about price and quality and delivery time, but I think there would be a fourth dimension, which may be really sustainability.

Tim Coldwell:

Yeah. And I think that the increasing awareness around this sort of a topic, around the globe, with the consumer, the construction industry has been isolated from the consumer impact to an extent. And my sense is the awareness around this is now hitting the construction industry. And so I think the kinds of behaviours that we’ll see is owners wanting transparency in supply chain, and if you can’t demonstrate that your materials and labour are ethically sourced, you’re not going to get specified on the project. You’re not going to get hired. I think the market forces are going to be very powerful around that.

Let’s shift from materials to more this idea of where the labour comes from on a project, and the idea of an inclusive approach to labour. You know, SAP has been very well-known for advocacy around social procurement and purchasing with diverse communities. Do you want to just touch a little bit on SAP’s initiatives there? And then also, how can technology help us have diversity in the labour supply?

Martin Kotula:

Where technology can help is, with SAP’s business network for example, we have a strong network with more than five million of companies being registered on the network, where we have also certificates and classification for minorities—for women-owned businesses. If you really want to make a very fast sourcing decision or buying decision, you basically can look onto this repository and basically see where you can really support social enterprises. I think, going forward it becomes also more important to have those transparencies. There are different perspectives, and I would say, which have different nuances when it comes to technology.

Tim Coldwell:

One of the things that we’ve learned here, in Canada, in implementing social procurement is that there’s a fragmented—let’s just call it fragmented directories of impact organizations that we can partner with. You know? So the Canadian Council for Aboriginal Business has certified aboriginal businesses and a directory for that. Buy Social Canada is doing great work in Canada, and they have a certification process for social enterprises.

And you know, I’ve had this idea in my mind, like how do you bring all these directories together, and put them in one spot, so that people know where to go when they’re making buying decisions? Do you think that that can be done at a country level? Or do you think that that needs to be done at an industry level?

Martin Kotula:

I would even add the global dimension to the space. Nowadays we live in a global environment. And suppliers became also large enterprises with different subsidiaries around the globe. It’s simply a data topic, yeah? It’s data, certification, local databases. It’s super-crazy across the globe, because everyone has its own standards. If you would imagine that we are getting a kind of “Yellow Pages” globally with all the different ticks, and qualifications, and certificates, that would be really awesome. But even companies, everyone wants to get their own criteria, their own specification, which complicates things. And we are starting with the business network. That’s the core idea that every company can register. They can provide their services globally. That’s a big goal, yeah, to have one global community and to bring the networks together.

You mentioned directories. I think in maybe the near-term future, we will see, through all the different technology capabilities—with APIs, for example, where you have different interfaces—that you can easily connect those different repositories, yeah, or directories. But you need to get a data-standard. So somehow you need to get this mapping done. And it would definitely help if you have one big organization and they define a kind of a standard. That would definitely help.

Tim Coldwell:

The construction industry hasn’t really seen the full impact of the changing values that consumers make. But there’s a younger generation that’s entering the workforce, and I think we’re starting to see that impact now.

Martin, you have a global perspective across all sorts of different industries. Can you paint a picture of how the consumer buying patterns have changed industries overnight? And that might maybe a bellwether for what’s coming for the construction industry.

Martin Kotula:

Being based in Europe, I think we see a massive, massive change. And so if you would ask me maybe five years back, or even two years back, I would never think about it. But what we see with the Fridays For Future motion, I would say, with Greta Thunberg being one of the thought leaders there in the space, is that whole massive change affected the automotive industry. Massive changes ongoing to electronic cars. And we see this also in the construction side, in the construction building now, with supply chain so prices definitely go up.

There are also some ideas about solar funding, wherein private families are investing heavily in solar parks. We see solar parks. And I lately saw one in Thailand, where you have a huge area of solar panels in the ocean. The difficulty for the construction industry will definitely be is if you really look on what are the core materials or categories which you are buying, one is definitely steel. And steel is a very high energy-consuming industry. So that will be definitely very hard for the carbon footprint.

I see it will come definitely across the globe that you have much more focus on how sustainable, what is your carbon footprint, to be Zero Emissions kind of a motion. Yeah.

Tim Coldwell:

Let’s just talk about transparency. We’ve had some conversations in anonymizing data, in terms of how people self-identify as whether they’re indigenous, or a visible minority, or…. And there’s privacy laws that relate to that. There’s an interesting stat that 91 percent of Canadians agree that the Canadian government should require companies to publicly report on who makes their products and what they’re doing to reduce child labour in the supply chain. How can you actually get ahold of that data? Do you have to anonymize it? Do you think that there’s an actual way to get it to be voluntarily provided?

Martin Kotula:

Oh, that’s very, very tough questions.

(laughter)

Martin Kotula:

When you now see what Apple is doing with the whole privacy change and they give the…. I mean, it’s an entire motion or marketing campaign. It’s a real core value change to go back to the consumer and tell them you’re the owner of your own data. Yeah. So everyone was talking about data, and Big Data, and data as the new oil. If you now see the whole ecosystem—with the Facebooks of the world and with the different providers—I mean, it’s a complete massive disruption in that market.

For businesses it’s not that on top of the agenda, so far. It’s only about the protection of their own data, of their employees’ data, and to have firewalls and security standards being established. We didn’t face anything, so far, when it comes to releasing or reporting additional information—except for the supply chain transparency topic. So for example, if you have the documentation for the full order to track the different shipments, to have the certificates being ready, I would say, from an operational standpoint everything was there.

Now, if you really want to release all the information to the consumer, I may draw an analogy which we saw in the food industry, where the consumer is really willing to pay, I think, around 10 to 15 percent more on the price only if they exactly know where, for example, the meat is coming from. They would even pay more if they know, “Okay, now this is the Farmer, eh, where I basically source it from, which is maybe next to my home country or home city.” The whole release of information, from a data-privacy standpoint, technology-wise it shouldn’t be any big issue. The main topic is really if every company in the supply chain is really willing to release all the information. That may be a very difficult one.

And then, if they release the information, the second one would be: is it all true? But you will always find people who are not really complying with it. And I think, from a legal standpoint, even if you talk about penalties, it will be very hard for everyone. And therefore this leads me back to what we initially said. I think there is a huge demand for companies standing up and releasing. And I think the first-movers who will stand up and say, you know, “This is my transparency,” I think they will additionally gain.

So you need to have your core values. And if you stick to the core values, and you are the first-mover, and you release all the information, it benefits basically the whole economy and everyone, yeah.

Tim Coldwell:

Yeah. And you know, I’ve been pretty overt. When I speak about business as a force for good, you know, we also can make a good profit and good margins while we’re doing this. And to your point about the data would suggest that people who are forthcoming and transparent around this probably can demand a 10 percent, or maybe a 15 percent, higher price. That’s in the consumer world. It’s probably lower in the construction world, but there’s margin to be had there. And the first-movers who voluntarily provide that information down through their supply chain, I think have a huge opportunity to take market share.

You know, we’ve really been talking about an ethical supply chain. So, Martin, in your view, what are the characteristics of an ethical supply chain? What are the hallmarks of that?

Martin Kotula:

In my view, the first main topic is really about human rights. And then child labour, I think this is a super-important topic, really. I would make it quite easy and really stick to the UN standards. If you do this and you’re already much more better than maybe many, many companies there.

The next one is definitely that, from a responsibility standpoint, if you have procurement professionals, I think you need to go and visit your supply chain.

The third I mentioned where we really want to support the kind of social procurement motion, I would say, to really define some targets. Basically look at where can you develop big impact for those companies and for that ecosystem, basically. And the same also applies for subcontractors. Right? I mean, to make sure that you don’t have a subcontractor who is having some very cheap labour policies or even some slavery motions in some of the countries. If we look around the globe, you still have that situation. Social standards are super-critical to be set up in every sourcing practice in every sourcing strategy. And then to make it really happen, that you are measuring the right things and that you’ll make sure to really deliver on your promises.

Tim Coldwell:

So, if there’s one final statement that you think a main take-away should be for our audience, what do you think Canadians need to understand better about ethical supply chain?

Martin Kotula:

Simply for the company I would say, if you haven’t started, start now. Start acting now and be one of the first-movers. Try to make the world better. Lead with example. Why should you always try to compete with the cheapest price? Do something different. Make it transparent, yeah. If companies are really open to open their books and say, “Well, this is our top suppliers we work with, and these are their production facilities,” then it definitely helps for the consumer to make a better decision. And in the end that’s ethical and that’s sustainable, and that’s also social.

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Tim Coldwell:

Thanks so much for checking out the show. I found Martin really insightful, and I hope you did too. We’ve got plenty more Building Good to come. So hit the “Follow” button. And if you like what we’re doing here and want to help us build good, leave a rating or a review, or just tell a friend about the show. It helps other people find us, and we love reading your reviews.

Building Good is a Vocal Fry Studios production. The executive producer is Jay Cockburn. Our associate producer is Kattie Laur, with production assistance from Jessica Loughlin. I’m Tim Coldwell. Thanks for listening.