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The State of Trade: Supply Chain Visibility (August 2022)

August 2022

There is a growing disconnect between what governments assume businesses know about their supply chains and what they want them to know. In this upcoming webinar, we’ll discuss both evolving trends in supply chain visibility as well as growing regulatory demands.

  • How much do companies actually know about 2nd and 3rd tier suppliers?
  • How do businesses keep track of their data?
  • Why is the government asking for more, and where is this headed?

Speakers:

  • Phil Levy | Chief Economist, Flexport
  • Tom Gould | VP of Global Customs & Trade, Flexport
  • Amy Morgan | Head of Trade Compliance, Altana AI

Webinar Transcript

Phil Levy: Hello everyone, and thank you for attending today's webinar, The State of Trade Supply Chain Visibility. Before we begin, a few procedural points. At the end of the session, we'll hold the question and answer discussion as time allows. You can ask questions through the Q&A function on the right of your screen. Your questions will only be visible to you and to the Flexport team. We will share a copy of the slide deck at the end of the presentation.

For our lawyers, a brief legal note please do keep in mind all information provided in this session is based on the situation at the current time and may not be customized to your specific business requirements. We always recommend reaching out to a Flexport expert to discuss your particular situation.

All right now, who are and what do we have for you today? I'm Phil Levy, I'm Chief Economist at Flexport, and I've got two great experts to discuss this topic with me. Tom Gould is my colleague who is our Vice President of Global customs and trade. Tom, welcome.

Tom Gould: Thank you very much.

Phil Levy: And I'm thrilled to welcome Amy Morgan who is Head of Trade Compliance at Altana Technologies. So Amy has an illustrious career with extensive experience, landed cost calculation and cross border tax compliance. She's a licensed US Customs Broker based in Seattle, Washington, where she was actually recognized as one of the Puget Sound Business Journal's innovators of the year in 2019, for using her big trade background to pursue progressive solutions to compliance challenges for companies of all sizes, and she's got an impressive list of companies with whom she's worked. So Amy, great to have you with us.

Amy Morgan: Thanks, Phil.

Phil Levy: All right, so let me give everybody a sense of where we're going. As we look over this, what I first want to clarify is what we mean by visibility. So there's lots of good reasons why you'd like to have visibility into your supply chain. You'd like to know when your shipment is going to arrive, for example, or maybe you'd like to know what route it's taking, all important things, not so much what we're talking about today.

Instead, we're gonna go visibility into who provides what and how in supply chains. So as you'll see from our agenda, we're gonna start talking about what companies have traditionally known about them, how their goods are produced, and whether that sort of visibility has changed over time.

We could also talk a bit in this section about why companies have wanted to know this. Then we're gonna move on to talk about what governments have traditionally wanted to know about supply chains. And, you know, we're holding, we're holding the session, the reason we're talking about this thing is that we see some interesting and potentially important developments on what governments want to know. But it doesn't mean that it's an entirely new issue. So we want to sort of ground ourselves in where we came from on this and traditionally, what has compliance meant?

Then we're gonna move on to talk about what are these changes? What are the things that have caught our eye, these new demands for visibility, and we're gonna to focus heavily there on government driven developments around the world with multiple governments. But these new demands can come from the private sector as well and we'll touch on that also.

Finally, we will do our best to project out and forecast where all this is heading. There will be so much a practical guide. We, our companies both do with that kind of thing, but that's not our topic for today, but more a broad overview sense of what's likely to come next. And then as I said, time permitting, we will get to questions and answers.

First, though, as is our want, we will start with finding out what you guys think about all this. So we are going to start with a poll, and I believe you now, should now see a new live poll off to the right asking you what is your experience? Or you know, what was your stance on supply chain visibility, specifically, the extent you felt the need for deeper visibility into your supply chain, as it's been primarily due to: the need to work around recent pandemic area interruptions, policy actions, such as tariffs, general ideas about cost minimization.

So in other words, you brought this on because you want to increase margins, existing or pending government informational requirements, or just haven't felt the need to have deeper supply chain visibility and you're just gonna be rushing off and doing things differently after this webinar.

So all right, so please let me know we're interested in sort of what has motivated you on this, what your, what sort of brought you to the topic. And let's see, we are getting a bunch of votes in, very much appreciate that. Thank you, everyone for contributing, we always enjoy seeing what you all think, at the moment. It's actually evolving, we're getting some action on pretty much every category, but the plurality at the moment is for the need to work around recent pandemic era interruption with second place being its work to a majority, general cost minimization. Amy is this your, what you would have thought of as you deal with people who are trying to get better visibility, are these similar to the motivations that you're generally seeing? Is that a reasonable breakdown from your experience?

Amy Morgan: Absolutely, not only in my current experience, but harkening back to my previous life as well, there really wasn't that need for us as compliance professionals to have that deeper supply chain visibility. We didn't need it as anyone really, it's only because of the pandemic, which highlighted how fragile our global supply chains actually have become. As well as the war in Ukraine, which is now showing us how countries are weaponizing trade, like these are things that are exposing to us that we have to know more. We have no choice to know more not only to be compliant, as we'll talk about with recent legislations, but just for our own business resumption, our ability to manage our supply chains to predict the future to prepare for the worst.

Phil Levy: Yeah, and of course. Tom, what's your take?

Tom Gould: You know, it's interesting, I would have picked a different answer than what the majority of people are picking today. I would have really gone towards either policy actions or government requirements as the leading reason for companies to want to dive deeper into their supply chains today than they had in the past. I think that definitely the pandemic is impacting pretty much everything businesses do today. But I think I would see the need for that deeper dive into the supply chain more for either government regulations, or for you know, different types of government policy actions that we're seeing around the world.

Amy Morgan: Hey, Tom, can I ask you a quick question? If you could consider policy actions as a result of the disruptions we're seeing where the government's are actually responding with new policy because of the pain that everyone is feeling from the air? They're kind of coupled, in a way right? Would you agree or?

Tom Gould: Yeah, there definitely are a couple that I think this was a good question, because really what it did is it showed a very diverse set of responses. Yeah, we don't have a majority on any of the answers. We have a clear, you know, one question, that's a clear leader, and that's the pandemic and that really tells us that the pandemic is pretty much top of mind for a lot of what's going on within the government as well as within trade today.

Phil Levy: That's useful and of course, we're hoping to inform on all of this and see whether people keep their motivations or have new ones. And of course we didn't compel everybody to pick one. So they might have had multiple, but now that's pretty useful.

Let's jump in to our first topic, and that is kind of setting a baseline on this. And Tom, maybe you can start us off where we're doing this topic because we see these potentially big changes coming. But let's, you know, people did already have some reasons, some of them quite recent, because the pandemic is a recent event. But what if the companies traditionally known and of course, if we go far enough back, we have supply chains that were significantly less complex. How did that factor in to, in people knew or didn't know?

Tom Gould: Absolutely Phil? Yeah. So, you know, I always like to look at the history of, especially of our industry, and one of the things that you know, as you mentioned, is supply chains used to be much far simpler than they are today. And, you know, I use an example, I often like to use textile and apparel example. Think about 100 years ago, when you were talking to a company in gen, maybe it might have been a store located in the local town that made apparel that made pants, made dresses. They would often be situated in the same town, as the company that wove the yarn, it's the same company or the person that spun the yarn. And the farm where the cotton was grown was probably within the general area of where the garment was made. So companies or people that manufactured products, really knew their supply chain, they had personal relationships with the different people that supply the various different components to them. Even if you think of something more complex, like the automobile, you know, look back to the days of Henry Ford, you know, when everything happened in Detroit, and everybody kind of knew everybody else, and they knew who was making what and where the where things came from, and it would be pretty easy for companies to really look at their supply chain and understand where all the raw materials came from.

You know, I mentioned in a blog post that I wrote a little while ago from dirt to shirt. And so, that's I think what companies are looking for today and what governments are really asking for companies to do today is to look at their supply chain, and be able to understand all the parties and all the transactions involved. Getting the product from the raw materials that are pulled out of the ground, whether it's the iron or its mine to make the car or the cotton that's grown to make the apparel, and all of the steps along the supply chain to get to the point of actual final manufacture and distribution and sale of those products. And I think that looking at our history like that allows us to really get a big, a good picture of what a supply chain, what supply chain visibility might look like in its optimum state.

And one of the things that I'm seeing today, that is somewhat surprising to me, maybe not so surprising, maybe it shouldn't be surprising. And that is the governments, what I'm seeing seemed to have the understanding, the misunderstanding, that companies still do have that type of visibility into their supply chain. And I think that's what we're going to talk a little bit more about is that, maybe we don't, and maybe we need to do some things to get better visibility into our supply chains.

Phil Levy: Yeah, absolutely. That's really one of our central themes is if there's a disconnect that's important between you know what governments want or think that companies don't want to actually know. But Amy, you were talking earlier, before we came on, about how you sort of related this to sort of the development of globalization? How have you seen the sort of evolution over time of what companies either know, or want to know about their supply chains?

Amy Morgan: There, I think Tom captured the history part well, right? I remember going to graduate school in the late 90s, where we were talking about globalization and the promise of globalization, and it's going to, you know, are going to open up national markets, and we're gonna have so much efficiency and cost optimization, it's the future, it's the wave. And it's true, it was. And what we're seeing right now, though, is because of that globalization, because our supply chain networks have gotten so big and so complex, that companies like Tom said, have lost that ability to see the supply chain end to end and lost the ability to know, to trust, to control where their goods are coming from, or how they're made. And the result of that has been like, just to take that now into what I'm seeing when I talk to customers regularly is that essentially, that supply chain complexity is created blind spots for all the good it did. It's created these big, opaque black spots in what we know, which makes it difficult, if not impossible, to comply with that government expectation. That Oh, you just you know exactly who you're doing business with, so this compliance would be so easy for you, right? And that's not the case. Companies might know who their direct tier one suppliers are, because they pay them, they order products from them. But they know very little about who that supplier gets their raw materials from, or they know very little beyond that tier one have very little knowledge of or even visibility to the suppliers and manufacturers and beyond that point.

Phil Levy: We're going to be asking our participants, our audience about this and a little bit, but let's get out ahead of them on this. You both have suggested that one of the reasons one of the things that's changed over time is increasing complexity. It used to be simpler stuff used to be nearby, it wasn't as difficult to know. To what extent is it just complexity that's limiting company's visibility? Or are there other factors such as maybe your tier one supplier doesn't want to let you know who the tier two suppliers are? Amy, you want to get first crack at that and then Tom?

Amy Morgan: Yes sure, so there's a couple things that come to mind right away, right. Like, of course, there's that competitive aspect. But few suppliers are going to want to share who they do business with, that's their magic, that's their secret sauce. And in some cases, we're seeing where countries are actually prohibiting companies from providing some information about their supply chain, such as China. But I'd be remiss if I didn't at least acknowledge that some industries actually do know more, like there are some industries like auto or aerospace, who are very vertically integrated, they have a very close hand on who they do business with. So I'd be remiss for not acknowledging that. But…

Phil Levy: That's a good point. And so Tom, is that a big differentiator, there's this sort of degree of vertical integration or the extent to which people are sort of doing arm's length transactions with the supply chain? What's your take on why people don't do more than they do?

Tom Gould: I think that the degree of you know, a vertical integration absolutely provides additional visibility, but then there are other reasons why companies, you know, will have visibility to a certain level within their supply chain. For example, companies that take advantage of free trade agreements, often have to know further back in their supply chain where the raw materials came from so that they can determine whether or not their products qualify, but it typically stops at a certain point in time.

So if you look back on, you know, wearing apparel again, like I often refer back to, there's what we refer to as the yarn forward rule. So companies needed to know where the yarn was made in order to qualify for a free trade agreement, but they don't necessarily need to know where the yarn was extruded, or where the cotton was grown to go that far back. So it's spotty, there's certain industries that know more, and there's certain industries that do less. But one of the things that I think we've seen with globalization is that there are a lot of companies that really specialize in distribution and sales. And they simply procure, they simply go out and buy products that were made by someone else, and turn around and distribute those, sell those products. And they often don't have any visibility into the, you know, deeper further back into their supply chain.

And many times, it's simply that they've just never had a need to know in the past, they were in the business of selling stuff, they didn't necessarily need to know where it came from. They didn't need to, they didn't have many requirements imposed on them for you know, for looking into that visibility. And what we're seeing today, and the shift that we're seeing today is that there are many many different factors that are encouraging companies or forcing companies to learn about the deeper aspects of their supply chain and go further and further back.

Phil Levy: Please , Go ahead Amy.

Amy Morgan: Sorry Phil, but Tommy, we think of something that I think is also a good call out like. Yes, complexity is like the big reason that companies don't know more, and Tom is totally right, they haven't had to know more. But like an offshoot of complexity is also data access. This is a data access problem. So even if a company wanted to know more, I know in my past, when I've wanted to know more, it was on a one off basis. And it was always kind of a circus, to try to find who is the supplier, and who's the supplier doing business with or whatever. But it's the data access problem I'm referring to is we've only had to resort to manual techniques, like audits or questionnaires or surveys, in order to collect that supplier information. And to go back to the previous point, the suppliers don't want to provide it. So it's that data access problem is also I think, a big inhibitor to companies knowing more.

Phil Levy: That's great. So go ahead.

Tom Gould: Yeah, even if the companies do want to supply it, it's often very difficult for them to do so. Because each step, you go back in the supply chain, you're dealing with more people, more documents, more systems that are not connected, that are not designed in a way that makes it easy to be able to provide that information forward.

Phil Levy: Now, that's great. So we've got, by my count complexity, the question about whether or not you have vertical integration, arm's length or intermediaries, we've got what are the government requirements, and we'll get to these competitive issues and whether people are willing to swipe?

Tom, you give us a nice segue into our next topic, which is that one of the motivations, there's a certain degree to which people want companies want to know this for their own purposes. But you brought into the things which are effectively government requirements. So let's move on to this. And then even next to this, we got a picture that was specially for me on this next one.

What Has the Government Wanted To know?

That's right, a cow. I'm from Wisconsin, America's dairyland and I'm the host, we could have whatever we want. No, actually, there's a substantive reason to this, but we'll get to it. But what I wanted to have a turn to now is that whole sorts of motivation that Tom already raised. And, Tom, you raised this in the context of rules of origin, that, you know, there's often with free trade agreements. There's a, you get a preference, for example, in the old NAFTA, if something was a North American good, and then that would then raise the question of what is in North American good?

Amy, I want to start with you on this one, because I know either one of you could handle this nicely. But what kind of informational requirements did that impose? And maybe you can elaborate, Tom has sort of introduce how there can be sort of big sectoral differences in this, depending on what the agreement said.

Amy Morgan: Oh gosh, you're gonna give me nightmares going back to old QIZ and preference programs, audits and verifications now. But I would go back to, I would start with my tier one supplier, right? And you ask them for bills of material. What goes into this? Where do you get your yarn? Where does the labor happen? Where does the thread come from? How much of the work is done right there in your facility? Beyond that, you need to go take that information, and now maybe you go after the tier two, you need to go out to the yarn supplier, ask for all their information. Did this information or did this product actually come from, was the cotton that made the yarn grown in Egypt in this particular case I'm referring to.

You had to go all the way back to the soil so that you could calculate the regional value content. Gosh, I hope I get these terms right. I'm a little bit rusty there. But you can actually determine, you know, did substantial transformation happen? Or does this meet regional value content to qualify for that trade program?

Now, the rules in the verification didn't actually state must go back, blah, blah, blah, the rules stated that you had to be able to calculate that the amount of labor or the amount of the product qualified for that program, it came from that region, or it came from that country, and then you had to support it with all kinds of documentation. But it wasn't as prescriptive as some of the legislation that we've seen recently, like in forced labor and what not.

Phil Levy: Yeah, go. Please.

Tom Gould: I want to add to that, look at some of the more complex products, think of something like a car or a computer, and think about, you know, looking at a computer, what's inside of it, where did all the materials come from, to make the computer? The case may be made with plastic or metal and where that petroleum come from that was used to make the plastic that was used to make the case and where did the metal get mined, to make the you know, to make to make the the screws and the components that hold it together, and look at how many components that there are, that are in in that in that product. And looking back to see where all of those components came from, it can be a very daunting task, because you can be going back, you know 2, 3, 4, 10, and maybe even more layers into the supply chain.

I remember the situation where there was a tsunami in Japan that really destroyed a portion of the manufacturing, some manufacturing facilities in Japan, and it destroyed the facility that manufactured red paint. And so all of a sudden, red paint was not available to make cars, you couldn't get red cars out of Japan. And nobody in the car industry realized that they were all sourcing the red paint from one company, and they had no redundancy, and things like that are the types of things that we just don't know about.

Phil Levy: Right. That was in Fukushima in 2011, if I recall, from Fukushima.

Tom Gould: Yes.

Phil Levy: Yeah, no. So you will have me thinking back, it's funny, we talk about the rules of origin. I'm an old trade policy, I'm not a compliance person, or customs expertise, like you guys, but I used to, at one point, I'm old enough to remember, first one, you had candidates who are for free trade. But second, when I think one of them made the claim, you know, you could put a free trade agreement on a postcard, which would say, you know, trade should be free. And what I would say to students and others was, No, there's a reason why these agreements are as thick as they are. But an awful lot of it was rules of origin.

Tom, you brought up, you know, complex things like what counts as a North American car? And then you actually did need to delve quite deeply into this stuff. Because, you know, it would be all right, well, the engine came from here, but the engine wasn't totally made in that other place. Do you round up? What do you do? other issues. In fact, that was one of the big changes that we saw with USMCA was that it was changing some of those requirements, right?

Tom Gould: Absolutely. It's interesting, you mentioned that one of the differences between NAFTA, USMCA, like in the auto sector and some of the other, you know, heavy machinery sectors is that under NAFTA, we may have needed to go back to where the metal was formed into the fender or formed into the the particular part of the machine that you were looking to import and qualify under NAFTA.

Today, though, the rules of origin under USMCA often require us to know where did the actual metal come from that was used to make the sheet of metal, where did the ore come from that was used to make the sheet of metal that was formed into the fender.

So the rules of origin have shifted to require companies to look further back in their supply chain. But if you also, if you look at the Free Trade Agreement rules of origin, they're very specific industry by industry. The auto industry has notoriously had much more stringent rules of origin that required a much more in depth knowledge of the production process of the car.

But if you look at another complex industry, the computer industry, the rules of origin were designed in such a way that you really didn't need to go that far back in the supply chain, to determine if you qualify.

One of the things that we're seeing with the governments today and what they wanted to know in the past and what they're what is changing today, is that today, companies are using multiple different laws and rules to encourage or force companies to dig further and further back in their supply chain. Not just things like the rules of origin.

There have always been things like the food safety and the consumer product safety rules that required companies to know pretty far back in their supply chain where things came from. But what we're seeing today is a vast expansion of the number of products and the types of products that governments are asking for further detail in it even not just governments, but companies themselves are wanting to know for various reasons, as well, as you know, NGOs are looking to dig into the supply chains of companies as well.

Phil Levy: Amy, I'm gonna want you to comment on that in a second. But I also want to toss another thing in there, which is the trade off between desire to know and cost of compliance. And in particular, this actually is my more serious reason for having Bessie here on the slide, which was, that was part of what this dispute was about was there was a requirement on this country of origin labeling, which you guys can probably correct me in the details, because gonna be a little bit fuzzy, but that it was that importers had to specify which herd or very specifically was their beef, or other agricultural products coming in on. And I think a lot of the debate was, how costly was it to comply with that informational requirement? And did that cost, effectively serve as a barrier to trade? Am I remembering that right? And generally, Amy, how do you see this sort of balance between yeah it’s nice to know these things versus it's really it's costly to comply.

Amy Morgan: Well, do you want me to talk about the past? Or do you want me to talk about where we are now, because in the.

Phil Levy: You can bring that right on up.

Amy Morgan: So today, the cost is infinite cost, right? Not only is it hard to do what the government is asking us to do, what we want to do, supply chain visibility is hard. Let's just be clear. And it's going to be expensive, whether you apply human bodies and human effort to do the manual work. Or if you employ a technology to help do it for you, you're going to have to make an investment. So there is a cost.

But if you don't do those things, now, you're risking not only non compliance, which comes with a whole slew of its own penalties, your privilege to import or export, you're also putting at risk your own business resumption.

If you don't have this visibility into beyond your tier one into your tier two into your end tiers out the door, how will you be able to better plan for any disruption that might hit your business? If there's an earthquake in Haiti, or a hurricane in the Gulf or whatever? How will you know if any of those events impact you?

If factories in China shut down? Because of a heatwave? How do you know if any of your products or any of your inputs, raw materials come from those regions that you can plan accordingly.

So now the cost is, if you don't invest, or if you don't engage in this deeper visibility, it's going to come back and hit you hard, like the last two years have with shortages of baby formula or cars, semiconductors, and the like. So the cost is exponential.

Phil Levy: Yeah, yeah. Do you get the sense that governments have factored that into account?

Amy Morgan: I think some of the policy is a result of them noticing the supply chain shortages and trying to address them by forcing companies to know more so that we don't come into this situation again in the future. But whether or not they know, or they understand the degree of the complexity and the cost, it's going to, that companies are going to have to incur, I don't know.

Tom Gould: And I, I would say that governments tend to not necessarily look at the cost, they look at the results, they want an answer to a question. And if you look at the different, you know, things like we're talking about rules of origins, food safety, and so forth, governments tend to want to know the answer. And they leave it up to the, you know, to the trade, to the companies that are actually trading and merchandise to determine how to do it.

And one of the things that we're seeing today is that, because we have not add the visibility in the past, many companies and the way that companies are going about it is they're looking back in their supply chain, meaning they're starting with an end product, and they're trying to work their way back to the beginning to the raw materials, and what companies, and that's what can be extremely expensive.

And what companies are starting to do today is starting to look at it from a different perspective, meaning they think that, the theory is that it would be less expensive overall, to start tracking origin at the beginning of manufacturing of products, so pushing into putting into place processes and procedures so that anytime that something is manufactured and made, that information is made available to the next level in the supply chain. And I think that's where we can look at lowering the cost to doing it bigger upfront cost to get the process started. But once it's in place, I think the overall cost will be less expensive by starting at the beginning and working forward, as opposed to looking backwards at something that was already manufactured.

Phil Levy: So this is a very nice cue for us to take on, go to our next poll, which is we're going to ask everyone out there who's dealing with these kinds of issues. What are your obstacles? So when you think, actually, I think we have the biggest obstacle to greater supply chain visibility. We are going to, all right, well you know what, we’re going to ask this question anyways, because the questions we have. So our forward looking question. So let's ask, when you think about enhancing your supply chain visibility, being forward looking, we're gonna come back and ask you what are the blockers.

Now, which are you most inclined to do? Buying tools that can map supply chains and screen for compliance simultaneously? Budget for traceability services? Find tools to enhance communications with suppliers? Hire more headcount? Or I'm not thinking about enhancing my supply chain visibility? We'll start with forward looking and then we'll see you later on what's been happening to you in the past.

But let me ask everyone to, who has a view on this. What are you thinking about? What are your inclinations and we will later be getting into a discussion of what we see as some of the options or the likely trends? It looks like what we have in the lead are easily finding tools for mapping and screening for compliance simultaneously, and then finding tools to enhance communication, coming shortly after that. Amy, this has to warm your heart, doesn't it?

Amy Morgan: I am overjoyed with these results. Because this was sort of a gamble, that tool that can match supply chains and screen for compliance or risk simultaneously feels like science fiction, right? And that's what I do all day long. So that makes me very happy.

Phil Levy: Cool. Well, that's great. So clearly, there's an appetite for that, and we're going to be talking more about that and get into these solutions as we get towards the latter part. Let's move now. And thank you everyone, by the way for giving us those responses. We are always very enthused about knowing what you are thinking. But let's move down to some of the stuff that we've hinted at. And the stuff that was really our motivation for holding this discussion in the first place, which is that, it strikes me and I'm gonna let all of you weigh in that we are seeing increasing demands this way.

Tom, you already addressed this a bit, you know, the sort of the government concerns. But I think our next slide will have just a range of examples of things that are coming in where governments want to know more. ### What Do Governments Want to Know Now?

I'll just pick one out of there, because I know the least of all of us about all this stuff. So I'm going to grab the one thing that I know, but something that has sort of really struck me has been the move in Europe towards a carbon border adjustment mechanism. That they've started out where the information requirements might not be enormous because it started with fairly simple products, at least four or five products that we started with.

But this seems to me that there's an inexorable trend here where we're going to have more and more informational demand. Because if you do something that makes a steel more expensive, by the way, I should just say that the purpose of this is to, from the EU's position, require that other producers around the world are facing the same kind of environmental costs that EU producers are facing.

But if you have the impact that some key inputs, like steel become more expensive, it seems only a matter of time before they start saying, well, now I want to notice that something much more complex like cars, and now you're gonna be getting into informational requirements that have to do with, okay, the same kind of thing that we were just talking about rules of origin, but with the added dimension of under what environmental regime, where the various components produced.

So, Tom, maybe you can lead us off with this. What are you seeing this trends? Do you share my concern that this is a mounting desire for information on the part of government?

Tom Gould: It absolutely is. And I think really what it is it's an indication that governments are realizing more and more that imposing rules, imposing taxes, tariffs on products, as they're moved internationally, is a tool that governments can use to further their own social initiative. Whether it be the environmental initiatives where they're looking at the carbon border adjustment mechanisms, like you mentioned, you know, labor issues. There are a lots of different issues that governments are looking at from a social perspective and saying how can we control? How can we dig in deeper into this issue? How can we find more information about this issue, and more and more the governments are looking at how they are connected to trade. And again, that's what is going back into the governments are looking at trade as a source of information. And so now what they're doing is they're imposing new laws, new regulations that are requiring companies to dig deeper into their trade into their supply chain, so that they can answer these very, you know, very lofty social questions that are being asked.

Phil Levy: Amy, what's your your broad take on the trend? And then we can dive into whichever specifics? Are those any particular ones that have caught your eye?

Amy Morgan: Oh, I think Tom captured it really nicely. I mean, the policies, we're seeing the industrial policies that we're seeing as of late or direct results from supply chain disruptions from issues, right, the Installation Reduction Act that provides for onshoring, clean energy manufacturing. I mean, now you're talking about onshore and changing your supply chain, in order to have a climatic impact. I mean, that's kind of bundling a couple of things all in one, the Chips Act because of the semiconductor shortage. We saw the Formula Act because the baby formula shortage.

So having to dig deep into your supply chain in order to find information to take it as, to have to comply with policy that is a direct result from supply chain disruptions. I mean, it's a fascinating trend. It's terrible that we're at this point. But it all factors back up to what Tom was talking about from the social issues, which are all really national security issues. And I could even broaden the national security topic to include, like the Stop Act in the US and the ICS2 in Europe, which are policies that require, that are trying to curb the trafficking of illicit drugs and small parcel shipments.

There's, gosh, you could even look at Tax Revenue Protection where the EU eliminated VAT de minimis, like all of these supply chain related issues are now manifesting as policies that now require digging deeper in order to be compliant. It's just this whole crazy.

Phil Levy: You know, we should, we also shouldn't forget about supply chain security, you know, post 911 programs like CTPAT, AEO, VIP that where governments are saying to companies, if you want us to provide you with a higher level of service, or you want us to scrutinize your supply chains less than or your imports, your exports less, look into your supply chain, understand the security aspects of your supply chain, impose requirements on your raw material suppliers on your vendors, and dig into your supply chain so secure. That was probably one of the first ones in the modern times where government started looking at companies to dig deeper and asking them to dig deeper into their supply chains.

Amy Morgan: Oh, Tom, you're so right. Like I was trying to stick with the current stuff. But like, if you go back, you could go back to 2001 with CTPAT, 2002 with the 24 hour advanced cargo manifest, 2009 we had ISF, 2010 ACAST, 2019, I mean, all of these, this trend towards asking the public private partnerships where the public is asking the private to provide these data elements in the name of security. Now, not all of those data elements are necessarily deep supply chain visibility related, but it's knowing more about where your stuff comes from in the name of national security. It's like the trend is just, if history speaks well.

Phil Levy: With both of you raising now let me post the question. Do you see, we've all sort of weighed in at this is a heightened level of sort of demand for company visibility and interest. Do you see this more as a continuum? Or the things like the pandemic and maybe the anti-trade turn on in the last several years marked a sharper break? So it's just a little more of the same thing? Was it sort of qualitatively different?

Amy Morgan: I would venture to say that it leaps us forward dramatically. Whereas before in order to comply with things like these, these were voluntary programs, CTPAT, and these things like, this was all voluntary.

Now it's becoming more mandatory. It's compulsory, you have to know more now in order to engage in cross border trade activity, but it's going to take us into the future as well. It's going to become the norm.

Today, the hot topics are we've covered a bunch of them, you know, for slaves on the top of everyone's minds. But tomorrow it's going to be mandatory climate legislation or it's going to be mandatory conflict minerals legislation, or it's going to be mandatory requiring knowing the financial health your suppliers or whatever. And all of those things require knowing more, require having that deep supply chain visibility that you haven't had to have.

So I think this is just a sign of things to come, what we're seeing right now is just a sign of more to come. So investing now and understanding your deep visibility into your supply chain is going to pay dividends later.

Phil Levy: Yeah, Tom, what's your take on continuity or escalation? Big escalation?

Tom Gould: You know, you know, I think it's one of these, like, a logarithmic curve, where, you know, it's been, it's been escalating slowly for you know, probably the past 20-25 years. But, maybe it has to do with the pandemic, maybe everybody had an opportunity to sit back and look and think, but we're starting to see that rapid escalation. And when I say rapid escalation, I mean, there's a rapid escalation in the amount of information that governments want, the types of information that governments want, even the reasons why governments want the information.

But again, it all comes back to and one of the reasons I like the fact that we're doing this webinar talking about visibility, really what it does all comes back to the fact that there is this strong need for visibility into where companies made the products and where and going all the way back, like I kept, like I said, dirt to shirt, where that where all the materials came from, and where all the inputs came from. And looking at all aspects of it.

We talked about security, we talked about safety, we talked about, you know, food safety, we talked about, you know, labor issues, other social issues, carbon issues, and it's coming from multiple different directions. And it seems like it's been this perfect storm over the last few years, where everything has kind of come together and to the point where governments and companies are realizing deeper visibility is going to be the important issue going forward with you know, as far as with for international trade.

Phil Levy: Okay, what we're going to talk about in our next topic is how we reconcile these things. Before we do we want to give you our last poll, and this is where we find out really what have been the you know, what have been the obstacles. Why? We've just been talking about the sort of mountain demands for visibility. So our question to you is, is your biggest obstacle to greater supply chain visibility, and some of this we talked about earlier, that suppliers don't want to reveal their sources, that it's too complex to keep track, that it's hard to know what information is necessary, what are they even asking for is too costly tract on the information? Or not really an issue, you're comfortable with your level of supply chain visibility? So thank you, for those of you who have voted, we'll ask everyone to, who can or has a view to weigh in. There we go, we're getting lots of votes now, at least on my screen.

So we're getting a bit of a mix here that it's, we have a clear leader at the moment, there's still time to vote, polls are still open. I don't want to bias anything, but at the moment that you know, we have a plurality with suppliers not wanting to reveal their sources. But you're getting actually you're getting weight across the board from almost everything except for everybody being comfortable. So people are uncomfortable, but for different reasons. Tom, did those reasons surprise you? Does the spread surprise you at all?

Tom Gould: Not necessarily, you know, I'm actually not surprised that some companies say they're comfortable with their supply chain visibility, I would expect it to be a very small percentage. There are companies out there that really do have a handle on this.

Generally they're vertically, you know, vertically organized, where they manufacture all the raw materials, as well as the final products. And there are some companies out there that do that. And I think it's important to look at them because that's what customers expect. That's what customs thinks is out there. I would expect that if we were to ask, take this poll of government regulators, the results would be very different. But honestly, I agree. I think that the fact that.

Phil Levy: What do you think they would say? What would the government regulate?

Tom Gould: I would, I would think the government regulators, a higher percentage of them, would say that they're comfortable with their level of supply chain visibility. That companies have the information that companies have that. I think that governments would be surprised at the high level of responses that we're getting where we're seeing companies that we do business with don't want to reveal that and it's just I think it's just the way that the government mentality the way the government works is they don't you know, we've seen this you know, in a company, business and government think things differently. But anyways, no I’m not surprised.

Phil Levy: Decision for a forthcoming webinar with government regulators and what do they know? No, I’m just kidding. Amy, what's your take?

Amy Morgan: I'm actually surprised that the complexity one isn't number one, just based on the first poll that we did. And the fact that the complexity actually lends itself to suppliers not wanting to reveal, but I'm actually quite surprised. Because it is the complexity. So if companies are trying to obtain that visibility, it is really hard to do. It's hard to do, because I know it's hard to do from firsthand experience. I know it's hard to do, because there's very few tools on the market that can even help a company understand and get that visibility. So I'm a little shocked.

Phil Levy: The two complex is it's coming in a fairly strong second, and there's a decent spread there. And of course, you always get a certain bit here where we make people pick one choice. And so as opposed to listing all the ones, it gives us clarity, but it does make people sometimes potentially downplay some of that they also thought was important.

Alright, let's move on. Thank you, everyone who shared your thoughts with us, as you see, we and our friends are going to regulators may all be surprised by this. But what we want to talk about is our sort of final topic before we get to some Q&A is what comes next.

So the picture that we've painted here is mounting government demands for visibility information. And you both have described this as something where it's a, whether it's continuous, exponential, whatever, it's seriously increasing. And we've seen from our participants, and from the kind of people that you guys work with, day in and day out, that maybe companies aren't as comfortable with this and aren't quite ready for this.

So I wanted to ask sort of how you see this playing out. You know, what role does, Amy, you were just talking about sort of technology as a solution. But before we get to technology, actually, you know, let's start with this. What do you see as the solutions? What do you see as the resolution? Amy, what do you forecast?

Amy Morgan: Yeah, so without being a, I'm not going to be a commercial for what I do. But I can tell you what I'm seeing is, what or what will have to happen is that visibility in the form of the way we traditionally think about supply chain visibility being like a map for instance.

Maps are not enough, right? Maps are static, they're snapshots of a moment in time, whereas our supply chains are dynamic. They're living organisms, they're changing, and whatnot.

So, in order to achieve that deep visibility we're going to need, or what we will see is more disparate data actually coming together. So folks have Excel or Google spreadsheets where they keep data they've got, maybe they have an ERP system, maybe they're lucky enough to have a vendor management system or multiple systems for different pieces of information.

But in order to get that deep visibility, it's going to require pulling all of that information together. So I think what we'll see is more dynamic integration of disparate data sets that can, from that combined data create that source of truth, that companies can then derive whatever insights from as they desire. So you have one source of truth for the trade compliance people to use to investigate their compliance with forced labor legislation, or you've got the supply chain team who can use the same data to look at their resilience or look at supplier metrics or plan for other risks.

So doing this, when everybody's working off the same data, and everybody's able to use that information to make better choices, then we'll see not only compliance with what's required, but you'll be able to, companies will then be empowered to trust their networks. They can have more control over who they do business with, and have more control over their own supply chain fate. I can keep going, but I'll pause.

Phil Levy: No, that's great. Tom, how do you see this reconciling?

Tom Gould: Well, I think what Amy was saying really is data is the key. And not only is data that is necessary for the key, but systems that are going to be able to manage that data and structure that data in a way that will allow for the visibility that's needed, is really the key to what we are going to be seeing in the near future.

And when I talk about data being the key, one of the things that we see when we start looking at supply chains is we realize that there are vast, a significant number of various different products that are being traded around the world. And historically, we have aggregated a lot of data when we were interacting with the government. So for example, when we buy something we might buy 10 different products that might all have the same HTS classification, but when we declare to the government and pay the taxes to pay the duties on that shipment of products, we may aggregate that information and tell customs we're importing a product. Meaning we might import 10 different colors of socks, but we might import, but we might report to the government, we're importing socks. And when you start to look at that supply chain visibility, what you realize is that the white socks are made with cotton and the red socks are made with, you know, a cotton polyester blend. And now you need to know where did the polyester come from, and where did the cotton come from. And it may be that the white socks have a different supply chain than the red socks. And that type of information is going to be needed to be able to provide the visibility that we need. Because once you get to the point of we're importing socks, all of a sudden, everything branches out into various different directions. And so then it's the data that is going to be the key to being able to push back further and further in the supply chain.

The white socks that are made of 100% cotton, you're only looking back to the cotton supplier. But the red socks that are made out of polyester and cotton, you're looking at the cotton supplier and the polyester supplier. And it may be a different cotton supplier, because you're dealing with somebody that's mixing the two in order to make the socks.

So that's where the detail is going to become so important and that amount of data, that granularity of the data that's going to be required for companies to have that visibility and provide that visibility forward to the government is going to require these massive systems that are going to allow companies to capture all of that different data, how's it in one place and analyze it in whichever way is required for that particular government requirement for that particular company requirements.

Phil Levy: Amy, did you want to say a bit about what you see as technology solutions and maybe you had an illustration you wanted to share?

Amy Morgan: Yeah, I'm not sure if the illustrations like I think we've left over that part, you're happy to flash them for visual interest, if you like they're just some pretty, we tried to create some visuals that can show how complex.

You might know your supply chain who you're doing business with, but who are they doing business with? And who are they doing business with? I think there's a couple I don't know if we selected just one. But we have a couple of visualizations where we've actually diagrammed some of the data in our graph that powers our platform to present these. So this is just sort of a zoomed in view. But needless to say, the point is that it gets really complicated and really gross. And so the intention is by pulling all this different data together is to create this picture. Now one thing I don't want to do in this discussion is scare people like this is impossible, I don't have this data, how can I do this, if I don't even know who those parties are?

Well, there are technologies that can help fill in those blanks or connect those dots. So even if you only know your tier one suppliers, artificial intelligence is now being used in this really cool way where we can pull all of this disparate data together and actually construct a company's extended supply chain for them. It's pretty fantastic. And it's, this is, it's really key at a time, like right now where companies have no choice but to look into technologies like this.

But if I can take that a little bit further, you know, it's not just knowing. But I think, if one of the things that we're also going to see come out of all of this is more evolved supplier due diligence. So let's say you have this source of truth, you've got this knowledge graph, the picture you're looking at now is all of the, this is your entire ecosystem. This is everybody you do business with, right?

So now from here, you can start to look at, I'm gonna look up this supplier to see if they're in good financial standing, are they exposed to forced labor? Do they deal in conflict minerals? Are they concentrated in one location? Or do they only ship through one particular port? I can look at all of those things now and make a decision about whether or not I want to do business with that supplier, or on the downstream side, a customer think about export controls and who do they sell to? And who do they sell to? today, you're at the mercy of them telling you or sharing your reports.

Now, what if you just knew? What if you could just know and then make better choices? So those are the sorts of technologies that are out there. And companies need to know that all of these things we're talking about are doable. It's possible. It's not out of reach anymore. It's not science fiction.

Phil Levy: Yeah, those are cool pictures, and you guys are actually new in the process to answer one of the questions that we got from the audience, which was for what is the role of artificial intelligence in addressing some of these questions.

I'm going to throw a couple other questions at you guys and let’s see if we can do quick answers because we've got little time remaining. But I wanted to come back to something you all said earlier, which and, Tom, I'm going to go at you with this one, which is, to the extent that we saw some of these challenges coming because people supply chains got more complex and extended, it seems like there's two solutions when you get to know your current supply chain or to you restructure to reduce your information requirements, and you have things like vertical integration. Do you think that these informational requirements are going to reshape the way people approach their supply chains?

Tom Gould: Oh, absolutely. I think that first of all, companies are going to get more insight into their supply chains, which will allow them to have access to information that will allow them to make different decisions.

They might find that the decisions that they've made in the past were the correct decisions. But by being able to dive deeper, and to know more about their supply chain, they might be able to make better decisions.

For example, going back to the Fukushima example that I gave, that we talked about earlier, is that companies, if companies all realized that they were all buying the red paint from one supplier, that may have been a reason for some of the companies to go out and say, you know what, we'd like redundancy, if you supply our blue paint for us, why don't you see if you can supply the red paint for us too? That we're not, we're not going to be so dependent on one.

One of the things that we've learned, you know, from the pandemic, is that just in time model may not be the best model for resiliency in supply chains. And I think that companies having that better insight into their supply chains will allow them to make better decisions.

Phil Levy: I want to put one more question because I only got time for one more, I think it's probably a lot of people's minds. This is what happens. This is from our audience, what happens if a company finds forced labor as it scrutinizes its supply chain, does that order just become a sunk cost and they don't bring it in, they have time to find new suppliers to meet their obligations to supply either a retailer or an OEM? I don't know what he wants to take up. Just we're not going to be this is not a webinar of practical advice, but just more generally, what happens, then?

Tom Gould: I would say that, really what we're seeing happening, and what happens then is having the information allows the company to make a decision based on the information that they have. Whether that be forced labor, or carbon, or you know, whatever the issue is that they happen to be looking at, just having that information allows companies to make those decisions better and maybe more quickly.

And so when we're talking about something like where you found that there's forced labor in your supply chain, or you found that there's a carbon, you know, emissions problem in your supply chain, now you're in a situation where you can look at the information that you have on your own what you're doing today, you can look at the laws and the rules that are out there, for example, forced labor, and or you can look at, you know, consumer demand, maybe that's something on carbon, and you can make a decision.

If you find actual violations in your supply chain, well, then obviously, that's a situation where you're going to probably need to cut that, you know, branch of your supply chain off. Maybe you don't necessarily completely cut it off, maybe you shifted somewhere else, you do something different, or you worked to mitigate that issue., but at least now we're in a situation where companies have the insight, they have the information so that they're able to make those decisions.

Amy Morgan: And I would just add one thing to that. And that is all very, very true, but do it soon, do it sooner, do it as early as you possibly can. So you do have time to mitigate any identified risk before it has to become that sunk cost. Maybe you could avoid it altogether by knowing more sooner. So that's just my quick input there.

Phil Levy: And there's a very useful point. All right, we have not run out of interesting things to talk about. We have run out of time. So let me, Tom, thank you for your insights and Amy, let me underscore what real pleasure it's been to have you with us. Thank you so much for joining us.

For the audience, thank you all for being here with us in August. We're going to email out the slides and a link to this recording tomorrow morning. There will also be a short feedback survey presented when you log off this call. So please do take a moment to share your thoughts and feedback with the team so we can continue to curate great content for you. With that, thank you again. Have a great day.

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