Each day, retailers are exposing more and more information about their respective supply chains. Details like material cost data, supplier locations, labor conditions, and environmental impact are now being overtly displayed for customer consumption by a selection of companies.

This disregard for what were previously considered trade secrets and the shift to transparency is not simply a passing marketing fad either. This trend actually makes real economic sense.

An Economics Explanation

Economists use the term “information asymmetry” to describe marketplaces in which the buyer and the seller do not share the same knowledge of the product being exchanged. Generally, the sellers know more about the product and this puts the buyers at a disadvantage. In response, the buyers assume a worst case condition for the product and will only pay a low amount. Of course, the sellers understand this and thus only sellers with poor quality products utilize this marketplace.

Nobel Prize winning economist George Akerlof introduced this concept in 1970 with the now famous example, “The Market for Lemons”, in which only the poor quality used-cars were likely to be sold in the marketplace.

used_car_lemon

However, if information about the products in the marketplace is exchanged, then high-end sellers can find high-end buyers and low-end sellers and can find low-end buyers. The marketplace becomes more efficient. By distributing information about products (i.e. signaling product value), sellers effectively segment their product offerings and can thereby better extract willingness to pay from a diverse group of buyers.

How Did We Get Here?

Supply chains used to start and end with the tradesman responsible for creating the product. However, the industrial revolution took the manufacturing of goods from the hands of local artisans and obfuscated it away behind factory walls. Then, globalization and outsourcing took these factories from nearby neighborhoods and moved them to far flung locales.

global_supply_chain_border

The end result was a complex, distributed supply chain where it was difficult, if not impossible, for anyone to see from end-to-end. Consumers were left wondering how exactly their products were made.

In the past couple decades, developments in supply chain software and communication platforms have allowed for better traceability of products and visibility into production methods. While these technologies have allowed companies to better understand their supply chain, consumers have also started exerting more pressure on companies through the advent of social media feedback mechanisms. The resulting combination of new capabilities and increased public pressure has led many companies to reconsider what is classified as a trade secret and what should be made transparent to the public.

What Does Transparency Look Like?

Companies today have taken a variety of approaches to transparency. Existing retailers have used a mixture of internal initiatives and external partnerships to expose information. New retailers have gone so far as to include transparency in their brand DNA. Third party companies have created tools to assist companies and evaluate products.

With so many transparency efforts brewing, let’s breakdown some of the companies and initiatives that are leading the charge into transparency:

Nike – The target of public criticism for labor practices abroad in the 1990’s, Nike re-emerged as a leader in supply chain transparency by disclosing a complete list of suppliers in 2005. This May, Nike released a new manufacturing map to help visualize and research their 744 suppliers which support almost one million workers.*

Everlane – Founded as a clothing e-retailer in 2010, Everlane promotes a culture of “Radical Transparency” with consumers. “Know your factory, know your costs” is not just a marketing slogan for Everlane, they actually create a profile on their website for each factory and show cost breakdowns for each item.

Zady – Another newly founded clothing e-retailer, Zady, wants to help consumers be “Ethically Fashioned”. Zady marks products on their site with badges that indicate qualities like locally sourced or handmade and writes in-depth articles for each product they sell in hopes of developing “conscious consumerism”.

Honest By – European brand Honest By believes in a “100% transparency policy” and wants “to give our customer the opportunity to shop with complete awareness of what they are buying”. Honest By lives up to their mission by providing unparalleled granularity on their website with breakdowns of material information, manufacturing details, price calculation, and carbon footprint for each product.

GoodGuide – By rating the health, environmental, and social impact of over 210,000 items, GoodGuide aims to help consumers find better products. GoodGuide uses a 0-10 scale to evaluate the impact of products much like how nutrition labels explain the health and ingredients of packaged foods.

LaborVoices – By providing a central platform to aggregate the concerns of factory workers, LaborVoices helps brands ensure that working conditions in remote factories meet expectations. LaborVoices is able to do this by “surveying workers using mobile phone technology” and anonymously aggregating the results.

No End to Transparency in Sight

As the companies above push toward transparency, they create a new normal. By uncovering what was previously hidden away in the dark reaches of the supply chain, these first-movers expose consumers to new ways of evaluating products. Secondary factors, like environmental impact and labor conditions, become part of the consumer consciousness and these externalities are finally subsumed into a more representative total product cost.

The seller benefits. The buyer benefits. The planet benefits.

Even the academics agree with transparency. In follow-up research to Akerlof’s Market for Lemons, Stanford economist Jonathan Levin concluded in the Winter 2001 RAND Journal of Economics that, “improving the buyer’s information—i.e., making private information public—unambiguously improves trade so long as market demand is downward sloping”.

So if transparency does make real economic sense, the real question is, why haven’t all companies eschewed trade secrets and embraced transparency?

*Disclosure: I am currently completing an internship at Nike.