How AI and DNA Unravel Supply Chain Mysteries – 04/15/2023 – Market

At a cotton gin in California’s San Joaquin Valley, a square machine helps spray a fine mist, containing billions of DNA molecules, onto freshly cleaned Pima cotton.

That DNA will act as a kind of tiny barcode, nestled between the soft fibers as they are transported to factories in India. There, the cotton will be transformed into threads and woven into sheets, before reaching the shelves of Costco stores in the United States. At any time, Costco can test for the presence of DNA to ensure that its US-grown cotton has not been replaced with cheaper materials — such as cotton from China’s Xinjiang region, which is banned in the United States because of its links to forced labour.

Amid growing concern about opacity and abuse in global supply chains, companies and government officials are increasingly turning to technologies such as DNA tracking, artificial intelligence and blockchains to try to trace raw materials from source to store.

US companies are now subject to new rules that require them to prove their products are made without forced labor, or they could be seized at the border. US Customs officials said in March that they had already detained nearly $1 billion (R$5.067 billion) in shipments from the United States that were suspected of some connection with Xinjiang. Products from the region have been banned since June 2022.

Customers are also demanding proof that expensive, high-end products — like conflict-free diamonds, organic cotton, tuna for sushi or Manuka honey — are genuine and produced in an ethically and environmentally sustainable way.

This has imposed a new reality on companies that have long depended on a tangle of global factories for their production. More than ever, companies must be able to explain where their products actually come from.

The task may seem simple, but it can be surprisingly complicated. That’s because the international supply chains that companies have built over the past few decades to cut costs and diversify product offerings have become surprisingly complex. Since 2000, the value of intermediate goods used to make products that are traded internationally has tripled, driven in part by expanding factories in China.

A large multinational company may purchase parts, materials or services from thousands of suppliers around the world. One of the biggest companies of its kind, Procter & Gamble, which owns brands like Tide, Crest and Pampers, has about 50,000 direct suppliers. Each of these suppliers, in turn, may depend on hundreds of other companies to source the parts used in its product—and so on down many levels of the supply chain.

To make a pair of jeans, for example, many companies must grow and clean cotton, spun it into yarn, dye it, weave it, cut the fabric into patterns, and sew the pants together. Other networks of companies mine, smelt or process the brass, nickel or aluminum that is worked into the zipper, or manufacture the chemicals used in the synthetic indigo dye.

“Supply chains are like a bowl of spaghetti,” said James McGregor, president of the greater China region at consultancy APCO Worldwide. “They’re totally mixed. You don’t know where things come from.”

Faced with these challenges, some companies are turning to alternative methods, not all of them proven, to attempt to inspect their supply chains.

Some — like the one that sprays DNA mist on cotton, Applied DNA Sciences — are using scientific processes to tag or test a physical attribute of the good itself, to figure out where it traveled from factory to consumer.

Applied DNA has used its synthetic DNA tags, each one billionth the size of a grain of sugar, to track chips produced for the Department of Defense, track cannabis supply chains to ensure product purity, and even to spray thieves who tried to rob ATMs in Sweden, leading to several arrests.

MeiLin Wan, vice president of textiles at Applied DNA, said the new regulations are creating a “tipping point for real transparency”.

“There’s definitely a lot more interest,” she added.

The cotton industry was an early adopter of tracking technologies, in part because of past transgressions. In the mid-2010s, Target, Walmart and Bed Bath & Beyond faced pricey product recalls or lawsuits after the “Egyptian cotton” sheets they sold were found to be made with raw materials elsewhere. A New York Times investigation last year documented that the “organic cotton” industry was rife with fraud as well.

In addition to the DNA fog it applies as a marker, Applied DNA can find out where the cotton comes from by sequencing the DNA of the material itself or analyzing its isotopes, which are variations in carbon, oxygen and hydrogen atoms. Differences in rainfall, latitude, temperature and soil conditions cause these atoms to vary slightly between regions of the world, allowing researchers to map the origin of cotton to a pair of socks or a bath towel.

Other companies turn to digital technology to map supply chains, creating and analyzing complex corporate property and trade databases.

Some firms, for example, are using blockchain technology to create a digital token for every product a factory produces. As that product — a can of caviar, say, or a batch of coffee — moves through the supply chain, its digital twin is encoded with information about how it was transported and processed, providing a transparent record for businesses and consumers alike.

Other companies use databases or artificial intelligence to comb vast supplier networks for distant links to banned entities or to detect unusual business patterns that indicate fraud — investigations that can take years to complete without powerful computing.

Sayari, an enterprise risk intelligence provider that has developed a platform that combines data from billions of globally issued public records, is one such company. The service is now used by US customs agents as well as private companies. Jessica Abell, Sayari’s VP of Solutions, recently ran a major US retailer’s vendor list through the platform and watched dozens of little red flags appear next to distant company names.

“We are flagging not only Chinese companies that are in Xinjiang, but also automatically exploring its commercial networks and flagging companies directly connected to it,” said Abell. It is up to companies to decide what to do about their exposure.

Studies have found that most companies have surprisingly little visibility at the upper levels of their supply chains because they lack the resources or incentives to investigate. In a 2022 survey by McKinsey & Co., 45% of respondents said they lacked any supply chain visibility beyond their immediate suppliers.

But staying in the dark is no longer viable for companies, particularly those in the United States, after a congressional ban on importing products from Xinjiang — where 100,000 members of ethnic minorities are reportedly working in forced conditions, according to the U.S. government. — entered into force last year.

Xinjiang’s links to certain commodities are already well known. Experts estimate that about one in five cotton garments sold globally contain cotton or yarn from Xinjiang. The region is also responsible for more than 40% of the world’s polysilicon, used in solar panels, and for 25% of tomato paste.

But other industries, such as automobiles, vinyl flooring and aluminum, also appear to have connections to suppliers in the region and are under increased scrutiny by regulators.

Having a complete view of their supply chains can offer companies other benefits, such as helping them recall defective products or reducing costs. The information is increasingly needed to estimate how much carbon dioxide is actually emitted in the production of a good, or to satisfy other government rules that require products to come from specific locations — such as the Biden administration’s new rules on tax credits. for electric vehicles.

Executives at these technology companies say they foresee a future, perhaps within the next decade, in which most supply chains will be fully traceable, a result of stricter government regulations and wider adoption of technologies.

“It’s eminently doable,” said Leonardo Bonanni, chief executive of Sourcemap, which has helped companies like chocolate maker Mars map their supply chains. “If you want access to the US market for your products, that’s a small price to pay, frankly.”

Others express skepticism about the limitations of these technologies, including their cost. While Applied DNA’s technology, for example, adds only $0.05 (R$0.25) to $0.07 (R$0.35) to the price of a finished garment, this can be significant. for retailers competing for narrow margins.

And some express concerns about accuracy, including, for example, databases that may incorrectly flag companies. Investigators still need to be on the ground, they say, talking to workers and remaining alert for signs of forced or child labor that might not show up in digital records.

Justin Dillon, chief executive of FRDM, a software company that helps organizations map their supply chains, said there was “a lot of anguish, a lot of confusion” among companies trying to meet the government’s new requirements.

Importers are “looking for items to check,” he said. “And transparency in supply chains is as much an art as it is a science. It almost never happens.”

Translated by Luiz Roberto M. Gonçalves