Social Value Creation Report "Industry Eco-System"
Achieving through digitalization
Balancing efficiency demanded for supply chains with social responsibility
Supply chains present great complexity under globalization and changes in consumption styles linked to urbanization. At the same time, environmental issues, labor issues, and other social issues are cropping up in supply chains; thus companies need to improve business efficiency while facing calls to fulfill social responsibility. These demands come not only from companies but also from consumers, investors, and central governments.
Attention is now focused on creating transparent supply chains through digital technologies as a concrete measure to balance business efficiency with social responsibility. Initiatives have begun that seek to improve the sustainability of supply chains overall by making flows of goods and money, the safety of products and services, working environment, and many other factors visible. Drawing on examples from at home and across the globe, this report discusses the various social issues found in current supply chains, and the global initiatives and trends in resolving such issues, and further introduces NEC’s approach to handle both business efficiency and social responsibility while implementing transparent supply chains with the free use of advanced digital technologies.
Demands on supply chains for the resolution of new social issues
Flows of goods and money are changing under population growth and urbanization
As the population of the world grows, the environment in which companies operate is changing. According to the United Nations, the population of the world in 2017 is about 7.6 billion people, a number that is forecasted to grow to 9.8 billion in 2050. At the same time, the middle-class population continues to grow in emerging countries, causing rapid acceleration in urbanization and the concentration of population in cities.
Changes in lifestyles and consumption styles, too, are becoming apparent under urbanization. In particular, electronic commerce is expanding rapidly against a background of globalization, the growth of the online population, and the proliferation of smartphones.
According to the Ministry of Internal Affairs and Communications of Japan, the scale of the global BtoC electronic commerce market in 2016 was 1.92 trillion U.S. dollars, an increase of 23.7% from the previous year. Double-digit growth is expected to continue.
Supply chains are also undergoing major changes, including the globalization of production bases.
Changes in supply chains broaden into social issues
One social issue resulting from changes in supply chains is CO2 emissions volume. The global volume of CO2 emissions was about 33 billion tons in 2014. The Paris Agreement adopted in 2015 declares an aim to "keep a global temperature rise this century well below 2 degrees Celsius and to drive efforts to limit the temperature increase even further to 1.5 degrees Celsius above pre-industrial levels". There is a need to tackle CO2 emissions reduction in supply chains.
Shortages of water, food, and other resources are also a severe problem. According to the OECD, global water demand is projected to increase by 55% between 2000 and 2050, making the efficient use of resources ever more important.
The safety of food is yet another social issue.
Consumers are demanding the assurance of safety in distribution routes from food producers to consumers, throughout increasingly complex supply chains.
Labor issues are also increasing in severity.
Although the productive working age population is on the decline in developed countries, it is growing in ASEAN nations, South America, and Africa. The balance of labor is shifting to emerging countries, and global companies are moving their production bases to those countries. Under these circumstances, human rights violations also occur, such as forcing locally hired workers to labor in poor environments.
In their supply chains, companies are now resolving these social issues while facing a need to increase efficiency.
An age for companies to survive through coexistence with society
Companies' responsibilities performed in the three areas of environment, society, and governance
Demands and expectations toward companies in sincerely tackling resolution of the previous mentioned supply chain-related social issues are rapidly increasing among customers, as well as among investors and central governments.
ESG investing truly reflects the demands and expectations from investors. ESG - environment, social, and governance - indicates investing that takes into account not only financial information but also nonfinancial ESG factors.
The trend toward an emphasis on ESG investing is strengthening worldwide. As of April 2017, over 1,700 institutions have signed the Principles for Responsible Investment (PRI), which incorporate ESG into the investment process. Of the balance of global assets under management, the percentage of investments that take ESG into consideration is about 30%, and has expanded to about 60% in Europe. ESG investing is expanding its range in Japan as well, which is rather behind in ESG investing, with the Government Pension Investment Fund (GPIF) signing the PRI. Asset management that incorporates ESG factors into its stock selection is also increasing.
Central governments around the world are placing emphasis on ESG. As an example, from the viewpoint of the environment, legislation under deliberation in France would oblige listed companies to disclose information such as their methods of reducing climate change risk through low carbon strategies.
Failure to carry out social responsibility may lead to management crises
In Europe from several years back, resource efficiency (RE) and a circular economy (CE) have been touted as keys to strengthening industrial competitiveness. RE seeks the efficiency of resources by using the Earth's limited resources in a sustainable manner while minimizing impacts on the environment.
CE is an economic model that maximizes added value by using resources circularly and efficiently through recycling. In December 2015, the European Commission adopted the Circular Economy Package as an EU shared framework for the realization of CE, and views this as the core of its future growth strategy.
In this way, companies are now becoming unable to survive merely by generating profits. The inability to answer such expectations and demands of customers, investors, and central governments as ESG, RE, CE, and sustainable development goals (SDGs), as well as the incapability to perform social responsibility may invite situations leading directly to management crises, such as withheld purchasing or withdrawn investment due to damage to the brand, or government regulation. What is being demanded now of companies is none other than both business efficiency and social responsibility.
Supply chain transparency is the key to balancing business management with social responsibility
Securing food safety through real-time tracking of food information
Initiatives to fulfill social responsibility in the supply chain have begun in companies and central governments worldwide. One concrete, effective measure is making supply chains more transparent.
U.S.-based Walmart, the world's largest retailer, has begun using digital technology in China to embody transparency in its supply chain for pork. China accounts for about 50% of the global production of pork. However, incomplete sanitation management and other problems have arisen, resulting in concern among consumers. In response, Walmart used blockchain technology to construct a system that records various data along the distribution route, from pork production to retailing, and enables tracking in real time.
By ensuring the safety of food through the system, the company allowed consumers to purchase pork with peace of mind. Taking full advantage of the same system in inventory management, which may provide work efficiency and cost reduction, Walmart’s expertise in supply chain transparency contributes toward making business efficiency consistent with social responsibility.
Transparency is indispensable in addressing national laws and regulations
In February 2017, the Swedish government reached an agreement on achieving zero greenhouse gas emissions by 2045, and is working to prepare relevant laws. Its target for the transport sector, calls for a reduction of 70% by 2030.
Also in Sweden, furniture mass retailer IKEA is working toward the production of renewable energy in the same quantity that the company consumes in its business. With respect to water demand, which is expected to continue growing throughout the world, IKEA is engaged in initiatives to save water and energy by recycling the wastewater from fabric printing processes.
Regarding worker rights problems, the U.S. state of California enacted SB 657, a law concerning supply chain transparency. The law seeks to prevent slave labor, human trafficking, and other forced labor, and sets reporting obligations. In the U.S., boycott movements have targeted the products of companies that have violated workers' human rights.
Transparency is also necessary for the prevention of such problems.
Supply chain transparency not only improves work efficiency but also indicates the soundness of a company in product safety, environmental response, and workers' human rights. By resolving social issues surrounding supply chains and meeting the demands and expectations of customers, investors, and central governments, transparency leads to improved sales and to calls for investment. What is important for a company is making issues in its own supply chain clear, and working toward transparency.
Supply chain innovation accelerated through digitalization
NEC's Goal of Value Chain Innovation
Utilizing world’s cutting-edge digital technologies including image recognition, object recognition, the IoT, AI and the like, NEC is working on the completion of “Value Chain Innovation” that solves social issues as well as creates new values by connecting people, things, and processes throughout supply chains that link MAKE (manufacturing), CARRY (logistics), and SELL (retail/ service).
As the social issues surrounding companies and industries deepen, there are demands for new supply chain redesign. The digitalization of supply chains is advancing worldwide, and the transformation to new processes is also accelerating. The age is demanding a transformation from supply chains led by individual companies to supply chains that are transparent and capable of sustainable growth, through co-creation with diverse stakeholders.
NEC believes that the constructing of supply chains that make maximal use of digital technologies will be the essence of a structure for future supply chains that balance efficiency with the following three points: sustainability, social responsibility, and governance support. NEC is advancing initiatives aimed at realizing transparent and sustainable supply chains in a wide range of fields, through the construction of supply chains for a variety of customers.
Environmental preservation and governance support through the visualization of logistics
In 2016, NEC established a joint venture in India, DMICDC Logistics Data Services Limited to provide logistics visualization services in the area of DMIC*1.
The joint venture has constructed a system that affixes RFID tags to shipping containers being loaded and unloaded at ports in Mumbai. Using NEC's "Logistics Visualization System" software, it is able to provide accurate location information on in-transport containers in real time.
In India, where logistics infrastructure development has not kept up with the degree of rapid economic development, the joint venture has achieved a 10% reduction in container retention time in the port, and a 25% reduction in work hours in customs stations.
Logistics infrastructure development also will contribute to the reduction of CO2 emissions.
In this way, initiatives to enhance the sustainability of supply chains are a policy that will expand solutions to other ports as well, including Chennai and Kattupalli in Southern India.
Foreseeing societal and economic changes and the social issues caused by these, NEC will provide support for the entire value chain, resolve social issues as a provider of flexible platforms, and contribute to the development of industry capable of sustainable growth.
- *1Delhi Mumbai Industrial Corridor
Achieving sustainable work processes and working environment through the use of artificial intelligence
Automating visual inspections in factories to improve working environment
NEC leverages leading-edge digital technologies to make work processes and working environment visible in supply chains, thus improving sustainability.
As an example of automation solutions for visual inspection processes in factories using AI (artificial intelligence), NEC incorporates deep learning technology that automatically detects and learns about feature values including minute scratches or dirt from available data to make automated inspection processes feasible. In contrast to visual inspections that depend on the eyes of inspectors, the solution provides reduced labor and uses AI to remedy variation in the finished product caused by difference of individual ability and a degree of fatigue of inspectors.
Stabilizing product quality and eliminating the time and labor spent on visual inspections lead to the construction of sustainable working environment that goes without any job-related stress in the course of supply chains.
Improving sustainability in logistics and transportation sites
Major pharmaceutical products wholesaler Toho Holdings Co., Ltd. in Japan has carried out proof-ofconcept tests using AI to optimize staff allocation in warehouses. NEC's cutting-edge AI takes the place of responsible managers to analyze conditions in real time and automatically plan optimal staff allocation. The system has improved the productivity of warehouse work at peak times by up to 20%. This eliminates the tying of work to specific individuals, enables work with a fixed number of persons even during peaks, and enhances the sustainability of work processes.
In addition, in proof-of-concept tests by Odakyu City Bus Co. Ltd. in Japan, NEC used (an easy to wear and non-obstructive) wristband wearable devices worn by drivers to enable the measurement of the biological information such as pulse or body measurement while driving, for supporting the safety of bus operations. NEC's IoT platform analyze a driver’s degree of fatigue and change in physical conditions, which they may not be able to recognize on their own, through collecting and stores such information. The system contributes to enhance the sustainability of working environment with at their best performance and better health conditions.
In this way, NEC leverages AI and other advanced ICT to provide services that support security, safety, and work improvements in transportation and logistics, contributing to the realization of sustainable working conditions.
Supply Chains for the Coming Age
The added value of security and safety through blockchain technology
A major transformation in supply chains appears set to take place through digital technologies. Voices in society are calling for multiple companies to cooperate with each other in resolving social issues that cannot be done by individual companies. One key to achieving this is blockchain technology for the distributed data management, an area in which research on the use of the technology is moving forward in banks and other organizations.
This basic research is advancing under expectations for the use of blockchain technology in the supply chain. The Ministry of Economy, Trade and Industry has named the development of this technology as one promising example in its call for "the realization of open, efficient, and trustworthy supply chains." Toward the further improvement of the technology, NEC is undertaking original R&D and has developed outstanding blockchain technology excellent in real-time capabilities, security, and availability. NEC is also working toward the further advancement and proliferation of the technology through participation in "the Hyperledger Project*2" and the establishment of multi-industry study groups.
Leveraging such leading-edge technology, NEC will work toward the sustainable transformation of supply chains.
Supporting pandemic intervention activities on the logistics front
Drawing on lessons learned from the 2014 West Africa Ebola outbreak, the World Economic Forum in Davos in 2015 affirmed the importance of a collaborative response by multiple organizations in support activities, including logistics. To address this, "the Global Pandemic Supply Chain Network (PSC Network)" was formed. The founding members of the Network include the United Nations World Food Programme (WFP), the World Health Organization (WHO), and other international organizations, academic institutions, and private-sector companies. NEC is the only Information and Communications Technology company in Asia that is participating in the Network.
As an activity of the PSC network, the WFP and NEC are collaborating on the development of the world's first logistics information management platform that makes the transport status of medicine and relief supplies visible in the event of a global pandemic. Through centralized management of the transport status of supplies in countries undergoing epidemics, and through the analysis of supply chain issues, the new information platform will promote timely and efficient provision of supplies, as well as continuous improvements.
Through initiatives to make supply chains more transparent, NEC will achieve both its social responsibility and more efficient management, while providing powerful support for improved sustainability in companies and contributing to the resolution of social issues.
If you have any comments or concerns regarding the contents of this report or NEC initiatives, please feel free to contact us.
- *2Hyperledger is an open source collaborative development project to hasten the evolution of blockchain technology. It is undertaking the development of key functions required for a cross-industry open standard.
See https://www.hyperledger.org/ for details.
(February 28, 2020)