This article was first published in the Historic Futures blog.
The move towards a better understanding of supply chains and the origins of products is predicated on a number of assumptions about the value of that information. Firms are told they should know where things come in order to manage their costs, control their risks, or secure a social license to operate.
But beyond that, companies are also told that there is value in providing consumers with information about the origin of products. And while evidence exists that consumers may, in some situations, be prepared to pay over the odds for products which are sourced far away, there is also the perception of a growing preference for goods sourced closer to home. The relationship between distance and value remains unclear, but longer supply chains could spell increased risk of consumer backlash.
Parallel problems of distance and value
Geographers have suggested the concept of distance decay to describe how the impact of one location on another changes with distance: as distance increases, social and spatial interactions are diminished, even if they never entirely cease. Economists have used the idea of distance decay to explain changes in willingness to pay, noting that distance would often reduce the value consumers put on products. Environmental economists, in particular, often determine distance-decay value functions with regards to environmental goods and services.
The application of these insights to the problem of how distance affects value is clear: as far as consumers are concerned, products procured far away are less valuable than comparable products sourced close to home. This creates obvious problems for firms: the world economy is strongly dependent on long supply chains, with production of goods frequently occurring very far away from where acquisition and consumption takes place. Furthermore, raw materials (such as oil, gas or metals) and agricultural products (like coffee, bananas or rice) are only available from certain areas of the globe, and cannot be sourced closer to consumers. As a result, retailers may often highlight the origin of products sourced close by (see the rise of certified British produced meat in British supermarkets), while at the same time not openly disclosing the provenance of products sourced far away. Of course, a communication strategy which focuses on highlighting some aspects and downplaying others spells trouble for the future.
A market for ethical goods
Obfuscating the origins of products is not a sustainable management strategy. In any case there is ample evidence that distance to origin may not always reduce consumers’ willingness to pay. One example concerns luxury goods, which often become more valuable when sourced from afar: besides rarity, exoticism is an important component of the perception of luxury. Consumers are not rational decision-makers, evaluating products across dimensions such as price and distance from source.
Another important dimension to consider is consumers’ ethical preferences. Decades of campaigning have created a widespread ethical interest among consumers to the hardship of millions of people living in developing nations. Increasingly, trade is seen as one of the ways to do good: by buying products from developing nations, Western consumers can help bring millions out of poverty. Commerce, and buying products from long supply chains, can be framed as an ethical decision, which allows simple consumption habits to have a positive impact on others’ wellbeing. Initiatives such as Fairtrade add a further layer to the ethical framing of consumption of products sourced from long supply chains, promising that a fair price will be paid to producers. The continuing growth of Fairtrade has been, among other things, a symbol of the success of highlighting ethical factors, rather than focusing on distance alone. The same can be said of the results presented in successive Co-Op Ethical Consumer Markets Reports. Ethical judgement is not necessarily impaired by distance.
Negotiating companies’ needs and consumers’ preferences
Supply chain management and marketing/sales are not necessarily independent disciplines. Decisions about the provenance of products can have an important impact on their marketability, and on how a company communicates with its consumers. The problem is not limited to retailers, or other companies which deal directly with consumers; the need to demonstrate traceability and detailed knowledge of the origins of products is increasingly a product of regulation, and affects all agents along supply chains. At the same time, ever savvier consumers are making their preferences heard, both at the till and on the many public forums springing up on social media. Better information about how ethical preferences and distance affect how much consumers are willing to pay for products is urgently required, for both marketers and supply chain managers. Hopefully the development of supply chain mapping tools should help with this, by allowing the overlay of the two types of information.
Dr. Carlos Ferreira is a Researcher at the Centre for Business in Society, Coventry University. His research interests include ethical consumer behaviour, online identities, and the emergence and use of markets.