Historically, fashion companies only had direct relationships with certain finished goods or fabric suppliers and relied on a network of agents, trading companies, and suppliers to source and take responsibility for upstream materials. Today, fashion companies are accountable for their entire supply chain due to recently proposed or implemented US and international legislation, non-governmental agency (NGO) and Congressional investigations, suits by private actors in international courts, and consumer demand for sustainable goods. This will fundamentally change how fashion companies operate globally and drive many to seek AI solutions to help with supply chain due diligence and identify risks.

Increased supply chain responsibility for fashion brands

After the 2013 Rana Plaza factory fire tragedy, the fashion industry increased oversight and responsibility for their direct manufacturers. This resulted in new Corporate Social Responsibility programmes, social audits, and supplier diligence. However for most, these programmes only extended to limited first tier suppliers —the factories that produce the finished goods and certain material suppliers.

Previously, most fashion companies have not monitored the conditions of upstream suppliers. Complete supply chain traceability is challenging for fashion products because the supply chains are deep and opaque, often involving multiple processors, material suppliers, and intermediaries. To further complicate tracing efforts, the financial and physical transfers often differ because some intermediaries never take physical possession. Even when factory and supplier identities were known, this information was considered confidential trade secrets. 

Supply chain due diligence requirements

Recent developments are compelling fashion companies to expand their supply chain due diligence programmes to identify the entities making their products and where, or face the possibility of considerable repercussions.

The proposed New York Fashion Act (S4746) holds fashion companies accountable for their social and environmental impacts through extensive supply chain due diligence and public reporting requirements. Fashion companies would be required to take affirmative action to identify and remediate any potential adverse impacts to human rights in their supply chains.

The US implemented the Uyghur Forced Labor Prevention Act (UFLPA) in June 2022, which banned the importation of goods with a nexus to the Xinjiang Uyghur Autonomous Region (XUAR) of China due to human rights violations against Uyghurs and other ethnic minorities. Products produced in XUAR, or more commonly products produced in other regions of China or third countries using XUAR inputs, may not enter the US.

Fashion companies are under particular scrutiny under the UFLPA. Congress has issued recent inquiries to several large fashion companies regarding their supply chain diligence practices and nexus to XUAR. Cotton products are a particular target for enforcement because XUAR is a major source of worldwide cotton. Based on most recently published data, since the implementation of the UFLPA, US Customs and Border Protection (CBP) has examined 812 shipments of apparel, footwear, and textiles valued over $34m for forced labour concerns. Very few of those shipments were released. While these numbers appear low compared to overall fashion imports, the impact of enforcement extends beyond these figures and is causing significant sourcing uncertainty and disruption. Identifying all suppliers is key to avoid sourcing from XUAR and running afoul of the UFLPA.

Supply chain diligence requirements still apply to fashion companies that do not source from China. US law bans the importation of products produced using forced labour from all countries. Mexico, Canada and Australia have also passed forced labour import ban legislation. A more stringent proposed EU law is expected to pass in September. Countries such as Canada and the UK also subject fashion companies to public supply chain reporting requirements.

Fashion company supply chains are also scrutinised by the private sector. Private actors have filed suits in international courts alleging that certain multinational companies have sold goods produced using forced labour. NGOs are investigating factory worker conditions and publicly holding fashion brands accountable. Consumers are also increasingly make ethical sourcing decisions.

The need for AI in fashion supply chains

These developments make it clear that fashion companies must conduct intensive due diligence to identify and locate each supplier within their supply chain. This is extremely challenging given the inherent nature of fashion supply chains, which may involve thousands of suppliers for many multinational fashion companies. Complete manual tracing is impossible even for companies with significant resources so AI may be the solution.

New AI technologies, such as Altana Technologies, Sayari Analytics, Mesuir.IO, Exiger, and many others have emerged to help companies comply with these supply chain transparency demands. CBP also uses AI to target shipments and assist with the enforcement process, although CBP will not release detained shipments based on AI reports alone.

While the AI technology interfaces, information inputs, and reporting output vary, they all generally function by collecting open source information such as corporate affiliations, shipping records, corporate financial filings and disclosures, government entity lists, NGO reports, and in some instances news and media information and proprietary information. Often within minutes, AI links the information to identify possible suppliers, map the supply chain, and flag for possible risks. In many cases, this can be accomplished by simply inputting a finished good (Tier 1) supplier name and product into the portal.

There are limitations, as this technology continues to evolve. AI currently cannot trace the exact supply chain for a specific shipment; the technology can only intelligently identify possible connections between companies. Thus, AI can identify suppliers to contact for information but cannot alone secure the release of detained shipments. AI could also result in some false positives because all possible suppliers in the supply chain may be identified, even if those materials are not used to produce a fashion brand’s products, such as the materials are used by the same vendor to produce garments for other companies.  

The trend towards increased supply chain due diligence requirements and accountability will likely only expand in the coming years. For fashion companies, AI can be a powerful supply chain diligence tool that should be explored, but with an awareness of its limitations.

About the author

Angela Santos, partner at ArentFox Schiff, counsels clients on compliance with federal regulations involving the importation of merchandise and forced labour and leads the firm's Customs Practice and the Forced Labour Task Force. She is especially knowledgeable in the field of fashion, consumer products, and electronics imports and has assisted many prominent brands and fashion houses.