Cass Business School Professor ManMohan Sodhi makes the case for full supply chain traceability, although it may not be practical for all firms
Why is it important to know the exact content of the products we buy or in the food we eat? The answer is simple: if money can be made by substituting a more desirable component or raw material with a less desirable but cheaper replacement, without doubt, someone will be realising the ‘arbitrage’ by substitution. In essence, this means a lack of security and absence of sustainability within the supply chain, both of which are important to reasonable and responsible companies. Of course, labels and certification exist, as do rules and checking, but while money is to be made from substitution, how can true provenance be guaranteed?
Consider the issue of food supplies in the wake of the horsemeat crisis. Horsemeat cost one-third of the price of beef when the scandal broke and is generally considered a cheaper substitute in markets where it is sold.
After the media revealed the scandal, the real story was not that food labelled as containing beef had horsemeat adulteration. Instead, the real concern is that even today, more than a year later, within the regulation-rich EU, retailers and food manufacturers will not guarantee even from what animal the meat in the food they sell originates. This is the case despite labels – as these are based on the information a company receives from its suppliers, which in turn base the labels on the information provided by their own suppliers. In the end, no one can say with absolute certainty what the end consumer is consuming.
It is likely that someone, somewhere in the supply chain will, at any given point, be tempted to make substitutions. This prospect has increased further because of the tight margins, which supermarkets suppliers consider are ever narrowing. As a result, although genuine traceability for food is desirable it is unlikely to ever happen.
One reason for businesses seeking to ensure total traceability is that, in doing so, they are helping the cause of sustainability. Knowing the source helps a business verify whether those sources are desirable – witness the usefulness of declaring diamonds sourced from war zones as ‘blood diamonds’ – especially if they sell their products directly to consumers. If a table is made from wood sourced from renewable forests, it maybe more appealing to certain consumers, at least those whocare about the environment. Moreover, consumers with children may prefer to buy shampoo with labels that claim ‘no animal testing’.
But how can the consumer be really sure that the label is correct? Even if the manufacturer is not lying, it may only be basing its statement on what its cheapest supplier says the product is.
Traceability is also important in respect of security. Nobody would want to buy pet food that kills their pet – but that happened to a number of owners in California. Similarly, no one would want to feed their child contaminated baby milk, as occurred in China. Producers cannot have complete security and they cannot guarantee their products for consumers unless the raw materials they buy are completely traceable.
Finally, the question of economic sanctions should be considered. Countries are under pressure not to buy oil from Iran, and even though oil is oil, the sanctions helped bring Iran to the negotiating table. For those taking a side on the issue of Israeli occupation, it is important to know if the Israeli products they are buying are made in occupied Palestinian territories – recall the storm the actress Scarlett Johansson raised by quitting Oxfam in support of one such manufacturer. Those wishing to economically support vulnerable populations such as Afghan women by buying products they produce will need to have assurance about who has actually made the products in question.
Further, anything less than 100% traceability is equivalent to being less than 100% faithful to your spouse: you can easily hide indiscretions. So 100% traceability is highly desirable, if not easily achievable. Therefore, when a large and respected manufacturer announces committing itself to ensuring 100% traceability of a key commodity or raw material, other companies take notice.
Some of those businesses, however, will wonder about the additional cost of traceability and where this will be incurred. Who will pay the price? If traceability requires investment or if it requires the company to pay more for supplies, would the money not be better used to create shareholder value?
A little reflection will show three reasons exist as why this may make sense for a manufacturer. Consider this from the viewpoint of, say, a large fast-moving-consumer-goods (FMCG) European manufacturer:
1. For selling in assumedly environmentally conscious Western Europe, a small increase in costs can be easily offset by a large (perceived) increase in revenues. Thus, the benefit may be large continuing revenues, incurring only small one-off costs by way of traceability.
2. Who pays for the cost of traceability: is it the buyer or the supplier? The cost of adoption of radio frequency identification devices by retailers was borne by the suppliers. A large FMCG manufacturer may be able to assert itself with suppliers.
3. Finally, the market may or may not have the capacity to provide traceability or sustainable products. This may affect the supplier’s ability to negotiate. If prices are weakening and you are a supplier to this manufacturer that wants traceability, would you not provide it and at your own cost?
As things stand today, it may not be practical for all companies to seek 100% traceability for everything they purchase, but it is certainly desirable. Moreover, it is the absolute minimum if the company wants to commit itself to supply chain security or sustainability. Some companies have already shown that it makes sense to opt for traceability and sustainability where there is economic value – and that benefits not only shareholders and but also society. Perhaps, this will extend even to food and, some day in the distant future, we might even find out what we are eating.
ManMohan S Sodhi, professor in operations and supply chain management, Cass Business School
Obstacles exist around confidentiality and need to be addressed
It is hard for organisations to achieve 100% supply chain traceability. So the question becomes: are there ways to ensure 100% traceability – or traceability close to 100% – in the areas that really matter. This can be vital to ensure appropriate product quality, to comply with regulatory requirements or to ensure required ethical / environmental standards.
The US has implemented regulation around minerals mined from specific conflict-affected and high-risk areas in Africa. The Dodd–Frank Act requires SEC-listed public companies that use particular materials – including gold, tin, tantalum and tungsten – to disclose the use of and source of such materials.
Many of these materials end up as electrical components for electronic devices. Given the lack of transparency in the supply chain, particularly around such minerals, businesses and consumers cannot know whether their purchases might ultimately be financing armed groups.
The Act, which requires reporting by 2 June, aims to discourage businesses from engaging in trade supporting regional conflicts. Here, it is vital that companies know where their materials are being sourced from, to comply with the law and to protect their reputation.
Let’s take the food industry as another example. It is obvious that food and drink suppliers need to keep tight grip on their supply chain and know where their ingredients come from as contamination or similar faults in the product could have devastating effects on consumer health.
Product quality is equally important for other businesses, particularly those involved with aerospace, nuclear and process industries.
For these industries, managing the supply chain is difficult as the supply chains grow longer and become ever more complex.
However, as the internet develops, with increasing digitisation and connectivity, it becomes increasingly possible for organisations to map more comprehensively their supply chains. Obstacles exist not least concerns around confidentiality and these need to be addressed to realise the benefits of increased traceability.
We’re not there yet and few businesses can claim 100% supply chain traceability. However risk managers now have a strong focus on supply chain risk management, with many agreeing the most effective way of managing the supply chain is to be clear about where component or ingredients come from. This will help businesses address product quality and availability which for many companies is at the heart of their business and their reputation.
Chris Mcgloin, chairman, Airmic