A Legal Supply Chain

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A Legal Supply Chain

By Jason Clay - 11/23/2016

One of the least talked about but most important risks facing retailers and brands is the illegality that occurs in the production and processing of the raw materials they buy, and the impact this has on their bottom lines.

In 2016 alone Interpol seized more than 10,000 metric tons and 1 million liters of hazardous fake food and drink in 57 countries. Incidences of food adulteration are up 60 percent since 2010, with at least 877 food products from 315 companies implicated.

But illegality is not just, or even primarily, about fake or adulterated food. Illegality is most common in the production of raw materials. Illegality in supply chains starts when producers do not obey the laws or regulations of the country of origin. If a raw material is produced illegally, then anything made from it arguably can be considered illegal, whether it's a processed food product or an animal protein from illegally produced feed ingredients.

Looking at illegality in this way, World Wildlife Fund research suggests that as much as 50 percent of globally traded food and soft commodities are not produced legally in the country of origin.

Let's take shrimp aquaculture to illustrate the point. Nearly 90 percent of Thai shrimp is produced with feed that uses fishmeal and fish oil produced by slave labor. The United States imports nearly 11 percent of its shrimp from Thailand, meaning that nearly 10 percent of all shrimp consumed in the U.S. is produced with slave labor. That is just one example, but the same can be said of a wide range of commodities.

Twelve percent of cocoa in Côte d'Ivoire—comprising 5 percent of global trade—is produced inside national parks. Estimates suggest that at least 40 percent of the cocoa is produced with child labor. Both are illegal. In Brazil, which accounts for 18 percent of global beef exports, nearly 80 percent of beef is produced on illegally deforested land. And when it comes to olive oil in the United States, 50 percent of it is either adulterated or not olive oil at all.

Global trade is increasing and supply chains are getting more complex. A more affluent global population is demanding more of everything. Many commodity producers are facing shifting resource frontiers exacerbated by climate change. Meanwhile, disorganized governments are facing highly organized criminals. Illegality itself is not new, but it is getting worse and resulting in major implications for businesses in the food sector.

Illegality, which could easily be ignored a few decades ago, now poses real financial and reputational risks for brands and retailers. The case about illegality can be made easily with information in the public domain. If a company doesn't know about and begin to address the issue, it doesn't care. Plausible deniability is going out the window. Companies are expected to know about where their products come from and how they are produced. And on a planet with 7.4 billion food experts armed with smartphones and social media, everyone is looking.

Smartphones and social media make brands more accountable for social and environmental issues like child labor or deforestation far up the supply chain. Just because a product is on the shelves doesn't make it legal and certainly won't protect a company from allegations of slave labor or unsustainable practices. Ignorance is never a good enough defense.

Meanwhile, brand value, reputation, license to operate, market access and long-term access to raw materials are more important than ever. In 1976, 83 percent of the asset value of S&P 500 companies was based on tangible assets. By 2009, 81 percent was based on intangible assets.  All it takes today is one controversial video or tweet to damage the value of a brand.

Moving forward, retailers will increasingly have to work to eliminate illegality in their supply chains or live with the reputational risks. Brands will need to become more informed about illegality and engaged in removing it from their supply chains—including demanding more transparency and traceability from their suppliers.

But knowing precisely where products are produced isn't enough. How they are produced and the impacts are just as important. Finally, no company can solve the issue alone. They will have to work together in a precompetitive way and with governments to eliminate illegality.

Those that address illegality will reap the rewards. Global food markets are worth trillions. They are all for legal products. As awareness of child or slave labor and illegal deforestation increases, illegally produced products or ones made from them will be shunned and then banned outright. Reducing the social and ecological impacts of illegality is game-changing, not just for supply chains, but for billions of people and the health of the planet itself.

And for those who plead ignorance, if you don't know, you don't care. And, if you don't care about this, what else don't you care about? In the end, consumer concerns won't be denied.

Jason Clay is senior vice president, food and markets, with the World Wildlife Federation.