Feeding supply chain risk

Improper due diligence breeds supermarket scandals

Working in high risk jurisdictions can lead to food companies unwittingly conducting infringements leading to severe reputational damage.

Modern slavery is well-publicized in global media. Whilst many jurisdictions themselves make their own efforts to tackle modern slavery via enforcement, well-constructed laws, which wholly prevent exploitation are only a work-in-progress.

Food companies, therefore, can never rely upon government agency watchlists as a crutch for assessing their supply chain risk. Instead they must employ additional expertise to ensure their knowledge of their third parties is absolutely watertight.

Unsavoury recall

JBS is one of the world’s largest meat processing companies. Reporter Brasil have obtained documents that demonstrate one of their third parties is under federal investigation for modern slavery. Whilst JBS say they have now ceased working with the supplier, Waitrose have had to pull their own-brand corned beef from the shelves in a move which has been much-publicized. The NHS is also implicated, through an entity affiliated with JBS - Marillo Foods Ltd. Simultaneously, The Guardian requested a response from JBS to the allegations, and the blame was simply placed on the third-party not being included in the government’s official blacklist of companies known to use slave labour.

JBS’s issues are escalating, even threatening to bring down the Brazilian president Michel Temer, after the former chairman Joesley Batista was taped with the president allegedly discussing bribes. The holding company controlled by Batista has been fined $3.16bn over a series of corruption investigations involving the bribery of politicians. Other supermarkets, such as Lidl and Co-op have also begun conducting their own investigations in response to the scandal.

The lesson to draw from this investigation is that blaming a scandal on an entity not appearing on government watchlists rarely holds water when it comes to adverse media and reputational damage. The Associated Press’s investigation on modern slavery in shrimp supply chains involved a mass boycott and reputational damage for all the firms involved.

Supply chains implicated in the shrimp slavery scandal (Source:AP)

Paltry scrutiny

Whilst this issue is ongoing, there are severe risks in the food industry of failing to conduct thorough and ongoing checks on third-party suppliers. China is the third largest exporter of agricultural products to the United States, a figure that no doubt was observed in the recent trade talks, after which cooked Chinese poultry will start to line U.S. shelves for the first time. However, supermarkets in the U.S. will have to pay close attention to third parties in China due to factors such as environmental pollution, with water and soil contamination at a high risk factor. China is not allowed to export raw poultry to the US due to the region’s avian influenza prevalence. Fraudulent ‘organic’ labelling is also common place in China: a 2010 USDA report stated producers use expired ‘organic’ labels on their products to reduce costs. Out of 23 cases of fraudulent organic certificates between 2011-13, nine involved Chinese companies. The same report cites a lack of equivalency between food safety standards and certification between the U.S. and China.


Saddled with scandal

The problem does not singularly pertain to China; few will forget the horsemeat scandal of 2013, involving horsemeat sold in beef products all over Europe. Whilst the Food Standards Agency advised that all products on sale were safe (with some claiming that horsemeat was in fact safer than beef), this did not stop many brands such as Findus suffering extensive reputational damage, involving millions of products being pulled from shelves. Lord Haskins, a former chairman of Northern Foods, a firm implicated in the scandal, put the problem down to ‘endemic fraud’:

“All the respectable retailers in this country will do this but [it is] the people on the margins – the shadowy guys – particularly in the non-supermarket trade. The area that worries me is the catering trade, the hospitals, the schools where the rules are pretty lax.”

Regulators taking the reigns

There was even strong talk of a possible ban on imports, which would have proved costly for the whole industry. This year, the European Parliament adopted new laws aimed at fighting food fraud, including regular unannounced checks of the supply chain. The measures will be in place at the end of 2019, and the penalties for companies in breach of the regulations will be higher than ever.

The EU and China are, together, working to tackle the problem from various angles. Yesterday, more than 30 partners were announced to be part of a project to tackle food supply chain issues, and will include innovative use of technology and AI, paired with the Horizon2020 funding, to improve access to information, legislation and inspection in supply chains. The project begins in September and lasts until August 2021.


 

What can food companies do to mitigate failures in their supply chains?

Acquiring suppliers in emerging markets is routine for multinational supermarkets who want to either a) increase supply or b) reduce production costs. However, a global supply chain involves regional subsidiaries, who in turn need to measure thousands of local suppliers. Whilst the due diligence requirements in the local jurisdiction may be minimal, failures in the supply chain implicate the rest of the multinational, requiring enhanced due diligence on onboarding new vendors, and watchlists, sanctions lists and profile checkers cannot be relied upon for this data.

The failure is often a case of scale. With often only one regional manager to oversee and control activities in several jurisdictions, leveraging expertise to prevent abuses is critical. Whilst only one party may have the intention to commit fraud, the law implicates several facilitators of the crime - a) the perpetrator, b) the regional manager, for an absence of controls and c) the company for not investing in proper controls. Just like the profits, the fines scale up.

Source: Safefood

Every supply chain manager will employ diagrams to visualize their supply chain - the role simply necessitates this top-level orientation. Performing adverse terms searches on these mapped entities, paired with local language alerts, whether it be a supplier partnering or being bought out by another firm (if not becoming embroiled with a scandal) will allow firms to see the whole network and keep ahead of issues before they boil over. Alongside routine inspections, access to unstructured data, litigation information and local language news media allows supply chain due diligence to be conducted in real-time.


Arachnys Investigator is the only search platform focused on gathering business information from unstructured & public domain data, critical to assessing supply chain risk. Investigator pairs well with existing profile checkers to eliminate your blind spots and see the whole network, using local information in high-risk jurisdictions to cover vendors for pre-screening to maximize risk appetite.

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Cover image: Sourcemap, Ben & Jerry's Ice Cream production

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