"Sustainomics": Agriculture and the Supply Chain

Stephen DeAngelis

April 20, 2010

Suppliers, distributors, retailers, and consumers are finding that the world is becoming ever more complex and interconnected. You hear a lot of terms bantered about such as lean supply chains, efficient supply chains, just-in-time supply chains, and resilient supply chains. You can add “sustainable supply chains” to that list. In decades past, one might expect the term “sustainable supply chain” to refer to a supply chain that was stable over long-periods. In these environmentally-concerned times, however, the term “sustainable supply chain” refers to long-term stability as well as a supply chain’s carbon footprint and how efficiently it uses other resources like infrastructure, capital, and human labor. Nearly two decades ago, Professor Mohan Munasinghe coined the term “sustainomics” and offered four core principles to guide the implementation of sustainable systems, which are discussed in a Financial Times article by Ross Tieman [“Plan for the future from fork to farm,” 27 January 2010]. Tieman believes that a sustainable supply chain can also be a resilient one. He writes:

“Building sustainable supply chains is not just about counting carbon emissions, says Professor Mohan Munasinghe, director general of the Sustainable Consumption Institute at Manchester University in the UK. Rather, it is about choosing development and production patterns that can still function ‘in 50 years’ time’. The professor, who first unveiled his ‘Sustainomics’ framework at the Rio Earth Summit 18 years ago, identifies four ‘core principles’ that any food manufacturer or retailer needs to keep in mind for a sustainable supply chain.”

The first principle identified by Munasinghe is the concept of sustainability itself. “Development, he says, needs to become sustainable, whether it is growing tea in Sri Lanka or beef in Brandenburg.” His second principle contains three “key dimensions.” Tieman explains:

“Second, the three ‘key dimensions’ of sustainable development – economic, social and environmental – must have equal priority. He is emphatic about this. Farmers in much of the world need higher incomes, he says. Food production regimes that degrade soil or water resources, or that lead to social breakdown, merely stock up problems for the future. But if farmers can husband resources and earn enough to pay for water, electricity, health-care and schooling, those services will come to them.”

The third guiding principle is that people must adopt values that motivate actions and influence decisions. Tieman explains that Munasinghe believes that “humans need to acquire ‘sustainable values’. This shift in thinking needs to include farmers and everyone else involved in the supply chain up to and including consumers.” The fourth and final guiding principle focuses on good analysis. Tieman explains:

“Finally, retailers and manufacturers need integrated tools to make a full life-cycle analysis of their products. This must span, he says, ‘from growing tea to picking, to shipping, to retailing, to brewing the tea to disposal of the tea-bag’. That is a pretty sweeping list, but the professor is an optimist. ‘It’s not rocket science,’ he says. ‘These are not intractable problems. We can do it.'”

As the cost of carbon-based fuels has spiraled upward and the consequences of climate change have played havoc on farmers, Tieman reports that “an awful lot of people in the food industry have come round to Prof Munasinghe’s way of thinking.” He continues:

“Mella Frewen, director general of the Confederation of Food and Drink Industries of the EU (CIAA) says: ‘Sustainability is about a lot more than just carbon and carbon foot-printing.’ The CIAA, she says, is working ‘with the entire supply chain from fork to farm’, tackling economic, environmental and sourcing issues. Countless initiatives have been launched, often embracing international and government agencies and non-governmental organizations, such as the European Food Sustainable Consumption and Production Round Table, chaired by Pascal Grévarath, director of environmental sustainability at Nestlé. Food retailers, too, have begun serious efforts to develop environmentally-sustainable supply chains. Altruism may play a part, but David North, consumer and government director at Tesco, a UK-based international supermarket group, insists there is also a strong commercial reason to develop sustainable supply chains. ‘The supply chain is the big prize,’ he says. ‘We think that in the future many of our customers are going to care about this: we think this will be an area of competitive advantage.'”

Tesco isn’t the only large retailer that believes “the supply chain is the big prize.” In a post entitled Companies Seeking Greater Control Over Their Supply Chains, I discussed recent decisions by PepsiCo and Coca-Cola to take greater control over their supply chains. For companies concerned about the environmental impact of their operations, they may find that the greatest impact can be found within the supply chain. Tieman reports what Tesco discovered:

“Last year, Tesco started looking both upstream and downstream in its supply chain. The company had achieved big environmental improvements in its own distribution activity. Yet studies suggested the environmental impact of suppliers was about 10 times greater than that of its ‘inhouse’ activities, while the impact after goods were purchased was 100 times greater. It is now looking for a 30 per cent reduction in carbon emissions among suppliers by 2020, while aiming to help consumers halve emissions arising from their purchases by the same date. Data about upstream carbon emissions is lacking. Nonetheless, by the end of next month Tesco aims to have established the carbon footprint of 500 of its products. Details will be added to the product label. Consumer choices will be closely watched. Mr North reckons CO2 emissions and cost are generally synonymous. ‘We can reduce costs by stripping out CO2,’ he says, and making supply chains more resource-efficient should make them more resilient. A study for Tesco found that foodstuffs were the biggest sources of carbon emissions, headed by fruit and vegetables, processed foods, meat and dairy, and beverages. Consumer goods were a long way down the table.”

Tesco’s effort to determine the carbon footprint of its products is laudable, but it can only provide a gross estimate of that footprint since calculating carbon footprints is difficult. For more on that subject, read my post entitled Counting Carbon. Tieman concludes that “the biggest challenge for development of sustainable supply chains is gathering information. Communication, and then action, [are then] the logical next steps.” As I point out in almost post about supply chains, more data and better information sharing are critical to making the next leap forward in supply chain resilience. Although some companies may promote their environmentally-friendly business practices as a way to attain a better public image, more and more of them are coming to believe that implementing sustainable supply chains are in their own best interests [“Self-interest drives new attitudes to agriculture,” by Rowenna Davis, Financial Times, 27 January 2010]. Davis reports:

“Global agribusiness companies are waking up to smallholder farmers. Long used to buying their produce through intermediaries, companies are now meeting farmers in the fields. Cadbury is committed to making its leading Dairy Milk brand Fairtrade by supporting small cocoa farmers in Ghana. Unilever is offering 5,000 small farmers guaranteed markets, access to finance and technical assistance to grow black soybeans in Indonesia. Blue Skies – a business supplying processed tropical fruits to Europe – is training workers to meet international accreditation standards, increasing exports from Ghana. This trend is recognized by some of the most senior authorities in the field. Oscar Chemerinski is director of global agribusiness at the International Finance Corporation (IFC), the investment arm of the World Bank. ‘There is an increased realization by global agribusiness that their success or failure in the medium and long term is tied to the success of the small farmer, both financially and environmentally.’ He says: ‘The balance of power may be shifting in favor of the producer.'”

In a post entitled Walmart and the Food Supply Chain, I discussed how Walmart is tightening its supply chain by eliminating many middlemen and negotiating directly with food producers. This is generally considered good news for both food producers and consumers. Davis reports that large agribusinesses are joining in the sustainable supply chain movement because they have come to realize that not only could the source of supply be at risk but buying and reselling unsafe products can adversely affect their bottom lines.

“Companies that were originally interested in their producers to improve their reputations are now motivated by a need to safeguard supplies. Nestlé the Swiss multinational is a good example. Having consistently refused to take up Fairtrade standards, the company announced in December [2009] that all of the cocoa used in its flagship Kit Kat bars in the UK would be sourced from certified producers. … Nestlé has a network of nearly 800 agronomists working with the 600,000 smallholder farmers. The solutions they offer are low cost and high impact, he says. In Pakistan, they are teaching female smallholders – the main suppliers of milk in the region – how to collect milk safely to avoid contamination and meet global trading standards. In China, they are helping farmers to turn fermented gas from cows into a local energy supply. In India, Nestlé has invested in local refrigeration hubs, allowing hundreds of dairy farmers to add their small contributions to the store at reduced transport costs. Each year, the company offers farmers almost $30m of micro-credit to fund installations that improve the efficiency and quality of production on the ground. Unilever, the Anglo-Dutch multinational, is also taking steps to improve its relationship with smallholders. By offering guaranteed markets for black soya beans at between 10 and 15 per cent above trader-set prices in Indonesia, it has secured a supply chain for its soy sauce, which is popular among locals.”

Davis reports that organizations interested in protecting smallholder farmers from being exploited see a brighter future for them. She continues:

“Bill Vorley, head of sustainable markets at the International Institute for Environment and Development, believes that these changes are set to continue. Much more than token efforts, he believes corporate concerns about sustainability are marking an important turning point in the history of agricultural production. ‘Over the last 10 years, the whole dialogue of the industry has changed. Businesses know that they need a healthier underpinning to their supply chains. It’s a really interesting example of how self-interest has moved businesses from a laissez faire approach to a more engaged sustainability strategy.'”

The best way to ensure the highest possible quality of products as well as their safety is to establish and enforce standards. Although companies want the best and safest products, they also want them produced at the lowest possible cost. This creates an understandable tension between product standards and workforce standards. As concern over the safety of food supplies grows, companies appear to be coming around to the fact that implementing good standards all around is the best way to protect their bottom lines [“‘Islands of best practice in sea of poor to middling ones’,” by Jane Bird, Financial Times, 27 January 2010] Bird reports:

“Unilever is proud of the medical care, schooling, clean water and renewable energy it provides for the 20,000 workers and their 80,000 dependents on its tea plantation in Kericho, Kenya. The site sets standards the company aims to replicate worldwide. With brands such as Lipton and Brooke Bond, Unilever produces about 12 per cent of the world’s black tea. This makes it a good place to start implementing Rainforest Alliance certification for sustainable farming, says Miguel Veiga-Pestana, vice president for global external affairs. ‘We are trying to put the emphasis on core crops where we have a large footprint in sourcing, so that we can create a bigger shift,’ he says. The aim is to be fully compliant in tea by 2015, then move on to palm oil. Organizations such as the Rainforest Alliance, Ethical Trading Initiative (ETI) and Fairtrade, include working conditions in their certification standards. But even a company as big as Unilever struggles to meet these. Last year it was reported to the Organization for Economic Co-operation and Development by the International Union of Food-workers (IUF) for the high proportion of temporary workers at its tea factory in Khanewal, Pakistan. Only 22 employees were on full-time contracts while hundreds were employed on low-paid temporary contracts , despite many having worked there for decades. Unilever has now agreed to 200 permanent contracts. ‘We have acknowledged that we were not conscious of this issue and got the balance wrong between permanent and temporary contracts,’ says Mr Veiga-Pestana. Factors such as a lack of awareness among senior managers, and the ‘casualization’ of the workforce, are among the biggest problems affecting working conditions in the food industry, says the ETI’s Julia Hawkins. ‘Whole swathes of migrant workers are being brought in, often to work very long hours harvesting seasonal crops such as grapes or producing turkeys and Brussels sprouts at Christmas,’ she says. Fluctuations in labor demand are also caused by retailers wanting to respond to unpredictable consumer behavior, such as a surge on burgers and chicken drumsticks for barbecues in a heatwave, she says. ‘Abuses and exploitation are often to do with responding to these peaks and troughs in demand.’ Improvements are being made, partly because of an increased need for supermarkets to identify and audit their sources, and partly because of consumer awareness heightened by incidents such as the deaths of Chinese cockle pickers at Morecambe Bay in northwest England in 2004.”

Unilever’s Kenyan operation underscores the fact that a company can do the right thing and still turn a nice profit. Bird agrees that taking responsibility for supply chains is one of the keys to ensuring high quality, safe products. She continues:

“The food industry is under increased pressure to take responsibility for supply chains, including chocolate, coffee, bananas and tea, says Chris Wille, the Rainforest Alliance’s chief of sustainable agriculture. ‘Consumers increasingly expect their food to be from managed farms where people are treated with respect and given good working conditions,’ he says. ‘Companies used often not to know where their products came from, but there is now a rapid and huge transformation to understand this and get workers’ rights included in their social and environmental responsibilities.’ … To simplify processes for producers who want to supply a number of companies, competitors such as Unilever, Nestlé and Kraft, are collaborating to standardize the data their auditors require. Auditing is not a foolproof way to ensure good labor conditions, admits Mr Wille. It is relatively easy to see if the water is clean and schooling is adequate, he says, but much more difficult to know whether a workplace is really free from sexual harassment, for example. ‘It would be foolhardy to claim that there was never a child working on a farm and that everyone has their full complement of rights, but we can usually detect if there are systemic faults.’ The ETI estimates 9m workers are covered by its 50 corporate members which include Tesco, Asda and Sainsbury’s. The Rainforest Alliance has also chalked up some big name signatories in coffee roasting, with Kraft, Nestlé and Sara Lee. But it acknowledges that less than 10 per cent of coffee farmers are covered by this type of program. The alliance has made good progress in the cocoa industry, where the many cases of child labor in west Africa are finally being dealt with, and Mars has been been signed up. Once products reach ports or beyond, good practice depends more on the importing companies and local labor conditions. Throughout the food value chain, says Ms Hawkins, ‘there are islands of good practice in a sea of poor to middling ones’.”

If middle classes are going to emerge in developing countries, ensuring that workers are treated and paid fairly is important. Since most future global economic growth will be seen in developing countries, multinational companies have a vested interest in helping ensure that the global middle class continues to expand. Today’s workers are tomorrow’s consumers.