How practical is 100 per cent Supply Chain Traceability
As a major multinational company pledges to achieve total traceability for the palm oil it uses, Professor Sodhi examines whether this goal is practical or not and suggests how an organisation may benefit from such a commitment.
"100% of palm oil bought will be traceable to known sources by the end of 2014" states the press release on Unilever's website. How practical is such a promise for a business, especially in the wake of the horsemeat crisis when European retailers and food manufacturers couldn't even guarantee what animal the meat in their food came from?
Let's first take a look at a company's motivation for this goal. It is certainly desirable to have traceability of where things are being sourced, if only to know that what you think you are buying is actually what you are getting. Knowing the source helps a business verify whether they are desirable or not - witness the importance of the diamond industry sourced from war zones, or 'blood diamonds' for instance - especially if they sell their products directly to consumers. In Unilever's case, the emphasis is on whether or not the source for palm oil is 'sustainable' or not, and the definition of sustainability can be as broad or as narrow as you want; Unilever certainly has taken a broad view. And traceability may be important for ensuring economic sanctions on Country X are being maintained. More than anything else, if a business wants to ensure sustainability or security in its supply chain, traceability is the first necessary step. Anything less than 100% traceability is like being less than 100% faithful to your spouse: you can easily hide indiscretions.
So transparency is desirable, but what about the additional cost? If traceability requires investment or if it requires the company to pay more for supplies, couldn't there be better uses of money to create shareholder value? That may depend on a company's specific circumstances. Unilever did not announce that all supplies or even all commodities they purchase would have 100% traceability -- they restricted their announcement to palm oil.
There are three reasons why this makes sense. First, as a large fast-moving-consumer-goods manufacturer with huge sales in environmentally conscious Western Europe, a small increase in costs can be easily offset by a large (perceived) increase in revenues. Unilever has had positive experience with bringing in sustainability to their Lipton tea brand in Western Europe. Second, there is the matter of who pays for the cost, the buyer or the supplier. For the adoption of RFID by retailers, the cost was borne by the suppliers. Unilever is one of the largest buyers of palm oil so it can assert itself with suppliers. Finally, the market may or may not have the capacity to provide traceability or sustainable products. The market for palm oil has softened greatly - supply exceeds demand - and prices are the same now that they were in 2010, about 30% lower than what they were in 2012, and they are expected to weaken further. So if you are supplier of palm oil and a big purchaser like Unilever wants 'traceability', would you not provide it and at your own cost?
From where things are today, it may not be practical for all companies to seek 100% traceability for all things they purchase but it is certainly desirable. Unilever has shown that it makes sense to go for traceability and sustainability where it makes immediate economic sense - and even that benefits not only shareholders and but also society. Perhaps some day we might even find out what we are eating.
A version of this article was published on The Guardian website on Monday, 3rd February 2014.