Food Supply Chains and the Earth's Balance Sheet

Everybody has to eat, and pretty much every day. One could argue, therefore, that the food supply chain is more important than any other. And yet some of the people closest to it worry about how it works. Nestlé is the biggest food company in the world with 461 factories worldwide (according to its 2011 annual report) and 171,000 employees. I met with José Lopez, EVP and head of supply chain for Nestlé at its headquarters in Vevey, Switzerland, this week to understand the company’s “Creating Shared Value” (CSV) initiative. He is worried. And he’s doing something about it.

Lopez recorded a YouTube video entitled “Planet Earth’s Balance Sheet” in which he describes the real, but crazy sounding, example of growing water-hungry tomatoes in arid southern Spain, harvesting them with migrant labour from equatorial Africa, and ultimately shipping them back to places like Dakar and Abidjan. This kind of thing drives activists crazy. In fact, it drives Lopez even crazier because he understands the full picture so much more deeply. The balance sheet concept, which Lopez articulates in the video, explains why these things happen and thus potentially what can be done about it.

Big publicly traded companies have no real right, given their essentially pure duty to maximise shareholder value, to engage in any kind of philanthropy. They can, however, take a long-term view of business value and see that developing a brand that can be trusted, a supply base that is reliable and sustainable, and a customer base that is healthy and growing ultimately serves shareholders. Nestlé’s CSV effort looks at it this way.

The angle here is to break value from a supply chain perspective down into three levels. The first level is brand value. Consumers do care about the corporate behaviour of the brands they buy – just ask Nike or Disney. Fair practices upstream do matter, but it seems the link between reputation and shareholder value is decidedly non-linear, with sudden cliffs when critical mass of public awareness breaks and the media gets cranked up. At this first level it might be enough to just stay out of trouble, suggesting that good PR and spin management would do it. But Nike and Disney, as well as many other big brands, go much further. They care about trust and invest in real supply chain responsibility to maintain it.

The second level is all about reducing variability in supply. I did a case study many years ago on the value of sustainability for Hewlett-Packard and found that the brand impact of its leadership in the EICC (Electronics Industry Code of Conduct) was less valuable than the fact that compliant suppliers were more reliable and hence required less buffering with inventory, capacity and logistics support.

Cheap suppliers that are irresponsible make for unsteady supply chains and that costs money. In part, this is an argument for at least virtual vertical integration, something that has served Apple well and is of course legendary as the root of Toyota’s rise in the automotive industry. Nestlé’s CSV initiative includes a major effort around rural development, which helps many thousands of farmers to make a better living, but also eliminates variability in supply by establishing, for instance, a “Swiss Milk District System” that standardises the collection of product, quality control and makes an early start to the cold chain.

The third level is about assuring demand. Consumer food businesses in developed countries are far less attractive growth opportunities than those in emerging markets. Nestlé’s 2011 organic growth in Europe was 4% compared to almost 12% for Asia and Africa. The same can be said for most consumer products, which brings us back to the Earth’s balance sheet. Twenty-five years ago, China was a near irrelevance to most global businesses because it was poor. Now China is the leading growth market for hundreds of companies around the world because millions of people have risen first into the middle class, and increasingly to wealth.

Much of the world’s agricultural supply still comes from small farmers struggling with a vicious circle of poverty, which prevents investment in equipment or training, keeps productivity low, and in turn entrenches that poverty. Nestlé’s rural development initiative is beginning to reverse this vicious circle, but not because the company is charitable. The goal is to create shared value inclusive not only of the farmers who get technical advice, infrastructure support and better prices, but also for shareholders who get a more valuable brand, better margins and higher growth.

As always, I urge you to contact me directly if you have any questions, comments or suggestions, now or in the future.

Kevin O’Marah
Chief Content Officer
SCM World

Please contact me directly with any comments, questions or suggestions. I welcome your feedback.