8 StrategicRISK [ APRIL 2013 ] www.strategic-risk.eu

NEWS ANALYSIS

SUPPLY CHAINS

Meat processing under the knife

THERE IS ABSOLUTELY NOTHING wrong with consuming horsemeat. It is high in protein, low in saturated fatty acids and rich in essential minerals and antioxidants. Previous studies have suggested it may also be more benefi -cial for health than beef owing to these factors. It is regularly eaten in restau-rants and homes across Europe, where statistics suggest about 1kg per person

per year is consumed in Belgium, France, the Netherlands, Luxembourg and Italy.

There is, however, something very wrong with eating horse-meat when consumers are told it is an entirely diff erent meat product altogether. What the horsemeat scandal has so far dem-onstrated (and it is far from over) is how poorly large supermarket chains and some food manufacturers understand and regulate their supply chains. In recent years, the length of supply chains has increased dramatically to lower consumer costs and increase company profi ts. But these increases have also culminated in an increase of criminality, deniability and a distinct lack of product traceability within major European food retailers. For supermar-ket retail risk managers, it is becoming less a question of where to begin looking at their supply chain risk and more a case of where their supply chain risk ends.

Integrity of a supply chain is the single most important factor for any business. Once the integrity of a chain is compromised, it will bring into question every other aspect of the chain. Ernst & Young’s fraud investigation team partner John Smart says supply chain integrity is an important part of the DNA of any business, and the fi rst point of failure in the horsemeat scandal. “Compa-nies are, in most cases, responsible for the actions of third parties acting in their name. However, our research reveals that fi rms, across a range of sectors, are not carrying out basic checks.”

Labelling failuresThe initial point at which supermarket supply chains have failed in this instance of food contamination begins with food label-ling. Food Standards Agency tests on beef products at the centre of the scandal have found items containing equine DNA, as well as pork DNA in other cases, despite being labelled as containing 100% beef and beef products. “In the case of packaging, when stating the provenance and integrity of products, companies

The horsemeat scandal has brought into sharp focus shortcomings in the supply chains of supermarkets and food manufacturers

Reuters

must be able to stand by their claims, requiring transparent dis-closure of the entire supply chain,” says Smart. “Companies need to be able to defend such statements and to demonstrate traceability of the data and declarations upon which it relies and which form the basis of the trusted relationship it attempts to build with its customers.”

EU farmers union Copa Cogeca secretary-general Pekka Pesonen stresses the horsemeat scandal has nothing to do with farmers and primary production operations in Europe, and is solely a criminal act of mislabelling of beef products. “It is very much a criminal act and we feel this is a fraudulent case of using raw material that doesn’t fulfi l the expectation of consumers in question,” he says. “If consumers are not given the proper infor-mation about what is in their food, that is a crime. And it needs to be penalised. We have laws in place at national and EU levels so we do not feel there will be any diffi culty in applying law to this case. It’s simple: if you break the law, you face the consequences.”

The issue of implicit trust by major retailers in their supply chain has been pushed to the forefront during the scandal, open-ing up risk managers to increasing criticism. Cass Business School operations and supply chain management head Professor Mohan Sodhi describes this trust as “plausible deniability” and says retail-ers are using it as a ‘get out of jail free’ card to overcome the bad publicity of the scandal.

“As a retailer, you can either verify the products for what they should be or simply trust the supplier,” says Sodhi. “It would cost the retailer a lot more to verify the products than to trust, and it

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www.strategic-risk.eu [ APRIL 2013 ] StrategicRISK 9

‘For risk managers, if the store is selling an own-brand product they must take 100% responsibility for that product’Mohan Sodhi Cass Business School

managers can mitigate the risk. Pesonen points out that there are already a number of meat traceability schemes in place across Europe, but they are not working as effi ciently or eff ectively as they should be when it comes to food labelling for end consumers.

He says the farmers union is concerned about the impact of any additional labelling requirements. “What would the cost be? What would the administration be? How would it be controlled and so forth?” says Pesonen. “We very much support the impact analyses to be done on additional labelling requirements, asking: is it feasible and can we go in that direction?”

The UK’s National Farmers’ Union president Peter Kendall says shorter and more traceable supply chains are the only way forward. “But more than that,” he adds, “I want to see retailers working on rebuilding consumer trust, improving transparency. And so partnership with farmers and the rest of the supply chain is critical. However, what we see currently in some sectors is real short-termism. The margin distribution in the supply chain needs more transparency and joined-up thinking to tackle the dual challenges of volatility and environmental pressures.”

Sodhi is sceptical that retail supply chains will change their ways in the long term, but he believes that in the short term super-markets will have little choice but to rely on public relations to overcome the scandal. And so far, it appears he is correct. Tesco has taken out double-page adverts in all the major UK newspapers every weekend since the scandal broke, admitting that its supply chains are broken and they need work. In the supermarket’s own words: “This is it. We are changing.” SR

would also create legal liability for the retailer. Trusting the supplier costs nothing and you get the right to blame the supplier if something goes wrong.”

Sodhi strongly believes risk managers need to take much more personal responsibility for the crisis than they have done to date. “What risk managers have done so far is not good. They are using deniability and saying: ‘We trusted our suppliers’. Whether they are a French or UK supplier doesn’t mean a whole lot. If the con-sumer is buying a product from a known and trusted brand, it is the risk manager who needs to take responsibility. This issue of deniability is immoral. This is not risk management in the usual sense. At some point you have to say: ‘This is my product and I stand by it’. For risk managers, if the store is selling an own-brand product they must take 100% responsibility for that product. Consumers trust the packaging and so they should. If a pencil package says it is pencils, why should it be anything else?”

Feedback to farmersBoth Smart and Pesonen are also concerned about how the loss of consumer trust in major retailers’ risk management practices will fi lter through to individual farmers. “There is a risk that this mistrust consumers now have in regard to foodstuff s may come back to the farmers themselves,” says Pesonen. “This is what we are worried about. We would like the European authorities and member states to sort it out as soon as possible.”

The issue of traceability of meat within the EU has arisen from the scandal, but there are surprisingly few answers on how risk

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