By Zafar I. Anjum
The recent scandal in Europe over the inclusion of horse meat in food products that were purchased by consumers who believed they were 100 percent beef has turned a spotlight on the importance of oversight in the corporate supply chain.
The scandal began in January 2013 when Irish authorities found traces of horse DNA in “value based” frozen beef burgers made by processors in Ireland and Britain and sold in Tesco, Aldi and other major supermarkets across Europe. Further testing of also showed the presence of pig DNA in the beef burger samples.
According to reports, the food products originated from Liffey Meats and Silvercrest Foods in Ireland, and the Dalepak Hambleton food processing plant in the United Kingdom. Trace amounts of horse DNA were also found in raw ingredients imported from Spain and the Netherlands.
Ironically, the scandal posed no real threat to human health. But it breached many cultural taboos related to eating horse and eating pork, and has raised a firestorm of questions and concerns over the integrity of the food system on the Continent and the security of food supply chains.
The ensuing media storm coming from the scandal has supermarket chains across Europe facing a wave of criticism. As a result, those operators were forced to pull millions of beef products from their shelves that were thought to contain horse meat.
With politicians, food standards agency officials and the public demanding protection against food fraud and food adulteration, the industry’s meat retailers, suppliers and supermarkets have all suffered reputational harm and widespread financial losses.
Tesco, the UK’s largest retailer and a leading international retailer, saw its market value plunge more than one percent, or £300m, in one day after it removed 21 lines of its frozen burgers from 3,000 British supermarkets. The operator of more than 6,000 stores worldwide has since worked feverishly to repair its damaged image by heavily promoting measures that will allow it to better track its supply chain and ensure quality in its food products.
Impact On The Industry
The scandal revealed a major breakdown in the traceability of the food supply chain, and exposed a web of fraud practiced by several food processors that took advantage of the intricacies of the supply chain for their own financial gain.
According to sources close to this scandal, a growing global economy has enabled the food industry to source its products worldwide, which has added to the sophistication of the industry and increased the complexity of the supply chain. Because of these factors, it’s becoming increasingly more difficult to monitor what goes into a product.
Moreover, a stressed worldwide economy has forced organisations to take extreme measures and look beyond borders for cheap labour and more effective ways to preserve the bottom line. According to one source familiar with the food industry, “Supermarkets are pressing the supplier, the supplier is pressing the sub-supplier, the sub-suppliers’ workers are cheating because they are paid poverty wages, being from the third world and imported as cheap labour.”
Because the supply chain has so many layers, it’s become increasingly difficult for even cash-rich companies such as Tesco to identify, monitor and secure their sources. Foreign suppliers are being blamed by experts who claim that those third-party suppliers have caused the contamination scare in a deliberate swindle to save money in supplying products to the value supermarket chains.
Silvercrest, one of Tesco’s meat producers, defended itself by commenting, “Silvercrest has never purchased or traded in equine product and has launched a full-scale investigation into two continental European third party suppliers who are the suspected source of the product in question.”
Tesco has since dropped Silvercrest as a meat supplier. That move was closely followed by several well-known food retailers and wholesalers through Europe, and even fast-food giant Burger King, which owns more than 500 fast food restaurants throughout Ireland and the UK.
“An Alarming Breach In Controls”
Fraud has always been a mitigating factor in the corporate supply chain. And it’s no different in the food industry. It is estimated that fraud accounts for as much as 10% of food sales, with common examples including Vietnamese catfish being passed off as cod, ordinary olive oil as extra virgin and vegetable fat as mozzarella cheese.
While the blame for the horse meat crisis may lie in part with lower-level suppliers and mislabeling fraud, the scandal has nonetheless shone an unflattering light on the food industry’s supply chains, and the alarming breach in controls that has been publicly exposed, especially those controls utilised by the major supermarkets.
For their part, the retailers are owning up to the fact that they may not be as diligent in monitoring suppliers as was once thought. Tesco, for one, admitted to its lack of knowledge that one of its suppliers had been purchasing meat over the past year from an unapproved third-party Polish supplier. According to a statement made by one of Tesco’s technical directors, “It was impossible to check the supplier in Poland, as we didn’t know it existed.”
That lack of knowledge of the processes being used by the companies to which the products are being sourced has led to the overriding issue that now plagues the food industry. With an ever-expanding global supply chain, it has become increasingly vital that retailers be made responsible for what they sell, how it’s made and where it comes from.
Managing Your Supply Chain
Short of a business launching its own in-house production or manufacturing facility to meet all of its component needs, the only economically viable way for companies to stay competitive in this global marketplace is to rely on its supply chain network. And it’s the responsibility of the organisation to ensure that its web of suppliers is reliable and trustworthy.
To ensure your suppliers’ values are in line with those of your business, it’s vital that you put in place an effective supply chain management system. Such a system will become a watchdog over the processes, controls and communications to mitigate the inherent risks associated with outsourcing the products that define your brand in the marketplace. Here are several recommendations to support your supply chain management system.
- Review Your Supply Chain. Launch a traceability audit with suppliers to document where your products are coming from. Every level of your supply chain (going well beyond your first-tier suppliers) should be reviewed, scrutinized and accredited. With that review in hand, ask yourself if your suppliers are conducting business in a way that conforms with your core values, and producing product that meets your requirements. A long supply chain means limited control over what you are producing, so consider the alternatives to your present suppliers and look into simpler ways to product your product.
- Conduct Your Own Quality Tests. Conduct factory audits on all suppliers in your supply chain before placing that first order. Ensure that every supplier conforms to your quality levels and are adhering to strict product specifications. Those audits will come in handy should any risk issues arise down the road. Additionally, require your suppliers to conduct and produce self-administered audit reports that show the reviews were conducted by independent (and credible) industry auditors.
- Maintain a Policy of Transparency. To instill confidence within your customer base, be as transparent as possible about your suppliers, producers and production operations (without divulging trade secrets, of course). This could vastly reduce the potential for a public relations crisis down the road. The more information your customers have, and the more transparency there is in the your corporate supply chain, the harder it will be to be taken by an unscrupulous supplier.
- Get Legal Involved. Make sure every supplier you’re working with knows the boundaries of your business relationship. Employ legal contracts that spell out required benchmarks related to quality, materials, delivery, sub-contracting and other production facets.
- Communication is Key. Do you have an internal communications system that engages with your workers (and perhaps your suppliers’ workers)? Workers typically have first-hand knowledge of production issues, and a communications system that enables them to provide input and feedback generally gives employees a chance to voice their concerns before the situation builds to crisis proportions.
- Look to the Industry for Support. As a result of the horse meat scandal, supermarket retailers across Europe were all impacted by the acts of a few third-party meat processors. Therefore, it’s important that trade partners share information on suppliers and utilise industry-sourced databases for the latest information and updates, so that red flags can be raised to identify undesirable suppliers. It’s also vital to monitor communications coming from the trade groups that cater to your industry to keep abreast of issues related to your market.
- Employ Independent Consultants. Using outside advisers who are impartial to the industry, your customers and your suppliers will add a degree of credibility and transparency to your supply chain management programme. Such advisers are knowledgeable at conducting thorough due diligence investigations that can expose undetected risks in third-party supplier relationships, while acting as an outside set of eyes to review your policies and procedures and detect any security breaches that could potentially harm your organisation.
Any viable supply chain relies on a certain degree of trust between all parties involved. And it’s only through the use of a well designed supply chain management system that the level of trust shared between parties will mature and grow stronger.
Several major supermarket chains throughout Europe have come under intense scrutiny after horse DNA was discovered in products they claimed were made entirely of beef. The ensuing crisis has eroded consumer confidence over the method in which supermarkets purchase their food products.
Persons of Interest
- Several food processors in Europe are being investigated for using horse meat in the beef products they sold to supermarkets.
- Major retailers, including Tesco, Aldi and others, are under the microscope for not properly monitoring and managing their food supply chain.
Breaches in Security
The complexity of the food supply chain has made monitoring of food processors increasingly difficult. Further, some processors are turning to fraudulent adulteration methods to reduce costs and compete on a “value” level.
Impact of Breach
Supermarkets have taken a beating financially, as shoppers are turning away from “value” foods which they believe contain products not mentioned on the labels. Retailers, in turn, are investing millions to restore trust and bring back that consumer confidence.
Establish systems that enable the business to know who its suppliers are and ensure that those suppliers are complying with benchmarks, requirements and other indexes that define the corporation’s core values.
- Tesco has pledged to shorten its supply chains and source meat from inside the country wherever it can.
- Tesco has promised to spend millions of pounds annually on DNA testing, to make sure its suppliers are delivering the ingredients listed on its food products.
ABOUT THE AUTHOR
Zafar I. Anjum, CFE, CIS, MICA, Int. Dip. (Fin. Crime), MBCI is Chief Executive Officer of CRI Group, a global supplier of investigative, forensic accounting, business due diligence and employee background screening services for some of the world’s leading business organizations. A Licensed Entity of the Dubai International Financial Centre, CRI safeguards businesses by establishing the legal compliance, financial viability, and integrity levels of outside partners, suppliers and customers seeking to affiliate with your business. CRI Group maintains offices in UAE, Qatar, Pakistan, Singapore and the United Kingdom. Email Zafar at email@example.com.