Supplier engagement key for sustainable food supply chains

Sustainable supply chains cannot be built by food companies in silos and effective supplier engagement is required to bring the required transformation in supply chains

Globally industries are facing increasing pressure to reduce their environmental footprint by way of national regulations, sector specific standards, investors, and consumer expectations. Assessing climate and resource impacts, risks, and opportunities is the first step in building sustainable and resilient supply chains. Corporate GHG accounting and target setting for emission reductions will help companies develop appropriate strategy and roadmap with identified opportunities in improving efficiency and environmental performance of their products and supply chains

The operations and supply chains of various industry sectors have significant impact on the environment through direct and indirect greenhouse gas emissions (GHG) emissions. Value chain/Scope 3 emissions typically arise from the upstream and downstream supply chain activities and consumers using the products. As per CDP Global Supply Chain Report 2020, the supply chain emissions are on average 11.4 times greater than the emissions of a company’s direct & operational (Scope 1 and 2) emissions. The ratio of supply chain to direct emissions for the ‘Food, beverage & agriculture’ sector was reported as 11.2 against 7.9 for Biotech, health care & pharma and 7.7 for Manufacturing – indicating significant GHG emissions across the value chain for the food industry. This necessitates the food industry to act across the value chain – from product design to end of product life – to reduce its environmental impact.

Assessing climate and resource impacts, risks, and opportunities is the first step in building sustainable and resilient supply chains. For example, diversified food companies relying on a range of agricultural commodities including cereals, pulses, meat, dairy etc. have high exposure to raw material risks from supply chains that are water and emissions intensive. Corporate GHG accounting and target setting for emission reductions will help companies develop appropriate strategy and roadmap with identified opportunities in improving efficiency and environmental performance of their products and supply chains; and to prioritise them to use their resources wisely. Eg, Unilever has set plans to reduce emissions to zero within its own    operations by 2030 and to net zero across its value chain by 2039. Cargill has adopted a Scope 3 target of reducing greenhouse gas emissions in its global supply chains by 30 per cent per ton of product by 2030. Nestle is taking measures to halve its emissions by 2030 and achieve net zero by 2050.

 

Interventions

Food industry can improve sustainability performance across the value chain through interventions like:

• Innovations in product design and use of sustainably sourced ingredients – an example is the increased product launches in the animal alternatives (dairy, meat) segment.
• Innovations in packaging – by redesigning packaging material, use of recycled material, reducing secondary packaging etc.
• Increased operational efficiencies – increasing productivity of resources deployed, use of renewable energy, optimis ing resource use (energy, water, heat, steam, refrigerant etc).
• Efficient supply chain logistics – by increasing localis ed/regional sourcing, establishing cold chains to reduce post-harvest losses, solar powered cold storage for fresh produce, supplier network & delivery logistics optimis Measures such as maximising fuel efficiency of vehicles, electrification of future fleet, solar operated transport etc. can reduce supply chain transportation emissions. 
• Business model innovations – by adopting circular economy models/ closed-loop production systems that utilise the 3R principles i.e., reduce, reuse. Eg, Recycling to prevent food waste, recovering resources from food waste and recycling the materials for packaging.

The circular economy models/products are still in their infancy and provide potential upscale opportunities in the food industry. Pallet pooling is a circular business model that has been successfully used in some markets wherein companies can rent pallets from a pallet pooling service (like LEAP India) where and when needed, instead of managing their own inventory of pallets. Further, the use of plastic pallets saves weight and fuel over wooden pallets, and their efficient model of use, reuse, and recyclability provides a viable option for sustainable supply chain management in the food industry. Reusable packaging is another product/ service with great potential in a circular model. The Loop Store, a US based reusable packaging platform, delivers products to consumers, and picks up the empty packaging to clean and refill it repeatedly. Loop has partnered with players like P&G, Unilever, Nestle, PepsiCo, Coca-Cola and others to deliver products in reusable packaging. Upcycling of by-products/materials from food waste is another intervention with great promise. “Upcycled foods” use ingredients that otherwise would not have been consumed and are produced from the by-products or food waste, thus having a positive environmental impact.

The Upcycled Food Association (UFA) has recently developed the first ever certification standard and certification mark for upcycled ingredients in food and beverages. The certification and the logo are expected to create consumer awareness and promote the upcycled segment in near future.

 

Working with suppliers

Sustainable supply chains cannot be built by food companies in silos and effective supplier engagement is required to bring the required transformation in supply chains. Firms can effectively manage the supplier engagement programs by starting with strategic suppliers, who are a smaller number of priority suppliers with significant environmental footprint and then gradually extending the program to other major suppliers. Firms may have obligatory or voluntary programs for their suppliers depending on their commitments /goals and nature of relationships with suppliers; and may also integrate the programs into their procurement practices. When engaging the value chains, companies commonly seek to influence compliance and onboarding procedures, collect information on behaviour, change behaviour through incentives or change markets via innovation and collaboration (Hungry for Change, CDP Report 2020). As per the report, the most common type of engagement on climate-related issues is information collection to understand supplier behaviour. However, only 11% of food value chain companies utilized innovation and collaboration in their engagement practices, suggesting most companies failed to integrate their suppliers and other partners in conversations on how to change markets. Emphasis could be laid on collaborative innovation that can leverage supplier capabilities in co-developing solutions.

Once engaged by customers, suppliers must work with their own upstream suppliers. However, efforts of CDP supply chain members to influence upstream emissions have not progressed beyond their direct relationships with first tier suppliers. It is also crucial to understand the supplier capabilities (scale, technical skills etc) and challenges such as access to capital. This may be also the case with Indian food industry, wherein a large proportion of MSMEs may be constrained to work with supply chains due to capital and/or lack of expertise. Supplier development and collaboration by way of knowledge-sharing, capacity building and access to finance is critical for greening supply chains. Mars, PepsiCo and McCormick have partnered to create a new Supplier Leadership on Climate Transition (Supplier LoCT) – a coalition that aims to drive emissions cuts in global supply chains by engaging with suppliers.

Benefits- Sustainable practices not only help mitigating the climate and related regulatory risks, but also help in improving operational efficiency and cost savings. Supply chain GHG emissions management can provide incentives for innovation in product design and supply chain management, increase sales and customer loyalty as well as improve stakeholder relationships through proactive & transparent disclosures and demonstration of environmental performance.

With the increasing trend of multiple third-party certifications for sustainable practices gaining acceptance with industry, increasing level of consumer awareness and investors interest in transparency in environmental disclosures and related actions, more food value chain actors are expected to embrace the sustainable supply chain practices. This also provides opportunities for companies to become leaders and create best practices in building sustainable supply chains for the food industry.

 

Dr K V Satyanarayana, Food Processing & Sustainability Practice, Sathguru Management Consultants, Hyderabad