Nutella Illustrates Supply Chain Risks

Por Lionel Laurent

Nutella, our beloved hazelnut spread, is a classic example of the benefits and costs of globalization.

Some 400,000 tons are produced each year by a supply chain that spans almost every continent. Key ingredients like cocoa, hazelnuts and palm oil are sourced from Africa, the Middle East and Asia, and producing countries boast of lifting their people out of poverty.

However, that network has had consequences. Allegations of child labor on hazelnut farms in Turkey pushed the parent company of Nutella, Ferrero, to increase the traceability of its supplies in 2019.

The rapid expansion of palm oil production in Indonesia and Malaysia has come at the expense of vast tracts of rainforest, which Ferrero is trying to counteract with sustainable sourcing and satellite monitoring of forest areas. Now, environmentalists and certain farmers are complaining about the impact of the company by moving part of the production to Italy.

This is a breakfast staple that, even as you strive to maintain increasingly strict control of supplies, seems to receive a lot of political criticism.

Nutella is just one of many reminders that multinational supply chains are at the center of global struggles like the one against climate change and the effort to eradicate human rights abuses. And yet this responsibility still seems to take companies by surprise.

The need for companies to look beyond their doorstep and analyze all aspects of their production has been a feature of the COP26 summit, where palm oil producers were among a hundred countries that pledged to halt and reverse deforestation. by 2030.

The issue has also been central during the pandemic of COVID-19as they endanger essential workers for low pay. Judging from the struggles to keep supermarket shelves stocked in the current recovery, supply chain vulnerabilities are still being felt.

While business has made great progress since the turn of the century – when the principles for responsible investing took shape – it’s time to raise the bar.

The task, in the first place, belongs to the legislators. Voluntary principles and standards should give way to legislation that propels companies on supply chain issues that are complex, opaque and lengthy. It seems that there is a flaw when looking beyond the supposed direct suppliers of level 1 of the companies, the final link of the chain, according to John Sherman, from Harvard Kennedy School. That means that problems from then on are ignored.

Mandatory due diligence requirements have been proposed in the United Kingdom and the European Union; the first threatens fines for companies that use products linked to illegal deforestation, and the second seeks a broader approach to punish environmental and human damage.

But the goal of the new legislation should be to maintain the benefits of globalization while reducing its harms, rather than simply creating the biggest hammer with which to hit businesses.

Governments should help companies by enforcing their own laws and principles on human rights and the environment. Legislators must not stop intervening in the way companies are run, for example by demanding more onshore production or changing the rules of corporate governance.

Support should also be available for small and medium-sized businesses, which could justifiably object to the higher relative cost of supply chain audits.

A study of product standards in emerging markets estimated the cost of compliance at $ 425,000 per company. This can be indirectly provided by governments or larger companies that can afford to spend more to improve supplier standards.

Businesses will naturally voice their resistance – close scrutiny of supply chains can reveal nasty surprises. More rules are likely to lead to higher costs. But at the same time, companies must also realize that this will ultimately benefit them. Fairer terms will protect supply and also boost consumer demand.

The more confidence we can place in how our breakfast got to the table, the more faith consumers will put in the products themselves. Lifting the lid to reveal supply chain risks should mean opening more (now reusable) jars of Nutella. Sometimes doing good in business is just good business.