The Market for Due Diligence and Chain of Custody Systems that Support Sustainable Sourcing – A Commentary

As the European horse meat scandal amply demonstrated, batch level traceability in some supply chains is currently very poor.  Price sensitivities at the retailer / consumer interface have invited unscrupulous suppliers to mix different products, as they seek to maximise compressed margins.  As a casual observer in March, it was interesting to see the ‘pointing finger’ wave across the map of Europe.  Slaughterhouses and suppliers in Poland, Romania, England, Ireland, France and the Netherlands were all implicated at some stage during the media furore that surrounded the detection of horse meat in products labelled as beef.

Dr Ulrich Heindl asked me to write for his blog this month in my role as an innovation consultant – in particular reviewing the different ways that the market currently seeks to address the issue of documentation, transparency and traceability.  I hope that this article can act as a primer for those who have an emerging interest in addressing sustainable sourcing.

Achieving better transparency throughout supply chains (the ‘chain of custody’), and providing information on sustainably sourced raw materials is influenced by a number of key players, which I have grouped as follows:

  1. Certification bodies e.g. Bureau VeritasSGSBM TRADA
  2. Non-Governmental Organisations (NGOs) e.g. WWFGreenpeacefoodwatch
  3. Software / service providers e.g. SAPGTS Global Traceability SystemsHistoric Futures
  4. Standards and identification components e.g. GS1QR codesRFID, scanners

And these players service the key ‘groupings’ within the supply chain, which I have summarised as follows:

  1. Customers i.e. businesses and consumers
  2. Retailers e.g. do-it-yourself stores, supermarkets, clothing / fashion outlets
  3. Import / export businesses
  4. Processors e.g. ready meal manufacturers, saw mills, paper mills
  5. Producers e.g. farmers, forestry companies

In my view there is also likely to be an emergent class of monitoring organisations – seeking to assure traceability at a batch level.  Although none of the players listed above owns this space at the current time, it is my expectation that either the NGOs or certification bodies will seek to occupy this niche.  My logic is this: NGOs generally have a focus that would motivate them to ensure product is correctly followed at all times, for example NGOs focussed on rainforest destruction.  Alternatively the certification bodies, who currently focus on process assurance, might want to extend their services into providing batch level traceability as an further service for their customers.  The customers might be either the import/export businesses wanting to ensure compliance, for example with the European Union Timber Regulation (EUTR), or possibly the processors and retailers who undertake their own import / export activities.

From my perspective as a technology innovation consultant, the traceability market seems to be underdeveloped with regards third party providers.  Given the influence of Dr Heindl, my research has been particularly focussed on issues that relate to the EUTR and the international paper and timber trade – and what seems to be true is that the due diligence activities remain within the key groupings within the supplier chain.

What one would expect is that, over time, third parties will establish themselves in the different verticals where traceability and sustainable sourcing is particularly important e.g. food, timber, coffee, palm oil.  My experience of situations with similar conditions i.e. legal compliance requirements, complex interactions between multiple parties, and high impact activities (be it on share price or reputation), is that some failure will need to take place before third parties are invited in to drive change.  This is, sadly, because often challenges such as sustainability are underestimated – and so are delegated too far down the corporate ladder; in only a few visionary organisations will internal solutions be built that effectively address the challenge.

What is particularly interesting about Dr Heindl’s operating environment is the number of parties that must interact – so whilst third party solutions will almost certainly win the day, the market education task is significant and will likely lead to a number of non-starter solutions which are ‘top down’ (which culturally fit with a lot of large organisations) but which lack the resources to acquire enough customers to survive.  These may well be replaced by a wave of ‘bottom up’ solutions that offer distinct advantages to each stage of the supply chain – and those that are able to provide the greatest advantage through the network effect will become market dominant.

About the author:

David Gates, Consultant, Rapid Innovation Group