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LRQA Podcast: Supply shortages could lead to greater food fraud risk

The Future in Focus

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In today's episode, we speak to Forbes Fyfe, LRQA's Technical Account Manager for the agricultural supply chain, about supply chain shortages and how this could lead to greater food fraud risks.

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What have been the key contributors to supply chain shortages in recent years?

At its simplest, it’s all about supply and demand. Overall, the world is becoming richer. More people are aspiring to a better standard of living.

However, this rise in demand-side change comes at a time when our global supply capacity is under pressure. As a start, the commodities that we consume all come from somewhere. There are only so many fish in the sea, for example, and if we take too many now, there won’t be the numbers to ensure that we have sustainable stocks in future. It’s a similar story in terms of expanding agricultural productive land. Do we really want to be cutting down more trees in tropical rainforests, given the evidence that we now have about the importance these habitats play? So that’s creating pressure in the chain.

On a related front, there’s little doubt that climate change is having an impact. Recent data suggests that the drought in India has reduced agricultural production by 20% to 40%. This in a country with a population of 1.6 billion people.

At the same time, we’ve had events in other parts of the world that have further added to pressures. The available volume of European wheat, sunflower and other agricultural commodities has been much reduced and we’re facing continuing uncertainties around supply.

To some degree, these imbalances have existed for a while now. And to address this, we have developed an incredibly efficient global supply chain that facilitates the movement of goods and commodities across the globe. “Just In Time” planning changed the world.

However, what I don’t think we realised is how finely balanced – and as a result, vulnerable – that model is. The efficiency of the global distribution operation masks some serious structural problems in the supply chain. As a result, when COVID hit in 2019, many global supply chains were totally unprepared and we’re still picking up the pieces today. It used to be that you planned for 80% stability and 20% disruption. Now, it’s the reverse. Issues such as labour shortages, soaring energy costs, distribution headaches, a lack of real understanding of how the supplier hierarchy works, they all combine to introduce delays into a system designed around the tightest and leanest of scheduling models. There isn’t the spare capacity to absorb this pressure.

To sum it up, it’s complicated. At root, demand and supply are not in balance, but this situation is exacerbated by the number of other events that have happened and that continue to happen.

What are the implications of supply chain shortages in the food industry?

The obvious consequence is that you may not be able to get the ingredients you need when you need them, in the quantity you ordered, and you may well have to pay significantly more for them. It may be that your supply chain has been so fine-tuned that you rely heavily upon a small number of suppliers because ‘normally’ that’s what’s found to be the most effective route to follow. In this situation, if those suppliers have issues of their own, you may not have alternate sources that you can switch to while your preferred sources get back online.

This supply-side disruption may then lead you into deciding that you need to reformulate your product or products. We’ve seen this happen quite extensively where food manufacturers have had to reduce, or replace, sunflower oil in their products. The challenge here is that you’re not making a change which has a positive supporting message to offset the potential commercial risk. For example, when reformulating to address supply issues you probably won’t want to change the amounts of fat, sugar, salt, or calories. You’re being driven to make a change that could impact on taste, mouth feel or shelf life, simply because you no longer have that surety of supply. And I don’t think we even want to go into the details of the potential impact that recipe changes may have on labelling compliance, other than to acknowledge that this area requires a great deal of time and attention, and labelling regulation does tend to be complex.

Alternatively, you may decide that your lowest risk solution is to find another source. And in this case, you now need to go through your supplier approval process, looking at food safety compliance, product specifications, relevant accreditation and so on. All of this may lead to further questions around whether you need to audit the proposed supplier before you start purchasing from them or decide if there are other actions you need to take to manage your risk exposure.

I am referencing risk quite heavily, because ultimately that is what we’re really looking to control. We need to ensure that introducing new ingredients, or new ingredient sources, does not inadvertently create problems for us further downstream. When the market is disrupted, this can be a challenge when we are dealing with existing suppliers. Bringing a new source on board introduces a whole new set of variables. Can we be sure the source is financially stable? Are they reliable? How robust are their controls and processes? And ultimately, how much can we trust them and their supply chain? Because we’re not just dealing with this new supplier, we’re absorbing the potential risk from their tier 2 and tier 3 suppliers. Which is where food fraud can become a real threat.

What is food fraud, and how could supply chain shortages lead to greater food fraud risk?

The European Commission defines food fraud as “any suspected intentional action by businesses or individuals for the purpose of deceiving purchasers and gaining undue advantage therefrom, in violation of the rules referred to in Article 1(2) of Regulation (EU) 2017/625 (the agri-food chain legislation)”.

That’s a little dry, isn’t it? But when you break it down, the three key themes are very clear.

First, there must be intent. Accidents and mistakes happen. Fraud requires a concerted and planned intention to represent products as being something they are not.

Second, there must be commercial motivation. Ultimately, what fraudsters are doing is passing off inferior goods as the real deal and charging the full market value for them. And there is a lot of money to be made from it. One measure sets the value of global food fraud at around US$40bn/ year. That’s comparable to the GDP for nation states such as Latvia and Bolivia.

Finally, food fraud is committed in the full and certain knowledge that it is illegal. And it is illegal for very good reasons.

At worst, people die, or become seriously ill, because of food fraud. A horrible recent example was in 2008 when a Chinese dairy producer adulterated powdered milk with melamine, to cover up the fact that they had been diluting the milk with water. Melamine has a high protein content, so this enabled them to fool the testing regime. Melamine can also cause kidney damage in humans. 300,000 infants in China became sick. Six babies died.

There can be real damage to business, both directly and in terms of reputational damage., In 2020, the Guardia Civil in Spain broke up a whisky fraud network. They seized 300,000 whisky bottles, all of which were counterfeit imports. That scam was valued at over US$970,000. Let’s call it US$1 million, for the sake of argument. The damage done to the injured party was estimated at just under US$5 million. These are big, big numbers.

The other area I’d like to mention relates to sustainability, which is a very live topic for many organisations and individuals. For many of us, we make a conscious decision to purchase ethically and responsibly. So, we may choose to purchase seafood that is harvested sustainably. In which case, it is a little depressing to learn that in March this year Chinese Customs arrested 18 people accused of smuggling just under 184,000 metric tonnes of frozen seafood. That crime was worth US$390 million. Those fish were almost certainly caught in illegal catch areas, or caught in excess of quotas, so the environmental and sustainability impact can’t be underplayed. Also, they may not have been as fresh, so there was an element of expiry date fraud as well.

The worst of this is that there is widespread acceptance that what happened is probably the tip of the iceberg when it comes to seafood smuggling. And it’s probable that we have similar issues with other high value agricultural commodities, such as organic raw materials.

So, food fraud is a big business that operates on a global scale. Sadly, it’s probably been a part of life ever since the first miller started adding dust and pebble straw back into wheat flour.

The difference now is that we live in a world where demand is increasing ahead of capacity to produce, and supply chains have become longer and much more complicated. It is perhaps inevitable that bad actors will choose to exploit the potential for profit and the perceived low risk of being caught that these two factors create.

At this point, it’s about looking at supply-side risk.  As a rule, tier 1 suppliers can be classed as low risk. Depending on the food sector you’re in, they may have some form of external accreditation to demonstrate compliance with a recognised food assurance programme. As a rule, you probably expect them to have a pretty robust approach to food safety and risk management.

The risks increase as you move to tier 2 and tier 3 suppliers – the businesses that are the sources necessary for your tier 1 supplier to provide you with your goods or services. By definition, tier 2 and tier 3 suppliers don’t have a direct relationship with you, or you with them. So that creates distance, and with that distance comes a decrease in visibility and a resulting problem in clearly seeing all the potential risks. And, particularly when the supply chain is squeezed, this inevitably increases the risk of food fraud.

What are the implications of food fraud, and who is affected by issues in food security?

The simple answer is, everyone is affected, and in more ways than we might first imagine. I’ve mentioned the horrible example relating to milk adulteration and obviously food safety is hugely important but food fraud covers a much wider scope than this.

For example, your organisation may choose to source materials that come from an approved supply chain. This might be because the organisation is committing to an ESG policy, it may simply be because you’re looking at the way future regulations are developing, and you want to act now before the risk exposure increases. If you are then the victim of food fraud, say because a commodity you buy has actually come from somewhere where there is conflict material usage, or unacceptable worker conditions, you may find yourself being held liable for this. So, we’re potentially looking at sanctions of some sort.  

Equally, your customers may have chosen to buy from you because of your ethical position. If it appears that you have been complicit in supporting worker abuse, will they necessarily wait to find out that it wasn’t actually your fault? Or will they take the view that you should have done something to minimise this risk? The risk to reputational damage is real and there are many examples where well-known businesses have never recovered from this sort of adverse publicity.

There are product quality risks. I’ve mentioned supplier and product approval and most of us would recognise that this a critical part of the overall risk management process. But these controls are based on known parameters. We evaluate new sources based on a defined specification. We identify the risks they present, determine whether hazards exist, and we make decisions based on this. For example, we might implement a specific testing and inspection model, or agree a fixed number of supplier audits. If we are the victims of food fraud, those initial assumptions are void.

Now, you could say that the simple solution is to test everything that comes into your processes. This is known as positive release and there are some sectors of the food and feed sector where it’s quite common. The problem here is that positive release requires several things to work successfully: you need long and stable order lead times; you need to have the financial resource to carry higher stock levels; you need to have an effective testing regime; and you need a market that will pay a premium for your product, because they have a very specific vested interest in the product they buy being within specification. Racehorse feed would be a case in point. Nobody wants to see their horse win the Kentucky Derby, for example, where the purse in 2022 was US$1.86 million, and then see their horse fail a doping test because there was a prohibited substance in the feed.

For most of the food supply chain, this simply isn’t feasible. Testing everything would introduce a level of complexity, delay and cost that is unimaginable. Particularly when you bear in mind that fraudsters keep raising their game. There is so much money in food fraud that they can afford to do it, so it’s a constant battle between the labs and the criminals. And businesses could not absorb these costs internally, so these would have to be passed on to the consumer. At which point we’re escalating the scale of the problem all the way up to geo-politics and macro-economics. It’s outside scope to talk about the outlook for the global economy but I very much doubt that anyone would favour potentially significant increases in food prices because we’re concerned about how we manage this particular risk.

Where are the main areas of concern in the food industry?

To be honest, and without wanting to sound too gloomy, food fraud is probably ubiquitous. The European Commission Knowledge Centre for Food Fraud and Quality produces a monthly Food Fraud summary. The most recent one covers August 2022 and I’ll pick out some of the instances reported:

  • A 2020 survey on Olive Oil report from the DGCCRF in France. Almost half the oil sampled was non-compliant in terms of organoleptic characteristics. More than a third of the establishments surveyed had anomalies, mostly concerning the absence or inadequacy of labelling information, substitution of olive oil with other vegetable oils, or wrong geographical locations.
  • In Angola, the Russian captain of a Ukrainian fishing vessel was caught with 800 tonnes of frozen mackerel, suspected of being fished in areas where catching is not allowed. Estimated market value, €1.18 million.
  • In Gujarat, 4000 litres of milk adulterated with sulphates, phosphates and carbonate oils was seized. The fraud had been going on for 4 months.
  • In Bolivia, the authorities seized 672 tonnes of transgenic soybean and corn – sourced from Argentina, Peru, and Chile. Market value, €870,000.
  • In the Philippines, the Bureau of Customs seized 3,300 tonnes of rice and 650 tonnes of sugar smuggled from Vietnam and Thailand. Market value, €4.1 million.
  • And – in a busy month for the Bureau – they also seized a further 7,000 tonnes of sugar, suspected of being from Thailand. Market value, €870,000.
  • I’ll add one more, from the July report. Brazilian Civil Police conducted an operation to end a food fraud operation where 9,000 tonnes of bulk soybeans and soybean meal were adulterated with sand, before being exported to China. I’ve taken this verbatim from a Brazilian newspaper report: “To commit the crimes, companies in the field of transport and grain trade were set up, so that they could carry out the transport, adulteration of cargo and subsequent trade of the diverted goods with the appearance of lawfulness. Eight legal entities involved in the scheme have been identified.”
  • The authorities in Brazil valued the crime at 22.5 million Reals. That’s about €4.3 million Euros.
  • So, if we go back to the question, where are the main areas of concern in the food industry? It might be more prudent to ask where they are not.

How can businesses navigate these uncertain times and remain compliant with supply chain regulations?

There’s little doubt that the outlook for the future is a lot less settled than what we’ve been used to. And the changes coming in the regulatory environment are likely to raise new challenges for businesses, particularly we evolve from a relatively simplistic ‘food safety’ approach and have to factor in wider briefs such as our ESG commitments, changes in consumer demands and expectations, new approaches to regulating sustainability concerns, and so on. And I think we can also see that we’re going to need to concentrate on preventive action, rather than retrospectively plugging holes.

Personally, I would recommend that businesses start looking at their risk profiles and take a wider and more holistic view of their risk management environment. Greater focus on suppliers is definitely something that we should be doing. And this applies in two ways. First, we need to shift focus from cost. Cost always matters, but we need to start thinking about the true costs to business and not just the market rate. Second, we need to get closer to the supplier base. We need to understand not only what they provide to us but also the constraints and challenges that affect them. So, in practical terms, I would be looking at doing more work on supply chain audits, rather than traditional supplier audits. That’s a bigger piece of work and something of a paradigm shift but a deeper dive will help identify potential concerns, whether these be Tier 2 or Tier 3 suppliers, risks in supply and distribution networks, social compliance, or anything else.

But ultimately, I would say that the best thing to do is talk to us. In a changing environment, there may not be a single answer. If there is, and it fits your business and your risk model, that’s great. But it may be that the best and most cost-effective overall solution for your business is to take some time, have that conversation with our experts and we see how we can work together to build a package that addresses your needs. I know it’s a horrible cliché, but at the end of the day, we all want the same thing: confidence in the market, confidence in our supply chains and the confidence that we’re taking the right risk management actions to allow us to focus on what really matters, which is ensuring that our businesses are successful.

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