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Our Insights 29 Nov 2011

The True Cost of Traceability

By Liz Muller

SustainAbility’s recent paper – Signed, Sealed…Delivered? – provides thoughtful insight and constructive recommendations on ways to make large scale shifts to new models of production, which will result in more sustainable and socially beneficial conditions.

My work is centered on linking market demands with improved raw material production through complex commodity supply chains and business realities. I believe that we must account for the true cost of a sustainability or ethical system and maximize the value to all supply chain actors. To do this we must understand where we reap the biggest benefits. Some key areas that should be evaluated include: running farmer support programs, implementing product traceability systems, and conducting audits to ensure integrity of the system.

Building capacity among farmers

I am currently supporting Olam International’s efforts to pilot the Better Cotton Initiative (BCI) in Mozambique. Olam sources over 20 products, including cotton, and is the largest private microfinance provider to smallholder farmers. Olam is the second largest cotton merchant and largest private cotton ginner in the world. They have vast experience implementing farmer capacity programs in developing countries.

Through the BCI effort, our partners are able to see the true costs of running large-scale farmer capacity building programs that include training on better production practices, providing agronomic advice, supplying quality inputs, and facilitating equitable financing. Olam has proven that the benefits of these investments – higher yields of a better product and a secure base of dedicated farmers – lead to a better business for Olam. It is important to note that Olam sells this cotton at market rates.

Investing in these areas yields the added value of a stronger partnership between the farmer and the ginner that often leads to additional benefits (e.g. improved risk management).

Tracing material in a supply chain

Costs and fees associated with tracing a product through a supply chain may vary between supply chains. But most include: developing and operating a tracking system, registering certified material, undergoing a facility and accounting audit, and paying special storage and transportation fees. At times, supply chain actors must absorb the majority of these costs while the brands reap the majority of the benefits. Regardless of final cost, these activities are geared towards marketing to consumers and don’t directly lead to the improvements we are seeking at the farm level. At times, the cost of tracing a product can actually limit the resources available for famer-level programs, and thus the degree to which an initiative can scale.

Auditing at an industry level

Moving away from agriculture for the moment, it’s helpful to look at global brands in the electronics industry, which have been effective in implementing industry-level programs. One such example includes the Conflict Free Smelter (CFS) program to support the industry’s ban of conflict minerals (minerals that fund the perpetrators of human rights violations in regions such as the Democratic Republic of the Congo) from their supply chains. The CFS program centers on conducting traceability audits of smelters processing ore from multiple sources to confirm that only conflict-free minerals are being used in our electronic equipment.
I lead a global team that conducts these audits and I have seen that rolling out a program across an entire industry can have real and direct business impacts. For example, some smelters won’t be able to sell their inventory until they pass the audit. Passing an audit may take some time as doing so requires a new way of doing business, including collecting documents not usually shared between sellers and buyers. However, businesses can benefit from improved inventory management and partnership with their buyers and global brands. Regardless, the cost of not undergoing the audits is much greater – the absence of your customers.

Moving forward

As our growing populations puts increasing pressure on natural resources, we must ensure we are investing in ways that will lead to the biggest overall improvements. I believe investing in improved material production holds the strongest benefits for businesses and farmers alike. Two areas that hold the most promise include:

  • Helping farmers improve productivity by providing quality seeds, training on maintaining soil health, limiting use of inputs, offering financial assistance for investments in labor-reducing equipment (e.g. oxen) or irrigation.
  • Investing in agricultural research and development (R&D), particularly in underserviced regions with great potential to improve. It is widely accepted that the world as a whole has underinvested in agricultural R&D despite clear evidence that there is a very high rate of return to agricultural R&D. And the investments we do make are not evenly distributed. The share of the bottom 80 countries slipped from 0.29 percent of the global total in 1995 to 0.26 percent in 2000.

I look forward to partnering with many of you to mainstream more sustainable production models through impactful efforts.

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