Supply Chains in Peril: Can we align incentives for collective sustainability?

By: Amanda West and Hetal Patel

This piece was originally written for The Purposeful Collaboration Issue of Business Fights Poverty Magazine (https://snipbfp.org/Issue2) to frame a conversation with Bayer, Nestle, AB Sugar and others at Business Fights Poverty Oxford 2019. We will follow up this post with outputs from the conversation.

Modern supply chains are a marvel. The system of organizations, people, activities, and resources involved in moving a product from source to consumer is complex. But, with constant and rapidly changing market, environmental conditions and customer preferences, incentives for key stakeholders in the chain are shifting. For long term sustainability and success, we need to look at the incentives along product chains, where there are gaps and alignment, and how we can align shareholder value with SME/Smallholder Farmer (SHF) value.

To keep the products we love, we need to move beyond solely focusing on scale and margin to focusing on the right balance of scale, margin and supplier sustainability.

Let’s take coffee as an example.

From a consumer’s perspective, coffee is better than ever. You can always access a rotating range of single-origin coffees. More often than not, that coffee comes unique stories about producers, their microlots, experimental processing or sustainability. And the price is of our latte is consistent. But, if you’re reading the article you likely know that this isn’t the true story of coffee. A coffee catastrophe is brewing — as are similar catastrophes in other value chains.

To understand (and hopefully help solve) these imminent catastrophe, you have to understand the underlying systemic problems as well as the incentives of the players in the value chain.

One of the systemic problems in coffee is the how it is priced (the C-Price). Paul Hicks does a better job than we can of explaining it in his Daily Coffee News article The Scandal of the C-Price. The short story is that the C-price exacerbates volatility in the coffee market because it relies too much on speculation and is based on very short-term projections. So, the C-Price wreaks havoc because coffee is a perennial crop, which takes about 5 years to come to full maturity creating a long lag-time between price signals and farmers’ abilities to alter production. In addition to this systemic issue, the incentives throughout the value chain are misaligned.

Farmers — Coffee farmers depend on their annual coffee crops for their livelihoods.

• However, they face a complex mix of major challenges: price volatility, a large flat commodity-grade coffee price (even if they grow specialty coffee), extreme weather events, labour shortages, and consistent (if not, rising) costs of production.
• In August 2019, the C-Price dropped below $1 per pound for the first time in a decade- not enough to cover the cost of producing that pound. If coffee isn’t profitable, then farmers are incentivized to switch to growing other crops- and of course- not encouraging their children to farm for a living.
• What happens when the next generation opts out?

Co-Ops — Coffee Co-Ops, critical SMEs in this value chain, attempt to use consolidated selling power to offset the risks faced by the individual farmer and provide needed services (e.g., extension) to promote sustainability.

• These SMEs compete in a highly-competitive, often well-capitalized globalized marketplace replete with very large and powerful buyers (Nestle, Starbucks, etc.), and other very large and often more efficient and/or more productive (cost/lb.) competitors (Brazil and Vietnam in particular).
• They compete for talent (accountants, marketers, increasingly techs folks, etc.) — attempting to attract and maintain strong talent to work in some of the rural/smaller cities versus for more highly-capitalized companies in cities.
• If SMEs are critical and can’t compete, can the value chain survive?

Corporates — Often as the last stop between product and customer, corporates are swayed by customer preferences and their responsibility to shareholders.

• They are receiving more pressure from consumers and regulators to validate where all the components of their products come from. So they have the immediate challenge of balancing traceability, consistent quality supply, and profitability.
• Now, they are scrambling to make supply chains more ethical while still being bound by their fiduciary responsibility to maximize profit for shareholders and show increasing quarterly earnings. Many that are responsible for sourcing for brands and larger buyers recognize the challenge and urgency.
• Can they last the next 20 years without fundamentally changing how they engage suppliers?

A collective goal of generational sustainability demands collective action for change on both the individual and systemic levels.

This is just the tip of the iceberg of the complex issues of coffee supply chains. The same relates to other products. From our conversations, it seems that disparate stakeholders understand that their generational sustainability is intertwined. If we have that common ground, can we find individual and systemic solutions together?