The relationship between legitimacy, reputation, sustainability and branding for companies and their supply chains PT5

Supply chain case: The European horse meat scandal

During the past decades the food industry in Europe has become extensively complex and internationalized. Despite the existence of an abundant body of laws and principles governing it, the increasing scale and the intricacies of the food supply chain resulted in a variety of dysfunctions. The horse meat scandal casts a cloud on both consumerism related topics and on commercial damage inflicted on manufacturer and retail brand equity (National Geographic, 2013). Just recently, Lawrence, 2013a and Lawrence, 2013b reported of legal action and financial compensation settlements launched by the Irish meat processing company ABP, delivering beef burgers to TESCO, against a Polish supplier and a Cheshire based trading company, Norwest Food, respectively as beef containing horse meat were supplied. According to ABP some of the horse meat came via the Cheshire based company from a Dutch factory. Norwest Food apologized to ABP for “… unknowingly and unwittingly supplied contaminated beef products …”. There are detrimental consequences on company and supply chain reputation, if dyadic and contextual consonance (Fig. 3) is not considered. This might result, for example, in apology advertisement campaigns as launched by TESCO (Sweney, 2013) containing a promise to simplify and streamline the supply chain. Compounding the matter, the ad was banned, triggered by a complaint of a butcher, by the Advertising Standards Authority (ASA), as it was perceived misleading in terms of mistakenly implying that all retailers and suppliers had sold horse meat contaminated beef.

In the first four weeks when the scandal came to light, sales of frozen burgers and frozen ready meal in the UK fell 43% and 13% respectively, according to a market research firm Kantor Worldpanel UK (2013). Consumer trust in the food supply was severely damaged as highlighted by recent polls in the UK. A consumer intelligence research company reported that 65% of 2200 questioned adults trusted labels less (Hutchison & Baghdjian, 2013). The extent of the scandal even altered the shopping habits of many meat consumers. Some stopped buying meat altogether, as reported in a poll by ComRes. which stated that 7% of respondents quit eating meat altogether (The Economist, 2013). However, the fullness of the problem of the European horse meat scandal has still not been reached, and governments and supply chain members are passing responsibility to each other. National food standard agencies, food manufacturers, brokers, auction houses, wholesalers, dealers and traders, primary and secondary processing plants, agents and distributors are all trying to find the scapegoats and allocate the blame.

This case aims to lead to a multidisciplinary conceptualization embracing a holistic view on how to identify and remedy the current gaps combining internal supply chain factors with external ones. This link between legitimacy related values and a reputation related topic such as quality, underlines the bi-directional relationship between legitimacy and reputation.

The increasing consumer demands for low end food products triggered by a recession are in diametrical contrast to high production costs for beef related products. To accommodate this situation, complex broker networks and longer food supply chains crossing European borders have been formed (Lawrence, 2013a and Lawrence, 2013b). Sustainable quality cannot be achieved without dedicating sufficient resources by all stakeholders and there is a limit to budget cutting on a macro level. Essentially, this means that there is a trade-off between reducing budgets and production costs (reputation related) and reducing the concerns for food safety (legitimacy related). As an operational consequence, the application of the dispersion model as suggested by Rong and Grunow (2010), would lead to limiting the batch sizes in the production stage and increases in production setups, cleaning efforts, etc., which trigger increased production costs and decreased efficiency and competitiveness.

Relating to transport costs, Hallier (2013) developed a transport chain for the food industry from the birth place of the animal to consumption via abattoirs, processing plant wholesalers and retailers. Thanks to EU subsidies conferring advantages on certain producers, firms were enabled to buy cattle from far away suppliers. The same procedure exists for slaughtering and for processing plants. Besides the dwindling quality, transparency in origin and authenticity of the meat is greatly reduced.

On the macro level, quality is also regarded to be affected by the reduction of national funds and resources committed, for example, when (not) involving vets and hygiene inspectors in the slaughtering process (Lawrence, 2013a and Lawrence, 2013b). Compounding the matter, a discrepancy between regulating and actually implementing the regulations exists. While the EU regulates the market, prohibiting the mislabeling of food products, it is up to the individual national authorities to enforce such regulations (Alemanno, 2013). The ongoing increased consumer demand for lower prices of high quality food, and the evident gaps between governmental and efficient self- auditing of the industry (Lawrence, 2013aLawrence, 2013b and National Geographic, 2013) point to a cognitive dissonance between stakeholders’ quality awareness on the one side and the preparedness by all players of the food supply chain to dedicate sufficient resources for quality protection on the other.

As an old English proverb goes, ‘all stakeholders need to put their money where their mouth is’. The reflection activity suggested by Czinkota twinned with a ‘resolution spirit’ is suggested to concentrate on the following holistic supply chain orientated topics (complementing and adding to the previously mentioned suggestions by literature):

1.

Enhanced coordinated and systematic planning and control

Whereas initially Chase, Aquilano, and Jacobs (2000) and Duclos, Vokurka, and Lummus (2003)focused their supply chain conceptual frameworks on flexibility (supply, organizational, information system, operations systems, market and logistic related flexibility), Aramyan, Ondersteijn, Van Cooten, and Oude Lansik (2006) developed an agrifood specific model referring to efficiency, additional responsiveness and food quality related factors.

Due to the “the high level of interdependence between the elements of Supply Networks, their inherent feedback loops, non-linearities, and delays”, the Remplanet Project (2010, p.6) suggests simulation modeling approaches and computational decision support systems in addition to purely analytical approaches (i.e. Soni and Kodali, 2013 and Van der Vorst et al., 2009). In this context, Taylor (2005)suggests agri-food value chain analysis. This is confirmed by previous research of Low, Johnston and Wang (2007, p. 99) in terms of linking the company’s technology to its various network constituents: “a company’s legitimacy emanates first and foremost from the development and commercializations of innovative and creative technological solutions”.

2.

Communication, positive collaboration experience and ‘functional’ trust

Supporting Czinkota’s view and relating to relationship related risks, Fischer (2013) defines two levels of trust in the agrifood supply chain. He labels the most important trust determinants in this context as ‘effective communication and positive collaboration experience’. At retailers’ and processors’ level, relationships tend to be more formalized, with larger use of contracts. The reason appears to lie in the fact that retailers deal with many and large corporations. On the other hand, processors and farmer relationships appear to rely more on trust, due to the representatives of each group tending to know each other from dealing in the local and regional markets. While Fischer (2013) holds that trust is needed when there are possible risks involved, it could, vice versa, be argued that for a food supply chain to be secure and safe, it must rely little on a dysfunctional connotation of trust. By the same token, a food supply chain that relies heavily on trust among its actors implies existing issues of safety and security. A possible solution is to create exclusively formalized rather than informal trust based systems. This more formalized trust could be based on food safety standards (Manning & Soon, 2013) or on modeling ethical behavior in the food supply chain (Manning, Baines, & Chadd, 2006).

3.

Concerted strategies and actions

The awareness of the value of quality needs to be heightened on all levels of the supply chain, recognizing that maintaining the highest levels of quality may be contradictory with the pressure for price reductions. Educational and social marketing measures are suggested to be taken by EU, governments, the supply chain and educational institutions. Regarding the latter, supply chain training as practiced, for example, in the car supply chain, should be integrated to a much greater extent by universities. There is a need to create a supply chain culture, replete with quality and corporate responsibility considerations.

More research funding should be provided from national sources and supranational sources, in order to investigate the cause and effect relationships of sustainable quality in a supply chain. Our current economic system based on globalization and free market forces, albeit flexible in expanding supply chains to achieve lower prices, does not guarantee sufficiently the dimensions of sustainable quality control and high ethical standards. On a macro level, the detrimental consequences of excessive concentration should be discussed, together with the potentially positive contributions of higher levels of competition in industry.

In addition, a higher degree of systematic and co-ordinated responsibility allocation, both within government and supply chain members is suggested. More strategic planning, quality benchmarking, authenticity testing, regulation and control must occur based on more formalized rather than trust based supply chain relationships.

This article is a part of a series. Read Part 4 here.

Conference Discussion: Transpacific Trade Agreement (TPP)

Ambassador Cuisia of the Philippines anticipates the ongoing rise of Asia. The Philippines are experiencing growth rates of over 6%, and even so ranks only third in Asia. He sees the TPP as bringing a new trade architecture to the world, drawing a line down the middle of the Pacific, and accelerating the dynamics of the Asian marketplace. Due to new strength in Asia, Mr. Cuisia forecast the beginning of a new “Roman Peace” with new allies and alliances forming a counterweight to the current “heavy hitters” in trade. His key message was that the Philippines want to become part of the emerging TPP.

Ambassador Jose L. Cuisia (Philippine Embassy Photo by Lilibeth Almonte-Arbez)

Jack Jan, chairman of the Taiwan-U.S. Commercial Forum reiterated the desire of Taiwan to join in with the TPP. That way, Taiwan could offer even more opportunities as a bridge to China. However, in spite of such a desire to join, he warned against the effects of too onerous a cost.

Skip Jones, the Deputy Assistant Secretary of Commerce explained that a TPP would greatly enhance and strengthen the role of Asia as a member of supply chains, global channels and technology. He believes that countries will be able to join the TPP, as long as they don’t break the effort or slow down progress. However, as he colorfully put it: “those who join late get bit by the dog.”

New Cartoon

You may have seen some of my previous posts with samples from my forthcoming international business calendar “The International Daily Iconoclast” with renowned artist David Clark. Each day will have a fun or interesting saying or fact, supplemented by a wonderful cartoon drawing.

Below I have posted another example of the fantastic drawings that are in the calendar. It is available for pre-order. The cost is $13.99 plus shipping. Get your orders in quickly. It makes a great gift for family and friends. Don’t miss out on your daily dose of international business wisdom. Email us here with your information to get your name on the list.