An Extension of Yourself
Building Trust with Suppliers
Trust is something which is the basis for collaboration and without trust, there is no successful contract manufacturing.”
At a time when real estate is at a premium and it’s difficult to expand into new land, dairy companies around the world often have to manage with the milk pools that are already established. In places like New Zealand, Australia, and parts of the Middle East, there are thousands of lifestyle farmers that use their land to supply dairy, not as a main source of revenue but rather as an extracurricular activity. Even so, these lifestyle farmers have become very important to the dairy supply chain. When a catastrophic event such as a drought occurs, which is becoming more common as we experience climate change, these farmers are the most affected as a result of a lack of preparedness and expertise. This can end up costing the industry on the whole. Governments in these places may not provide subsidies when things go sideways, so there has been an increase in larger consumer products companies investing in the resilience of lifestyle farmers.
Enter Fonterra, a New Zealand-based dairy cooperative that operates globally. Fonterra offers a “milk price advance” program, which allows farmers to receive a portion of their expected milk payments in advance to help with cash flow during challenging times. This program has been particularly helpful for lifestyle farmers, who often have smaller herds and may be more vulnerable to fluctuations in milk prices or weather events. This program is just one example of how companies can support their smallholder farmers and improve the resilience of their supply chains. By providing financial support and other resources to these farmers, companies can help ensure a stable and consistent supply of raw materials while also promoting the sustainability of their supply chains.
Scenarios like these not only underscore how consumer products organizations must now be looking after the entire chain of contributors but also thinking about the fragility of our supply chain and the growing significance of building a wide range of suppliers.
In earlier times, the number of suppliers was limited, so consumer products companies tended to have more direct contact with their network. Larger enterprises usually audited every supplier to make sure they were up to standards, following established rules and practices. Today, the supplier portfolio has expanded, largely as a result of companies wanting to build resilience through increasing available options—a trend that was only accelerated by the pandemic. Consumer products leaders realized the importance of partnering with multiple suppliers in multiple regions to keep their business running during disruption. But then, with the onset of war in Ukraine and other geopolitical factors, conversations around deglobalization and regionalization emerged; discussions around moving from offshoring to nearshoring to onshoring have become more commonplace.
“In this environment, with all these back-and-forth trends and so many suppliers in so many places, it’s difficult to have direct control all the time,” according to Rita Iacoviello of Veeva Systems. “You need to establish a trusted relationship now more than ever, as well as rules and mechanisms for building trust with suppliers. It’s also about giving them the knowledge and guidance through operational activities in order to let them be autonomous. It’s become essential to provide them with policies, guidelines, and procedures to guarantee the level of safety and quality you’re expecting, especially in such a turbulent period.”
Up-leveling the playing field: What today’s consumer products companies are doing to build trust with suppliers
Consumer products organizations have come to understand that they’re responsible for their products from the moment a fruit is picked, or an ingredient is created. If not done correctly, the ramifications can be significant. For example, if a supplier decides to change a key ingredient and doesn’t inform its partners, there is potential to negatively affect not just the company but the entire industry. In 2018, several brands of infant formula were recalled in France after a supplier changed the source of an ingredient, resulting in the formula containing salmonella bacteria. The contaminated formula caused dozens of infants to become ill, and the recall affected millions of products across Europe. The incident led to an investigation into the supplier’s quality control practices; the importance of supply chain monitoring and control in the infant formula industry was highlighted. This example emphasizes the potential risks associated with changing suppliers or ingredients and the importance of quality control and monitoring throughout the supply chain. Companies in the CPG, F&B, and Specialty Chemicals industries must ensure they have effective systems in place to detect and respond to any changes in their supply chains that could impact the safety or quality of their products.
Transparency and partnership are key here. This means investing in and partnering at the supplier level. Consumer products companies need to have visibility to make sure suppliers aren’t engaging with underage workers or quietly switching ingredients. “In our industries, we should be asking to what extent do our suppliers trust us as a company so that when they foresee a change or a problem, they come to us first to jointly solve a challenge,” said Venkat Venkatraman, Professor of Information Systems at Boston University. “Do we have enough trust with our suppliers so they feel they can be transparent, so we know about a problem before it becomes a major one?” Dr. Venkatraman added that sharing of data, business plans, and roadmaps are ways to foster and reinforce trust with global suppliers.
It’s been proven that a large percentage of consumers and customers don’t want to buy from brands that fail to show a broader understanding of their obligations and responsibilities to society.19 Two-way trust between consumer products organizations and suppliers becomes even more important in the area of Environmental, Social, and Governance (ESG), which is also now deeply connected to compliance and regulatory.
ESG happens across the value chain—from sourcing raw materials all the way down to reuse and disposal—and suppliers play a critical role here. For example, a company may set a goal to reduce carbon emissions. Still, if its suppliers are not aligned with this goal and continue to produce carbon-intensive products, it will be difficult for the company to achieve. In order to ensure that suppliers are aligned with a company’s ESG goals, it’s important to establish strong relationships based on trust, transparency, and accountability. This may involve setting clear expectations and standards for suppliers, conducting audits and assessments to monitor compliance, and engaging in regular communication and collaboration to identify areas for improvement.
19. “From Me to We: The Rise of the Purpose-led Brand,” Accenture, 2021.
Patagonia, an outdoor clothing and gear company, launched the Traceable Down Standard (TDS) in 2013. TDS ensures that the down used in Patagonia products comes from birds that have not been force-fed or live-plucked and that the entire supply chain meets rigorous animal welfare and traceability standards. To implement TDS, Patagonia works closely with suppliers to ensure they meet the company’s sustainability and animal welfare standards. The company audits its suppliers regularly to ensure compliance with TDS and provides training and support to help suppliers adopt more sustainable and responsible practices. Through TDS, Patagonia can trace the down used in its products back to specific farms and regions, which has led to significant improvements in its ESG performance.
By maintaining trust with suppliers and working together to achieve shared ESG goals, companies in the consumer products industry can create more sustainable and responsible supply chains, enhance their reputation with consumers and stakeholders, and contribute to a more sustainable future.
While it’s true that some supplier relationships are more transactional (e.g., commodities), others run much deeper, such as when a supplier provides intellectual property. Suppliers are experts regarding the chemicals and ingredients they manufacture and deliver. Acknowledging their expertise and engaging in innovation with them can build immense amounts of trust and give them a stake in a product or brand’s success. As McKinsey & Company recently noted, “These (successful) organizations understand that when buyers and suppliers are willing and able to cooperate, they can often find ways to unlock significant new sources of value that benefit them both.”20
When buyers and suppliers are willing and able to cooperate, they can often find ways to unlock significant new sources of value that benefit them both.”
There are numerous examples of consumer products enterprises building trust through co-innovation with their suppliers. The same McKinsey source states that “Building trust takes time and effort. Often this means starting small, with simple collaboration efforts that deliver results quickly, building momentum.” In the Philippines, Jollibee Foods Corporation hosts quality days to bring together suppliers and discuss best practices, quality standards, and ways to improve supplier performance. Another example: the Clorox Company may co-create with a chemical supplier to gain exclusivity of an ingredient and then collaborate on a packaging design and execution with a manufacturer.
Larger, more ambitious opportunities between consumer products companies and suppliers await further along the trust scale. In some regions, dairy and beef enterprises are coming together with their supply chains to advance innovation at the supplier level to reduce methane and the burden of so-called “burp taxes.” Here, larger F&B and CPG companies sometimes provide investments, and smaller suppliers can access the insights and value produced by these investments. This, in turn, stimulates the research value chain for universities. In another example, Unilever partnered with Novozymes to develop sustainable detergents using their combined expertise. Unilever provided knowledge about stains and materials, while Novozymes used its reagent-optimization capabilities.
The partnership led to the creation of two enzyme innovations that improved product performance, increased market penetration, and allowed Unilever to compete with premium-branded competitors. The new formulation also performed well at lower temperatures, helping customers save energy and reduce CO2 emissions.
Overall, innovation with suppliers is essential for consumer products and food companies looking to improve their sustainability, efficiency, and competitive position in the market.
By working closely with suppliers and leveraging their expertise, these companies can create more sustainable and responsible supply chains, reduce costs, and build trust with suppliers. In fact, in one McKinsey survey of more than 100 large organizations in multiple sectors, “Companies that regularly collaborated with suppliers demonstrated higher growth, lower operating costs, and greater profitability than their industry peers.”20
20. “Taking supplier collaboration to the next level,” McKinsey & Company, 2020.
Photo by: World Agroforestry Centre/Yusuf Ahmad.
Smallholders play a significant role in the global supply chain, particularly in the agricultural sector. According to the Food and Agriculture Organization (FAO), smallholder farms account for more than 90 percent of the world’s farms and produce over 80 percent of the food consumed in Asia and Sub-Saharan Africa.21 Smallholder farmers, defined as those who cultivate less than two hectares of land, are responsible for producing a wide range of crops, including coffee, cocoa, tea, spices, fruits, vegetables, and grains. These crops are used in a variety of industries, from food and beverage to cosmetics and pharmaceuticals.
Large consumer products and food companies are increasingly recognizing the importance of empowering smallholders and are taking various steps to support and work with them. Various initiatives are aimed at improving smallholder productivity, increasing their incomes, and promoting sustainability.
21. “Smallholders and Family Farmers,” Food and Agriculture Organization, 2014.
Mars Inc., a US-based multinational food company, has a program called “Cocoa for Generations,” which focuses on promoting sustainable cocoa production and improving the livelihoods of cocoa farmers, many of whom are smallholders. The program is active in cocoa-producing regions across the world, including West Africa, Indonesia, and Brazil. Mars Inc. provides training and technical assistance to improve smallholders’ cocoa production practices. The company has partnered with local organizations and governments to develop training programs on pest and disease management and post-harvest handling.
These training programs help smallholders improve the quality and quantity of their cocoa production and increase their incomes.
Mars Inc. is also working to promote sustainable cocoa farming practices by investing in research and development and collaborating with other stakeholders in the cocoa industry. The company has set a goal to source 100 percent of its cocoa from certified sustainable sources by 2025. In addition, the company is supporting smallholders through various initiatives aimed at improving their access to financing and markets by partnering with financial institutions to provide smallholder cocoa farmers with access to credit and other financial services. This also includes working with local cooperatives and organizations to help smallholders access new markets and receive fair prices for their cocoa.
By working closely with smallholders, consumer products companies can help build more resilient supply chains and promote a more equitable and sustainable food system.
One of the chief benefits of this kind of activity is that it builds trust at the source— often the most vulnerable part of the supply chain.
It is not only consumer products enterprises providing opportunities for and building trust with suppliers—banks and financial institutions are coming to the fore to play an important role. By providing financing, risk management, and other services, they can help suppliers operate and grow their businesses. If suppliers can meet targets set by financial institutions, they are then able to access loans with lower interest rates. “Financial incentives drive behavior change, and that is the big challenge at the supplier level,” said Natasha Telles of Veeva Systems. “It’s not because they don’t want to, but because suppliers often lack capital and manpower. This is a way to bring them on the journey.” With suppliers, the “stick” is often found in compliance and exporting in market, while financial incentives and creating a community are the “carrot.”
Building trust with suppliers goes both ways—suppliers must also seek to invest in trust mechanisms with the consumer products organizations they supply. Aside from delivering on time, suppliers should be expected to follow a code of conduct and meet contractual agreements, standards, and requirements related to quality, safety, sustainability, and ethical practices. In the United States food industry, the FDA states that “Receiving facilities and importers may need to conduct onsite audits to determine if their suppliers are producing food in compliance with FDA food safety standards, including the new standards promulgated under the FDA Food Safety Modernization Act (FSMA).” This includes an annual onsite audit when the hazard will result in serious adverse health consequences or death to humans or animals and is controlled by the supplier.
Consumer products companies often use third-party auditing firms to audit their suppliers. These third-party firms are independent of both the consumer products company and the supplier being audited and have expertise in auditing and assessing compliance with various standards and requirements. Coca-Cola, for instance, has a global Supplier Guiding Principles (SGP) program that outlines the company’s expectations for supplier compliance with environmental and social standards. As part of this program, Coca-Cola requires its suppliers to undergo regular audits to ensure compliance with SGP. The beverage giant uses third-party auditing firms to conduct the audits, typically on-site at the supplier’s facilities. The auditing firms assess the supplier’s compliance with Coca-Cola’s SGP, including requirements related to human rights, labor practices, environmental management, and business ethics. The auditing firms then provide detailed reports to Coca-Cola. The reports are used to identify areas of non-compliance and opportunities for improvement.
By using third-party auditors, Coca-Cola is able to ensure the independence and objectivity of the audit process and leverage the expertise and experience of these auditing firms in assessing supplier compliance with its standards.
It’s not just consumer products companies that drive all the innovation; suppliers themselves can also take a lead role. BASF created Onono (Centre for Scientific and Digital Experiences) in São Paulo, Brazil, a lab for personal care and home care that combines BASF’s science with the innovation demand of its customers and startups to develop ideas and think about the trends of the future. Onono has been a success because it became an ecosystem for the personal care industry in Brazil.
The development of customized products for the skin or hair, based on an individual’s type of skin or hair, using digitalization technology to deliver a solution for the end-consumer is very important for us and we will see more of it in the future.”
As a consumer products leader, building trust with suppliers is essential to ensure the quality, safety, and reliability of your products. Here are some important questions you might consider when it comes to fostering trust with your suppliers.
What are our supplier’s quality standards, and how do they ensure the quality of their products and materials?
What are our supplier’s ethical and social responsibility practices and how do they ensure their workers’ safety and fair treatment?
How do our suppliers manage their supply chain, and what steps do they take to ensure the integrity of their materials and products?
How do our suppliers approach sustainability, and what measures do they take to minimize their environmental impact?
How do our suppliers handle product recalls, and what is their process for ensuring prompt and effective resolution?
What is our supplier’s financial stability, and how do they ensure they can fulfill their contractual obligations to us?
How do our suppliers approach innovation, and what new products or technologies are they developing that can benefit our business and customers?
By asking these questions, you can establish a more transparent and collaborative relationship with your suppliers, build trust and confidence in your products, and mitigate potential risks and issues in your supply chain.
