Applied Business Law

29 Mar 2010

Don't Know Exactly What's in Your Supply Chain? Then Brace Yourself for the Backlash

Consumers want to know exactly what's in your products, where the ingredients or components came from, and whether your ethics measure up with theirs. Buying decisions increasingly hinge on the answers to these questions - and so does your brand's reputation.

Your supply chain is a potential minefield, where ethics, surprises and knowledge gaps can leave you vulnerable to an ugly public backlash, sales slumps, and severe brand damage. Cadbury's very public reversal on using palm oil in their chocolate is a good example - as are the global recall of lead-tainted children's toys, and the tragic furore surrounding melamine-tainted milk powder.

Trust, Traceability and Trouble Shooting are the keys to avoiding disaster. This FYI looks at the "three Ts", and tells you how to better protect your image and brand - by knowing your supply chain inside out.

Trust - the effect of your ethics

Consumers must trust you and your brand to keep investing in your product.

Consumer trust and brand selection is increasingly being driven by the specific values held by consumers over moral issues such as the conditions of workers, environmental impacts, and animal welfare. Global marketing campaigns around "food miles", "fair trade" coffee and chocolate, and "free range" foods have all emerged from these concerns.

Concerns about animal welfare are not new to Western consumers, first emerging in relation to animal testing and the cosmetics industry. However, animal welfare campaigns have recently expanded from research and testing into the everyday context of food production. In New Zealand, a campaign fronted by Comedian Mike King heightened sensitivity about the factory farming of pigs and generated headline news in print and television for weeks. McDonalds are trialling the use of free range eggs in their Christchurch and Dunedin branches because "… we are listening to and addressing … customer feedback and desires".

American ice-cream giant Ben and Jerry's recently committed to animal welfare policies. In Australia, the Good Egg Awards now celebrate companies who are showing leadership in animal welfare. International winners already include McDonalds UK and Google, who say that using free range eggs makes good business sense, boosts staff morale, improves brand image and reputation, and benefits their bottom line.

Think ethical issues don't apply to you? Don't bury your head in the sand.  Brand trust takes years to build, but irreparable damage is just one Twitter or Facebook campaign away.

Traceability - do you know enough about your supply chain inputs? 

You must be aware of exactly what is in your supply chain, and how it is produced. In England uber-celebrity chefs Jamie Oliver and Hugh Fearnley-Whittingstall's television shows challenge consumers to think about "where food really comes from". New Zealand-produced television show What's really in our Food? examined the same issue, featuring some of New Zealand's biggest household brands.

Additionally, any representations you make to consumers must be true and accurate. If not, you risk alienating your consumers and you could also be in breach of the Fair Trading Act (FTA). This could mean a court-enforced fine and a whole heap of brand damage. Animal feed specialist Mainfeeds Limited found this out the hard way earlier this month after it was fined $125,000 for breaching the FTA for knowingly, falsely representing the make up of their calf feed to the market by not telling their suppliers the formulation had changed, and not amending its packaging.

Check all your supply agreements. Make sure your supply agreements say exactly what you expect from your supplier and set out how you can check up on that. If a supplier claims their product is accredited, check whether the accreditation system is credible. Make sure you check:

• production conditions before agreeing to the supply;
• what accreditation, if any, actually means; and
• whether your consumers are familiar with, and trust, the accreditation scheme.

Carefully audit your supply chain. Auditing is a way of verifying compliance and a way of identifying potential weaknesses. Great gains can be made through working closely with suppliers to identify those areas where improvements can be made.

How would your supply agreements stack up?

Trouble Shooting - minimising the risks

There are two important ways of minimising the risk of a consumer backlash and/or an investigation by the Commerce Commission:

• Design and implement a compliance programme: As the Commerce Commission has stated, "…businesses need to ensure that they have effective compliance programmes in place to allow them to identify and fix potential breaches of the [FTA] … ". Your compliance programme should act as a risk management system for production techniques, trouble shooting, and crisis management (see our July 2009 FYI on compliance programmes).
  
  
• Have any packaging, advertising and representations you make reviewed by a sales and marketing law specialist. This way you can minimise the risk of potentially misleading consumers and keep your business on the right track. And don't forget that representations can also include the pictures on your product - smiling pigs, happy hens, and grassy fields all have animal welfare connotations to your consumers. Learn from the costly mistakes that other businesses have already made.

Your next steps

Think Trust, Traceability and Trouble Shooting:

• find, check and have your lawyer review all your supply agreements. Check specifically whether they require suppliers to comply with your ethics and standards, allow you to make the representations you want to about your product, and permit you to regularly audit your supply chain;
• develop and implement risk management practices, and most importantly a comprehensive compliance programme so you know exactly what's going on in your supply chain.

Drop us a line now and we can start reviewing your supply agreements and developing a compliance programme that's right for your business.

Get to know your supply chain inside out - don't get caught out telling a porky, or with egg on your face.

Authors

Peter Stubbs

Partner - Corporate & Commercial

DDI: +64 9 977 5010

Mobile: +64 21 955 230

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Gwendoline Keel

Senior Associate - Corporate & Commercial

DDI: +64 9 977 5201

Mobile: +64 21 242 6639

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Craig Nelson

Senior Associate - Corporate & Commercial

DDI: +64 9 977 5185

Mobile: +64 21 918 309

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