Procurement: The key to supply chain resiliency

Agriculture is the keystone of global food security, but the current system is built on a house of cards. It relies on cheap labor, abundant resources and energy, and a stable supply chain.

According to the Food and Agriculture Organization of the United Nations (FAO), 30% of the world’s workforce was employed in agriculture as of 2021. Yet, the Farmer Income Lab revealed that up to 70% of farmers may be living below the global poverty line of $3.20 per day.

At the same time, the agricultural sector is responsible for 90% of deforestation from land use conversion, 70% of global freshwater use and 30% of the world’s emissions. This exploitation is putting Earth beyond its planetary boundaries, exacerbating biodiversity loss, increasing pollution and accelerating climate change.

As global supply chains continue to face growing instability from extended COVID impacts, ongoing international conflicts and soaring energy prices, it is evident this is a frail system with limited resilience to shocks.

This is a red flag for companies reliant on the global agrifood system; companies won’t survive without a sustainable supply of raw materials and farmers can’t continue to operate in a model that doesn’t support their livelihoods. In this increasingly volatile and transparent environment, a transformation is needed – for farmers and business.

What needs to change?

Buying low-cost raw materials in areas of the world at high risk for negative social and environmental impacts cannot be the path for a sustainable future. To course correct, we must move beyond a commodities approach to factor in the real cost of social and environmental risk. As the closest lever to the supply chain, procurement is the key to this change.

Prevailing efficiency-focused procurement processes have failed to propel the needed transformation and their ability to align with and meet corporate sustainability targets is being challenged. Some innovative procurement practices are actively being explored and deployed, such as price transparency, longer-term contracts and cost-plus pricing, but adoption is slow and greater progress is needed.

Concurrently, mitigating material risks like supply security, cost, reputation, and regulatory compliance is becoming more relevant for the procurement function, revealing an opportunity to reorient corporate sustainability strategies to center procurement. To better leverage the potential of procurement to secure stable supply and thriving rural livelihoods, there needs to be greater and more widespread connectivity between sustainability and procurement teams.

What’s possible?

There are many steps businesses can take to build resilience into global supply chains and help farming communities thrive. A few, gleaned from insights from the Farmer Income Lab, IDH Farmfit Intelligence and World Business Council for Sustainable Development (WBCSD), are as follows:

Increase value distribution and reduce volatility and risk for farmers. This can be accomplished by providing guaranteed minimum or offtake prices, living income differentials, pooled resilience funds, insurance schemes, support for climate adaptation and cash transfers to supplement incomes in a crisis. Guaranteed minimum prices and cost-plus models, where the costs of production are covered plus a premium, are effective in stabilizing farm gate prices. Establishing resilience funds, such as Fairtrade’s Producer Resilience Fund, to cover farmer costs or income declines during supply chain disruptions is another intervention companies should support. Addressing farmers’ exposure to price volatility and climate change is a key pathway to greater resilience.

Invest in women. Supply chains are more resilient when women reach their full potential. In agriculture communities around the world, women continue to face structural barriers to equal opportunity, including access to education, access to assets, access to finance, and expectations for unpaid childcare. The IDH Farmfit gender report shares key data that underpin these challenges. Yet, women remain key to unlocking sustainable development by investing a greater portion of earnings back into businesses, families, and communities. Sustainable sourcing strategies need to account for the unique opportunities a women’s rights lens provides in reducing community vulnerability and improving supply chain resilience. This means improving women’s access to agricultural inputs, capital, technology and markets. One recent example is a collaboration to facilitate the flow of finance to women-owned SMEs in Indonesia.

Offer valuable targeted services to farmers. IDH Farmfit shows holistic service packages that combine different interventions, such as providing training, seeds and fertilizers, and access to markets, are twice as effective for increasing farmer incomes than those without - especially when finance is included. Other proven interventions as outlined in a Farmer Income Lab report include poverty graduation programs, out grower schemes, climate change adaptation, savings-led groups, access to finance and investment in producers’ groups.

Localization strategies. Companies should leverage their convening and purchasing power to build partnerships that encourage governments to achieve and expand commitments to the social protection of vulnerable farming populations. Some companies are already considering expanding localized input distribution or processing facilities, which can protect farmers from supply chain disruptions, thereby protecting businesses’ first point of trade. Some are also adapting sourcing processes to accommodate farmers, such as delivering inputs directly or collecting crops closer to sourcing villages.

Why should this matter to procurement?

Procurement officers can rebuild the agricultural system and help farming enterprises become resilient and thrive. The negative impacts of the current system are apparent and there is an ethical and business imperative to transform practices to drive improved social and environmental impacts. Enabling smallholder farmers to be profitable, increase assets, reduce liabilities and risks, and have stable cash flow will reduce food system vulnerabilities and provide value to business by:

• Reducing supply risk as farmers may seek more profitable opportunities outside of agriculture or are unable to meet volumes and quality standards when they cannot adequately invest in productive and cost-optimized farming systems.

• Managing increased reputational risks as upstream vulnerabilities to people become increasingly scrutinized, and as expectations grow for businesses to approach societal challenges with the same rigor, thoughtfulness and energy used to deliver profit.

• Meeting business responsibility and reporting requirements under internationally recognized frameworks such as the UN Guiding Principles on Human Rights.

How do we get there?

There is a new era of agriculture on the horizon and procurement is the path to get there. To deepen equitable supply chain relationships and deploy responsible procurement practices, the industry must transition away from transactional supplier-buyer relationships and invest in more innovative and long-term partnerships with suppliers.

The return on this investment has the potential to generate shared value through strengthening and stabilizing supply chains, as well as addressing societal challenges. There is more to be done and companies cannot do it all alone, but a clear prerequisite for this change will be for businesses to create the environment and incentive structures for such positive changes to take hold. This means reorienting sustainability strategies to better center procurement and transforming buying practices to prioritize better social and environmental impacts.

Everyone relies on the global agricultural system – from the farmers growing the food, to the workers laboring in processing plants, to business leaders running food and agricultural companies, to people at the grocery store buying food for their families. Each of us has an engrained interest and a responsibility in helping rebuild a broken system. Right now, procurement is in the driver’s seat and has the best opportunity to ensure we are on the right path to building a future that is resilient and equitable for all.

About the authors:

Ilaria Ida Walton is global socioeconomic impact lead at Mars. Iris van der Velden is global director of innovation & insights at IDH. Ruth Thomas is director of equity action & food and agriculture at the World Business Council for Sustainable Development.

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