Disruption and resilience in agricultural supply chains

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Business issue (problem) The operational viability of companies in the food, beverage and tobacco industries depends on a supply of the right volume and quality of key raw materials at the right price. While procurement functions often have contingency plans for alternative sources of supply, a large part of this disruption of supply is increasingly driven by megatrends, like climate change and natural resource scarcity. These trends are worsening globally; thus, reducing the number of viable alternatives for each scenario. At the same time, stakeholder scrutiny of sensitive environmental and social issues directly affected by supply chains is rising. Nongovernmental organizations (NGOs), investors and governments are becoming more active on issues like deforestation, farmer livelihoods and the use of natural resources, such as biodiversity, land and water. Procurement decision makers now face events like crop losses, low yields, drought and extreme weather event losses in the context of accelerating regulatory change and competing use of scarce land, water and other natural resources. Water scarcity illustrates the supply chain risk issue well: agriculture is the single largest user of water consuming 70% of the water withdrawn from rivers, groundwater and other freshwater sources. The box below illustrates how water scarcity is accelerating and presents a deepening challenge to those charged with meeting the rising demand of this resource. Disruption in supply can mean: Paying premium prices for commodities on the open market Dealing with impacts on the brand s quality standards Failing to meet supply in rapidly growing markets Natural resource risks and opportunities for agriculture Water scarcity is accelerating and presents a deepening challenge to those charged with meeting the rising demand of this resource. Roughly, a liter of water is used to produce a calorie. Thus, an adequate daily diet requires more than 2,000 liters of water to produce enough food for one person. Of this, 40% of water on global average can come from irrigated agriculture. New factors, such as increasing world population and improved affluence, will likely further strain water resources. In addition, the uncertain effects of climate change on drought, floods and agricultural productivity will likely exacerbate the situation. 2x By 2050, agriculture will likely continue to be the largest user of water globally, accounting for twothirds or more of supplies drawn from rivers, lakes and aquifers. Pressures on water resources and demand for water use will continue to increase and, by 2050, water scarcity will likely affect more than two-thirds of the world s population. Current question: How do we meet this challenge without increasing freshwater withdrawal to feed the world? Reference: Towards a Water and Food Secure Future: Critical Perspectives for Policy-makers, FAO and World Water Council, 2015. 1

Water is only one of a series of interrelated natural-resource risks facing organizations. Others include: Land: growing crops has become increasingly contested as farmers, governments and NGOs all express concerns and competing priorities over the use of limited land for cash crops, food crops, industry, leisure or wildlife conservation. Deforestation: remains an acute problem in key sourcing locations due to suppliers failing to secure the right sustainability certifications and, thus, risk being dropped by major brands, resulting in disruption until new suppliers are secured and verified. Use of inputs: increasingly on the radar of NGOs, aid agencies and governments. Using high volumes of fertilizer in inefficient ways not only drives up costs but also pushes up the greenhouse gas (GHG) emissions that can increase water pollution after use. Targeted inputs are needed to avoid these risks. Loss of biodiversity, including pollinator species: can occur from deforestation and chemicals and poses a risk to supply chains. Insect-based pollination is worth approximately $190b per year, roughly equivalent to 8% of the total agricultural output globally. Declining wild pollinators are an increasing challenge to many agricultural supply chains, like blueberries and almonds. Whatever the specific supply chain risk is, procurement is now faced with a complex decision tree one that includes addressing competing priorities, dealing with potential trade-offs between environmental and social impacts, fielding powerful lobbies and stakeholder interventions, and balancing short- and long-term considerations, where the immediate security of supply is just one of a number of key factors. Examples Deforestation Greenpeace has launched international campaigns that draw attention to companies and products and how their sourcing practices may lead to deforestation. Some of these campaigns went viral on social media and concluded in these companies dropping their suppliers and setting bold commitments toward responsible sourcing. In 2010, a leading consumer goods association committed to zero net deforestation by 2020 for palm oil, soy, beef, and paper and pulp supply chains. According to a report from Forest Trends, as of March 31, 2016, there were 579 public commitments from 366 companies around the world who have pledged to remove forest destruction from their supply chains. 1 Water Companies are responding to scarcity threats through focused water stewardship initiatives designed to achieve a sustainable water balance. In 2007, a leading drink manufacturer committed to return to nature and communities a volume of water equivalent to what is used in the company s products and production operations by 2020. In 2015, they met the goal five years ahead of target by building a global sustainability impact portfolio of community water partnerships that replenished 115% (191.9 billion liters) of their global sales volume (166 billion liters). Soil health Research has shown that using enhanced soil health tests to guide input application can save up to 25% in nutrient costs, reducing fertilizer costs by up to $10 $15 per acre, while helping farmers maintain or increase yields and decreasing nutrient runoff into rivers and bays. 2 Pollinators Several products of a leading food manufacturer have fruits, vegetables, honey, nuts and other ingredients that require pollination. Consequently, the company has invested more than $4 million since 2011 to support pollinator and biodiversity efforts. 1 Supply Change: Tracking Corporate Commitments to Deforestation-free Supply Chains, 2016, Forest Trends website, http://www.foresttrends.org/documents/files/doc_5339.pdf, accessed 22 June 2017. 2 Reducing Fertilizer Needs by Accounting for Soil Microbes, AgResearch Magazine website, https://agresearchmag.ars.usda.gov/2014/jul/soil/, accessed 22 June 2017. 2

How we can help EY can help address natural resource challenges through leading yet pragmatic practices in procurement combined with the latest risk analysis tools to prioritize and respond to supply chain risks. Our three-step process can help organizations identify and prioritize the biggest natural resource risks and opportunities in their supply chains, select the appropriate approaches to remedy them and develop an implementation road map to address them. Step 1: Identify priority focus areas As a member of the Natural Capital Coalition, EY helped develop the standards and tools that organizations use to identify, measure, and value their impacts and dependencies on natural resources known as natural capital within their operations and supply chains. In Step 1, we apply tools to identify, scale and prioritize the organization s environmental impacts along its supply chains. By placing a monetary value on the land, water and air resources they consume and impact, we gain a sense of the scale of the value at risk in the supply chain. Organizations can then compare various impacts using a common currency and, thereby, start to prioritize those that present the highest risk or importance to the company so-called hot spots. Step 2: Identify scalable solutions Through our global network, we have knowledge, resources and networks covering a range of solution areas. These include crop science and genetics, tech-enabled agronomy to improve yields from reduced inputs, data and analytics, natural resource management and monitoring, stakeholder outreach and coordination, and governance and policy. In Step 2, we apply our analyses of the major impacts and risks to identify technical, social, environmental and/or governance solutions with the potential to significantly reduce those risks. We connect directly with a network of resource specialists to critically, but constructively, assess solutions with the potential to add value to the client. Step 3: Prioritize solutions Moving from analyses and solution identification and prioritization to implementation at scale requires a solid business case for investments in time, capital and operational costs. In Step 3, we develop the business case for each proposed solution, showing how it addresses key risks, the value it could represent in terms of risk and impact reduction, and return on investment with a clear timeline and expected returns profile. We synthesize all of the individual components into an overall implementation road map grounded in our client s ambition and organizational context. Example approach Phases 1 2 3 Identify priority focus areas Identify scalable solutions Prioritize solutions 1 2 weeks 3 4 weeks 5 6 weeks Objectives Conduct assessment to identify potential impacts Analyze available data to assess impacts and risks Prioritize impact areas based on potential benefits Align impacts and risks to possible solutions Identify and assess solutions that add value Develop list of potential solutions Prioritize solutions Develop the business case for each component solution Provide overall implementation road map Outcomes Heat map of supply chain social/environmental hot spots Detailed impact analysis for priority areas List of priority solutions Identification of priority solutions per business case Next-step recommendations 3

Case study $450m beverage sector manufacturer EY developed a strategy to reduce supply chain risk by $450m for a client with an estimated $4.9b global exposure to natural capital risks. Challenge Imminent merger would raise the company s commercial and stakeholder profile Need to reassess procurement strategy Examine how sustainability strategy adds value to the vision, growth ambitions, risks and opportunities faced by the new organization Approach Identify, prioritize and monetize natural capital risks Highlight key crop hot spots and locations with respect to natural capital risks Develop portfolio of potential interventions to address key risks and impacts Prioritize, develop road map and business case for short-listed interventions Benefits Identified $4.9b exposure to natural capital costs Identified measures to reduce risk exposure by ~$450m, avoid annual losses of up to $10m and drive down logistics costs by $45m Underpinned growth plans to 2025 in key markets and business case for an enhanced global procurement operation as a value adding profit center 4

Example thought leadership and publications Thought leadership Click on the image to access available publications. Collaborated publications 5 6