Addictive supply chains: Why Nestle can’t quit child labor

Value Chains

Addictive supply chains: Why Nestle can’t quit child labor

Nestle and other multinational food and beverage companies have launched multi-million dollar programs to improve farming conditions and end child labor. Critics say it isn't working. Photo: Ton Rulkens/flickr.

Multinational corporations can seem like alcoholics--they promise to reform, be responsible and end labor abuse--but in the end, quitting is harder than it appears.

For example, if you’ve read up on Nestle recently, you might think there are two companies with the same name. One seems to earnestly want to make the world a better place: its massive Creating Shared Value Program includes everything from labor codes to $37.8 million in farming assistance per year (2012 figures), and it is aggressively turning major product lines--like the famed CRUNCH bar--into ethically-sourced products at a cost of $120 million, according to TriplePundit.

The other Nestle is a bit shadier: it scored 61 percent on Oxfam’s “Behind the Brands” scorecard this September--highest among multinational food corporations, but low overall. Suppliers routinely fail to implement Nestle’s code of conduct or fail to pass on those standards to the farms that sell them cocoa, as a 2012 report by Fair Labor highlighted.

Ultimately, Nestle’s programs have failed to satisfy the skeptics. Its plan to improve the CRUNCH bar “falls short of what is actually needed to ensure the chocolate we eat is fair for those who grow and harvest cocoa,” Forbes’ Beth Hoffman wrote in May. Nestle isn’t alone. Oxfam posted a letter in September from 33 major investment funds demanding greater transparency and better labor standards in the supply chains of all major food and beverage brands.

Why do companies like Nestle have so much trouble improving labor standards? Simply put, they’re just too complicated.

Organizational design expert Jay Galbraith calls it “concatenation:” When businesses start out, their design is simple and one director can manage the entire production process. Over time, however, the business grows, adding departments and regional divisions. It buys from increasingly large and diverse suppliers, who in turn have to look for more producers to meet demand. More than a century later, no one really knows where its ingredients come from.

Here is a flowchart of Nestle’s supply chain from the Fair Labor report.

Only about 15 percent of Nestle’s cocoa comes from cooperatives, according to the report, and both cooperatives and large farmers sometimes buy from sharecroppers, leaving auditors confused about where the cocoa comes from. Because of multiple layers of borrowing, the cocoa fetches a price that is too low to pay all the workers along the chain, the report explained, opening the door to child labor.

But it’s unclear whether child labor would end even if prices were higher.

Benefit Corporations have confronted this problem by building personal relationships with producers and partnering with auditing services that scrutinize their simplified supply chains. Some of these companies have achieved a modest scale of production--Andean Naturals, for example, claims to control one third of quinoa imports to the United States. In another example, Numi Teas became the largest importer of Fair Trade tea in 2010, according to PR Newswire, while simultaneously pushing through its new set of Fair Labor Practices in partnership with certification company SCS Global Services.

These companies have the advantage of building checks and balances into the supply chain from the beginning, and their smaller size allows them to maintain close relationships with their suppliers. For existing food and beverage multinationals, that task would require expensive restructuring that most corporations are unable or unwilling to take on.

Instead, companies like PepsiCo and Walmart are turning to traceability--protocols and databases that would help big companies follow a food product back along the supply chain to its origin. These firms are backing the Institute of Food Technology’s Global Food Traceability Center, which they hope will establish both regulatory standards and tools to help corporations better monitor their supply chains. A global traceability standard would achieve two goals, in theory: help companies eliminate illegal practices like child labor and improve food safety.

One other way Nestle has fought against its own complexity is through its “Prize in Creating Shared Value,” which awards up to 500,000 Swiss Francs (USD $547,000) to a local not-for-profit, small enterprise or individual to scale their water, nutrition or rural development project up to a financially-sustainable level, according to a Business Fights Poverty interview with Nestle’s public affairs specialist Barbara Wettstein. Nestlé hopes that by supporting these local efforts, it will help farmers improve their revenues and standard of living, reducing incentives for farmers to use child labor.

In the end, however, the best way to break an addiction is to go clean. While steps like Nestle’s plan to reform its CRUNCH bar show that multinationals are heeding consumer demands for better practices, more systematic changes are vital to weaning the food and beverage industry off of abusive labor. Restructuring the supply chain may or may not be necessary, but it will take innovation from within corporations like Nestle--not just good intentions--to right the unjust way we get our food.

The views in this article are those of the author and not Global Envision or Mercy Corps.

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