Effective supplier due diligence vital in food industry

January 22, 2015

The golden arches of McDonald’s Corporation are recognisable all over the world. Many people think of it as the classic, all-American fast food meal, and people in Japan, Morocco and Russia know they can all go to McDonald’s and get the same food, plus dishes catered to local tastes.

In July 2014, a shock hit McDonald’s and many other restaurants in the fast-food industry when it was discovered that a Chinese meat supplier had been selling expired products to fast-food chains in China, Hong Kong and Japan. The supplier in question, OSI Group, used a Shanghai-based subsidiary called Husi, which supplied chicken and beef products to McDonald’s, Pizza Hut, Starbucks, KFC, Papa John’s and Burger King.

According to an article from The Wall Street Journal, the scandal was uncovered during a broadcast from Shanghai news station Dragon TV. The report stated that workers of Husi repacked chicken and beef past their expiration dates, stamping new expiry dates on the patties. More than 3,000 cases of the product were sold, with an undisclosed number of units in each case.

In addition, workers were caught on camera holding the meat with their bare hands and putting meat that had fallen on the floor back on to the processing machine.

Due to the scandal, McDonald’s temporarily pulled many menu items, including McNuggets and chicken fillets, from the menu. According to the same WSJ article, while many of the other affected restaurants stopped using OSI Group as a supplier, McDonald’s chose to continue its relationship, though it did switch operations to plants based in Henan province and an undisclosed location. McDonald’s stated that the meat quality of Husi was still better than that of local suppliers, and that Husi assured a high-quality product in the future.

Though no one reported becoming ill as a result of the tainted meat, the scandal has brought many issues to light, especially the importance of food safety. According to a CNN article form July 2014, as a reaction to the Husi issue, Shanghai Food and Drug Administration closed the plant at the centre of the problem and detained five employees for questioning. OSI Group, the parent company of Husi, promised to hold its own internal investigation in which swift and decisive action would be taken against any responsible employees. OSI also promised to make organisational changes to ensure better food safety at its China plants, including launching a quality-control centre in Shanghai and a three-year food safety campaign.

It is interesting to note that the tainted meat did not come directly from McDonald’s or its supplier, but from the third-tier company in the chain. While many companies conduct due diligence on their suppliers, they may not think to check the companies their suppliers work with. McDonald’s does in fact have a high-standard third-party code of conduct. And yet, companies can still fall through the cracks.

Another recent food safety scandal is the Tesco horsemeat scandal that made news in 2013. Although a number of supermarket chains across Europe sold the meat, some of it containing between 60 and 100 percent horsemeat, Tesco was the most noted in the media. Many of Tesco’s tainted products came from a company called ABP Food Group, which, according to an October 2013 article published in The Guardian, received its ingredients from as many as 40 different suppliers, making it nearly impossible to trace the source of contamination. In the course of its investigation, The Guardian came across testimonies from migrant workers who stated that they had to process defrosted meat that was green and years old.

Subcontractor due diligence

Both the Tesco and McDonald’s cases shed light on the importance of due diligence even further down the chain than a company’s direct suppliers.

Mary Shirley, Senior Advisory Consultant at The Red Flag Group, noted the effects that impropriety of distant companies may have on a company. “The importance of conducting due diligence on suppliers further removed from your direct relationship with a supplier is important because any flaw in the chain may ultimately be traced back to your company and you could be held liable for it,” she said.

“It will not be enough to issue a press release to the media stating that your product quality is bad because someone further up the supply chain stuffed up. It is, however, more difficult to control your supplier’s third parties. Therefore, the simplest way for you to control the whole process is to control who you deal with and impose conditions on them to ensure that their third parties are above board. You can do this by getting assurances in contracts that they will only use certain vendors which comply with industry standards – perhaps they need to have a certain level of qualification, food safety standards, certification or industry membership. Or you may insist that third parties of the supplier are provided with compliance training … or that the supplier is responsible for conducting due diligence on their third parties.”

The food industry faces problems that companies in the technology or manufacturing industries may not, Shirley said. “Pharmacy and food supply chains share the characteristic of high-priority due diligence and compliance because it can affect human health and, in the most serious consequence, result in death.”

Although the idea of conducting due diligence on distant suppliers may seem tedious, cases like McDonald’s and Tesco show it may ultimately be good for the company. After its expired meat scandal, McDonald’s faced declining sales in Asia and temporary shut downs of branches in Russia.

“Like any instance where due diligence is not conducted, failure to conduct an adequate level of due diligence means that you face the risk of not dealing with reputable partners,” Shirley noted. “Companies can face reputational damages, which goes hand-in-hand with financial losses, or even legal consequences.”

McDonald’s and Tesco, multinational, multimillion-dollar companies, will likely bounce back from their troubles and financial losses. Smaller companies, however, who lack the same financial resources and recognition, would have a much tougher time recovering from such issues. In cases such as this, it is better to be safe than sorry. 

Previous Whitepaper
Integrity due diligence in 30 points
Integrity due diligence in 30 points

The Red Flag Group has seen a significant increase of interest into a variety of risks that extend beyond t...

Next Article
Due diligence challenges and possible remediation steps in India
Due diligence challenges and possible remediation steps in India

Conducting due diligence in India differs significantly from conducting due diligence in other countries. I...

Do your suppliers meet the expectations of your integrity & compliance programme?

Tell me more