Opportunism in the food industry— can we learn from Walmart’s global sourcing practices?

By Juan Marcelo Gómez and John G. Keogh

In a post-pandemic world, global food ecosystems exposed numerous supply chain risks that arise from the complexities in the governance of global sourcing. Many businesses have increased their global sourcing reach to satisfy diverse and growing consumer demands. Economic benefits may be more significant for companies that can fulfil demand based on good governance practices combined with supply chain due diligence and logistical agility. But there are both a food safety and reputational risk involved as supplier opportunism is intricately linked to various types of frauds, deception, and ethical and moral lapses. Opportunism is defined as self-interest seeking with guile or pursuing self-interest benefits, such as shirking responsibility for food safety, cheating or withholding information from the buyer.

In Walmart’s 2020 annual report, many global sourcing issues are considered operational risks. Walmart notes, “We expect our suppliers to comply with applicable laws, including labour, safety, anti-corruption and environmental laws, and to otherwise meet our required supplier standards of conduct.”

Post-contractual (ex-post) issues relate primarily to hidden actions or behaviours of the supplier that lead to moral hazard. As opposed to (ex-ante) or pre-contractual issues, which relate to instances of hidden information or distorted information exchange that can lead to a situation called adverse selection. In the latter, the falsehoods are discovered ex-post. Many risks in global sourcing can be related directly to the unobservability of the actions and behaviours of suppliers. These risks are consistent with the operational risk statements mentioned in Walmart’s annual report. To reduce these risks, mechanisms that improve transparency and trust in global food ecosystems must be prioritized.

Adverse Selection

Supplier management and onboarding could be considered a relatively mature academic research and industry practice area. However, supply chain risk management lacks consensus in the literature. The risk of adverse selection is created when a potential new supplier purposefully hides or provides false information before signing the supplier contract. For example, a new overseas supplier may deliberately withhold information about their company operations from the buyer or purposefully share fraudulent, incomplete, or inaccurate information. This may include false claims of resource competence, including the firm’s technical knowhow, the provision of fake or lapsed certifications such as fake food safety laboratory test results, or false claims of organic, kosher or halal. New suppliers may have improperly implemented food safety management protocols which could result in frequent product safety recalls. They may have insufficient or outdated machinery and tooling, undeclared subcontracting, precarious financial situations, or a bad credit rating—these are just some of the potential problems.

Moral hazard

For businesses, post-contractual opportunism creates a moral hazard. When such ex-post opportunism occurs, the supplier’s and the buyer’s interests diverge for various reasons. This could include situations where the supplier feels mistreated and perceives a substantial power imbalance with the buyer. As a result, suppliers may act in their self-interest and knowingly deceive buyers by supplying low-quality products or unsafe ingredients, blending non-organic and organic products, and sourcing from unapproved upstream suppliers and or shirking their moral and ecological obligations such as engaging in deforestation causing habitat loss, or engaging in forced labour or child labour. They may be involved in animal abuse or various forms of corruption or bribery of public officials to maximize their profits. Opportunism can be interpreted as food fraud or economically motivated adulteration when there is a deliberate misrepresentation, dilution or substitution of a food ingredient or product against the agreed expectations of another party.

The globalization of food chains has created a lucrative food fraud opportunity. While it is challenging to estimate the global burden of food fraud, the Canadian Food Inspection Agency (CFIA) website indicates that up to ten per cent of food traded could be subject to various types of fraud. In 2019, the CFIA blocked over twelve tonnes of adulterated honey from entering the Canadian market. Food fraud is alive and well, and Canadian taxpayers are investing over $5 million a year to enhance market surveillance activities.

We theorize that during the COVID-19 pandemic, many businesses in the food industry experienced supply interruptions and massive product and economic losses, while recent increases in inflation across global markets have provided fertile ground for opportunism. The fact that opportunistic behaviour in the food industry appears to be a lucrative business has increased the attention of organized crime regimes to use the food chain as a space to be explored and exploited. Collaboration between governments, enforcement agencies, businesses and researchers are essential as innocent consumers are increasingly exposed to human health and safety risks. This creates challenges for regulatory controls that, while they aim to achieve compliance and enforcement, are reactive at best. In a recent publication on food fraud in Canada by the Arrell Food Institute at the University of Guelph, it was noted: “A 2019 survey of Canadian food business operators highlighted that 56 per cent of respondents were confident they could address food fraud vulnerabilities, but only 33 per cent indicated their business was safe from food fraud.”

The time is ripe for business leaders to step up their efforts in gaining better insights into risks while improving governance practices across global food trade sourcing practices. The focus should be on supply chain due diligence, good governance and reducing the risk of supplier opportunism by implementing proactive supplier controls, which could include unannounced audits. Reducing the risks to the health and safety of consumers must be a priority alongside enhancing transparency and trust across all global sourcing processes.

Could we learn from Walmart’s global supply chain governance practices?

While problems in the global food chain are abundant, good examples of trade governance, such as those outlined by Walmart in its annual report, may assist other business leaders in modelling policies and controls that are adequate in practice and uphold higher trading standards for the benefit of consumers. In doing so, Walmart has continuously stepped up its efforts to address critical areas of vulnerability, which have increased transparency across stakeholders, as we have previously argued.

Walmart has instituted a global policy which enables a system of controls managed by its anti-corruption compliance programme. The system aims to prohibit anti-regulatory business practices by adopting an in-source and integrated ethics and compliance organization, including anti-corruption, training and communication, licenses and permits, management of third-party risks, and data analytics.

Walmart’s ethics and compliance organization comprises a global to local market team that routinely conducts cross-disciplinary and geographical assessments across the business, including a community of subject matter experts to share best practices. Anti-Corruption compliance focuses on third-party providers by assessing unaddressed risks and aligning organizational process assets, while anti-corruption training is provided internally and externally to third-party providers available in many languages. In addition, third parties, or intermediaries, are required to adopt anti-corruption practices and undergo routine site and financial audits across international markets. From a monitoring perspective, Walmart has implemented a centralized system to comply with licenses and permits at global and local levels. This has increased risk reduction through the implementation of safeguards and improved workflow. Analytical systems use collected data at different transactional and functional levels while incorporating business intelligence approaches such as screening external public data to manage unassessed risks, including litigation and sanctions, proactively. The integration of ethics and compliance has enabled Walmart to create a process that is guided by transparency across the organization to proactively identify and mitigate risks while at the same time engage a learning organization through continuous improvement.

In conclusion, in its 2022 annual report, Walmart understands that there isn’t room for opportunism in its increasingly globalized business and that misrepresentation to its customers can have significant adverse and cascading effects on the brand, its reputation and ultimately, its financial performance.

About the Authors:

Juan Marcelo Gómez is a trusted advisor in the private and public sectors. He is an assistant professor at Toronto Metropolitan University for The Ted Rogers School of Management in Retail Management. He specializes in supply chain and procurement and risk and regulation of complex trade systems.

John G. Keogh is the Managing Principal at the supply chain advisory and research firm Shantalla Inc. He provides confidential advisory and research on supply chain technologies, industry standards, food ecosystems transparency and trust. John is a professor of practice at the McGill University Centre for the Convergence of Health and Economics (MCCHE) and sits on the board of directors at the Canadian Institute of Food Science and Technology (CIFST).