Cardinal Foods: Sweet Sourcing

Jennifer Schramm was a purchasing manager in the cocoa and chocolate division at Cardinal Foods (Cardinal), a multinational agribusiness giant based in Chicago, Illinois. She had earned her BS in food science from North Dakota State University in Fargo, North Dakota, and had progressed from a summer intern as a flavor-lab technician to food safety scientist to the head of South American cocoa purchasing at Cardinal over her 10 years with the company. Although Cardinal sourced cocoa from three areas (Asia, Africa, and South America), Schramm's team handled the South American sourcing from Ecuador. As part of a biennial supplier review, Schramm had been considering several different cocoa cooperatives. For the last eight years, Cardinal had used the Dulce collective, which had started in 1990 with 50 families and had grown to 850. Several other Ecuadoran collectives had appeared on the radar and Schramm needed to assess the advantages of staying with Dulce or going with a different supplier. In addition, Schramm's customers, large consumer product goods companies like Hershey and General Mills, had become increasingly interested in avoiding environmental and social risks in the ingredients they sourced from Cardinal. The worldwide demand for cocoa bean products had increased tremendously (in part because of the rise of the middle class in China), as had, simultaneously, public demands for sustainable cocoa bean farming and harvesting. Schramm needed to take these factors into account while at the same time maintaining quality at a competitive cost.

Cardinal Foods

Cardinal was a private but well-known agribusiness company that had operations in 55 countries. In fiscal year 2016, Cardinal had $63.7 billion in sales and other revenues. Adjusted operating earnings were $1.84 billion and net earnings were $1.04 billion. The company had 103,000 employees in 48 countries; its customers included food, beverage, industrial, pharmaceutical, and personal care product makers, as well as farmers and food service providers. Cardinal's cocoa and chocolate division employed 800 people and offered the food industry both standard and custom cocoa and chocolate ingredients to be used in food manufacturing, bakery, confectionery, and dairy applications. Cardinal's corporate values included being a responsible global citizen, and strategically it had seen investments in responsible sourcing pay off in the last few years as increasing numbers of customers were demanding sustainable ingredients.

Cocoa

Needing a specific tropical climate and susceptible to disease, insects, and abnormal weather patterns, cocoa was a somewhat difficult and delicate crop to grow. Cocoa trees grew only in tropical zones within no more than a 15-to-20-degree latitude from the equator. They preferred a hot and rainy climate but also required plenty of shade-providing vegetation. Cocoa was grown in parts of Africa, Asia, and Latin America, with the largest

supplyapproximately 33%grown in Cte d'Ivoire. Cocoa was something of an anomaly in agriculture in that 80% to 90% of cocoa beans came from small farmers (an estimated five to six million worldwide), often operating in a collective of small family farms rather than a single large agribusiness. Many of the farmers used outdated farming practices and many of the collectives lacked organizational heft and effectiveness to modernize practices. Because of the difficulty in growing cocoa, many farmers resorted to growing palm for making palm oila less fickle crop, but also a commodity that trapped the farmers in poverty.

Cocoa production and supply chain

The cocoa bean's journey to the palate was a complex one, starting with the farmers and passing through buyers, shipping organizations, processors, manufacturers, chocolatiers, and distributors. Since trade balances, pricing, and futures contracts depended on accurate supply estimates, cocoa production was monitored through the supply chain as well as by government and international organizations. The growing season was continuous, necessitating constant attention to the health of the trees and the soil.

Cocoa beans grew in pods, which farmers removed from the trees using special long-handled tools. The farmer then split the pod, which could yield anywhere from 20 to 50 beans. (One pound of chocolate required approximately 400 beans). The beans were then dried either in containers or in piles covered with banana leaves, and went through a natural fermentation process; during fermentation, the chocolate flavor emerged. The beans were then packed into sacks and transported to a local agent, who would transfer the beans to an export company, which then shipped them to a processing location to be stored in a warehouse before finally being transported to a manufacturing plant where they were inspected, cleaned, roasted, and ground. In this process, the "nib"or inside of the cocoa beanwas separated from the shell and then ground into a paste. This process involved high temperatures, which melted the cocoa butter in the nib, resulting in cocoa liquor. How this cocoa liquor was further processed determined the resulting product, whether unsweetened baking chocolate, sweetened chocolate bar, or something else.

Quality/science

As anyone who has tasted a Hershey's candy bar and a Godiva or other high-end brand of chocolate knows, chocolate quality varies wildly. Making a difference were the raw ingredients that went into the chocolate as well as the production process. The size of the chocolate particle and the processing method affected the taste. Chocolate customers were willing to pay a premium for fine-tasting chocolatemeaning that the size of the particles was key.

The size and variation of chocolate flavor particles were intimately connected to the specific farming practices deployed, such as using the right fertilizers at the right time, removing pests and diseases from plants, and the spacing and tending of the plants to produce more pods, as well as post-harvest practices including picking, transporting, and processing the pods.

Industry/market pressures and challenges

Chocolate was more popular than ever, particularly with a growing middle class, increased discretionary household incomes, and subsequent increased consumption in China, Brazil, and India. Aside from the ubiquitous sweet tooth of the global population, chocolate was made even more popular by the reported health benefits of dark chocolate (which contained a high level of antioxidants) as well as the increasingly exotic culinary uses of chocolate (every fruit imaginable could be and often was coated with chocolate). Increased popularity led to pressure for increased production. Production had grown steadily at 3.1% over the decade leading up to 2017. However, there were worries that a quest for profitable and increased yields would lead to habitat destruction and consequent degradation of the cocoa bean, or that farmers would take shortcuts that

ultimately would hurt production. Also, farmers often gave up on growing cocoa and turned to easier, less

delicate crops.

Cardinal sold directly to large companies, such as Hershey's, Godiva, or Mars, that used cocoa in their food

and beverage products. These companies were becoming more conscious of the ethical risks in the cocoa supply chainbecause their own customers were asking questions about how cocoa was sourcedand of the social and environmental effects of cocoa production. Watchdog groups were calling attention to products and suppliers who used unethical practices, and customers were demanding more transparency about the supply chain. Cardinal had begun a three-year initiative to encourage sustainable practices throughout its supply chain. In highly centralized markets such as corn or sugar, it had started to see some improvement, but in more decentralized markets with thousands of farmers, a positive impact was harder to achieve.

Issues in cocoa production¹

Poverty: For a variety of reasons, including a lack of infrastructure and access to market and market information, the majority of cocoa farmers lived in destitution. Other factors that kept many farmers enmeshed in poverty were constantly fluctuating (and often low) cocoa prices, a lack of organization among farmers leading to diminished market power, and the setup of the farming system in general, whichthrough a sharecropping model and the resulting uncertain land tenure for manycontributed to low productivity. This poverty then gave rise to subsequent issues: malnutrition, child labor and trafficking, and overall extremely poor working conditions.

Shrinking workforce: According to the "Cocoa Barometer 2015" report,²because of the extreme poverty that cocoa farmers experienced and the hard labor (e.g., swinging a machete to open pods) involved, fewer young people wanted to stay in this industry and the number of cocoa farmers was diminishing.

Low productivity: Because of a lack of knowledge about modern farming techniques, limited farm management skills, and an inability to purchase state-of-the-art equipment and planting materials, cocoa farmers were at a disadvantage in increasing (and often even maintaining) their productivity. Because of inadequate knowledge, tools, and supplies, farmers often harvested from trees with cocoa pods that were well past their prime and suffering from diminished soil fertility and the incursion of pests and diseases.

Environmental concerns: Inevitably, soil fertility levels decreased over time and with constant use. Cocoa land rejuvenation required applications of the appropriate quality and amount of fertilizer as well as robust composting. Environmental concerns could be alleviated with the use of proper agroforestry techniques in order to maintain and sustain a diversity of shade trees, cocoa crops, and food crops in general.

Marketing challenges: There was a marked variance across growing regions in the percentage of the world price that farmers received. Many factors were involved, including limited access to market information, regulatory environments, transportation costs, knowledge of cocoa quality requirements, and a lack of group buying power.

Educational access: Lack of a quality base education was an issue in many regions. It adversely affected farming labor practices and business decisions, and often led to youth migration to urban areas, a trend that threatened cocoa farming's future.

¹Child labor/trafficking: Over the years, investigations had uncovered widespread child labor and slavery on cocoa farms, primarily in Western African countries (Ghana and the Cte d'Ivoire). Although confined mostly to these African countries, there had been rumors of similar practices in some of the South American cocoa farms.

Public scrutiny: The revelation about the West African child labor and slavery had battered the chocolate industry in the eyes of the public, leading to increased scrutiny by governments and various NGOs. Then, in 2014, a video of a cocoa farmer tasting chocolate for the first time went viral, underscoring the disparity between

the farms and the manufacturers and consuming public.³

Which Supplier to Partner with?

Schramm was required to conduct biennial reviews of suppliers and either renegotiate terms or find other suppliers. Schramm narrowed down the possibilities for sourcing cocoa in Ecuador to three of the largest collectives, thus ensuring a steady supply. It was not feasible to pull out of the region altogether for several reasons. Competitors would invariably appear to take the company's place and develop cocoa supplies; Cardinal needed to diversify its cocoa supply in case any single region was adversely affected by weather or crop disease. Schramm organized the information her team had collected about the three collectives by ranking each collective on a scale of 1 to 3, 1 being the best among the set and 3 being the worst (seeExhibit 2).

Dulce

For the last five years, Cardinal had sourced all of its cocoa from Dulce, a group of families in the Esmeraldas region of Ecuador. The collective was not the best at environmental or sustainable practices, with unused chemicals typically dumped in nearby rivers and ponds. Given the proximity to the ocean, the lack of environmental practices had far-reaching effects. The collective was strong enough to generate relatively uniform cocoa across many different families, but the use of child labor was an increasing issue in the supply chain. Human rights groups had already called out the collective as one of the most aggressive users of child labor in the region. Farmers were paid better than other collectives, but not the highest rate. The cost of Dulce cocoa was $2.80 per pound.

Nacional

A recently formed collective called Nacional had begun selling cocoa globally in the past two years. Started by a group of US-educated farmers, Nacional prided itself on better integration with global supply chains, and on stronger environmental practicesfor example, farmers in the collective did a better job at preventing chemical spills and avoiding the use of child labor. The cost of Nacional cocoa was about the same as Dulce's, but the farmers were paid the least, and therefore more farmers lived in poverty. The managers of the collective took a higher fee for coordinating the market because they knew the farmers and the land better than most. There was some speculation that a portion of the payment was used to bribe farmers into reducing child labor and using more sustainable environmental practices to meet global quality standards. The collective had also been known to bribe truck drivers and other logistics workers to deliver product on time.

Calidad

Calidad was the oldest collective in the region with more than 1,000 farmers. The collective operated in a very loose fashion and therefore the cocoa farming practices were the most diverse, with some farmers regularly using child labor and unsustainable practices and others farmers relying less on these. The cooperative basically took in the supply of cocoa from farmers and paid them the market rate, so little money was kept for management and little control was exercised over the farmers. The farmers were the best paid in the region. Given the high variability in practices, Calidad was middle of the pack on sustainability practices, child labor,

and bribery. The cost was the lowest, at $2.10 per pound.

Schramm's Decision

The size of the particles in the processed cocoa was of major importance to the quality of the final chocolate product. The target measure for Schramm and Cardinal was an average particle size of 25 microns, plus or minus 1 micron. Batches with an average particle size outside of this range were rejected and all of the product scrapped. Schramm had requested cocoa samples from each of the collectives, and she decided to run some sample production batches to test the cocoa quality. SeeExhibit 1for the results.

As Schramm looked over the quality data for each of the cooperatives, she wondered what to do next. She

wanted to (1) source high-quality cocoa, with the proper particle sizes, (2) source cocoa from environmentally and socially conscious producers, (3) keep the cost of cocoa sourcing as low as possible, and (4) not increase any reputational risks to the company or its customers. When she was earning her degree in food science, she never realized the complexity of the decisions she would have to make.

Exhibit 1

Cardinal Foods: Sweet Sourcing

Results of Sample Test Runs

(N= 100 for each collective)

Collective	Dulce	Nacional	Calidad
Mean particle size (microns)	25.63	24.78	25.05
Standard deviation of particle size (microns)	0.16	0.48	0.76
Count	100	100	100
Number of samples below 24 microns	0	6	9
Number of samples above 25 microns	4	0	11

Observation	Dulce	Nacional	Calidad
1	25.48	24.02	24.60
2	25.43	24.04	25.79
3	25.56	25.22	23.32
4	25.65	24.53	24.98
5	25.69	24.37	25.04
6	25.57	24.32	25.45
7	25.65	25.32	24.74
8	25.58	25.25	25.83
9	25.67	24.52	23.46
10	25.60	24.84	24.66
11	25.52	25.05	25.51
12	25.66	24.78	26.13
13	25.46	24.06	25.65
14	25.64	25.05	26.29
15	25.73	25.25	24.09
16	25.70	25.25	25.20
17	25.60	23.91	24.79
18	25.58	25.33	25.07
19	25.58	24.95	24.81
20	25.34	25.70	25.22
21	25.60	24.31	24.95
22	25.62	23.97	24.72
23	25.65	24.02	25.40
24	25.46	24.12	25.00
25	25.57	25.38	24.58
26	25.52	24.26	24.64
27	25.57	24.68	24.49
28	26.10	23.98	25.51
29	25.74	25.29	25.66
30	25.57	25.11	24.93
31	25.60	24.37	24.75
32	25.67	24.44	24.24
33	25.60	24.59	24.06
34	25.63	24.86	25.30
35	25.53	25.51	23.22

Page 7 UV8036 Exhibit 1 (continued)

Observation	Dulce	Nacional	Calidad
36	25.65	24.98	25.68
37	25.55	24.68	24.84
38	25.67	24.54	25.45
39	25.74	24.74	26.57
40	25.66	24.94	25.73
41	25.63	25.12	25.36
42	25.53	25.49	25.64
43	25.69	24.91	23.43
44	25.71	24.98	25.53
45	25.63	24.40	26.08
46	25.61	25.93	24.59
47	25.44	25.05	25.46
48	25.52	24.71	24.34
49	25.68	24.51	24.98
50	25.71	25.66	25.74
51	25.55	25.34	24.86
52	25.54	25.36	25.56
53	25.65	24.53	25.51
54	25.68	24.62	24.84
55	25.71	24.96	24.93
56	25.84	25.03	25.60
57	25.57	25.30	24.65
58	25.50	24.76	25.03
59	25.60	24.09	26.43
60	26.40	24.45	26.21
61	25.41	25.22	26.41
62	25.54	24.66	24.69
63	25.68	24.96	25.61
64	25.55	25.00	24.91
65	25.56	24.24	24.72
66	25.68	24.39	25.72
67	25.63	24.40	25.96
68	25.62	24.79	24.57
69	25.50	24.92	26.34
70	25.42	25.62	23.89
71	25.56	25.37	25.04
72	25.68	25.40	26.46
73	25.56	25.09	25.08
74	25.62	25.50	23.75
75	25.69	23.76	24.69
76	26.30	24.96	26.00
77	25.25	24.49	24.58
78	25.53	24.42	25.38
79	25.56	23.87	23.79
80	25.47	24.70	24.13

Page 8 UV8036 Exhibit 1 (continued)

Observation	Dulce	Nacional	Calidad
81	25.57	24.89	25.70
82	25.72	24.72	25.07
83	25.57	24.53	24.95
84	25.59	25.23	24.73
85	25.61	25.03	23.42
86	25.60	24.94	24.16
87	25.62	24.77	24.62
88	25.81	25.11	24.56
89	25.68	24.76	25.68
90	25.66	24.20	25.59
91	25.77	24.66	24.35
92	25.63	24.92	26.24
93	25.60	24.53	24.62
94	25.69	23.95	25.35
95	25.55	25.54	23.52
96	25.67	24.74	25.22
97	25.61	24.33	25.84
98	26.20	24.17	25.61
99	25.72	24.89	25.26
100	25.44	25.04	24.22

Exhibit 2

Cardinal Foods: Sweet Sourcing

Schramm's Assessment of "Other" Factors

	Sustainability Practices	Reducing Child Labor	Reducing Farmer Poverty	Avoiding Bribery
Dulce	3	3	2	1
Nacional	1	1	3	3
Calidad	2	2	1	2

Based on her team's research and assessment of each collective, Schramm ranked each collective on several dimensions. 1 = the best of the set, and 3 = the worst

Ques) What analytical tools do you use to investigate and visualize the factors affecting cocoa production? Explain briefly.