Halal Supply Chain Risks

By Dr. Marco Tieman, CEO – LBB International

Background

The global Islamic economy, according to the 2023/24 State of The Global Islamic Economy Report, is an estimated USD 2.29 trillion industry consisting of the following key sectors: halal food, modest fashion, media & recreation, travel, pharmaceuticals, and cosmetics. As a result, the Islamic economy supported by its young and increasing Muslim population is difficult to ignore by the industry. Halal, rooted in Islamic law, is not limited to dietary guidelines but an important requirement for all aspects of Muslim life.

Evidence supports that halal requirements are moving away from a Muslim owned company (based on direct trust between buyer and seller), a product approach (the product or outlet is halal certified by an independent halal certification body), towards a halal supply chain (halal is addressed from source up to point of consumer purchase) and value chain approach (halal is addressed throughout the entire business value chain and its network). The Muslim consumer is increasingly expecting companies certified as halal in Muslim-majority countries to uphold a genuine commitment to halal principles. Muslim consumers over the past months have been boycotting several halal certified multinational companies based on a possible link or sympathy with Israel. Some multinational companies have lost revenues up to 50% in Muslim countries like Indonesia and Malaysia. As a result, brand owners need to urgently address both halal integrity and reputation risks when doing business in Muslim (majority) countries.

The relationship between the brand owner and halal integrity and reputation risks is shown in figure 1. The brand owner defines its halal assurance system, where it establishes halal control points and control measures in halal purchasing, production and distribution. This determines how a brand owner supply chain is organised from source (raw material supplier) up to the point of consumer purchase (retail, restaurant, or consumer doorstep in case of e-fulfilment).

The halal reputation of a brand owner is based on all the actions of the company, also referred to as its halal DNA or halal value chain. To determine the halal reputation performance of a brand owner, it requires the measurement of key performance indicators such as: halal trust (trust of the Muslim consumer in the brand), halal reputation index (the halal reputation of the brand owner), and licence to operate rating (the halal reputation in relation to the market requirements of each (Muslim) market).

The halal integrity of a brand (and its products) is determined by how the brand owner organises its supply chain and choice of supply chain partners. The halal integrity of the supply chain is as strong as its weakest link. The halal integrity performance is paramount and should be structurally measured. Currently, often only the internal halal committee has halal-related performance measurements, which are operational indicators at best. The importance of halal integrity measurement transcends the internal halal committee. Halal integrity measurements require the tracking of, for example, the halal maturity of the company (Muslim-owned company, halal product, halal supply chain, or value chain approach) and halal rating (halal integrity risk profile of a company).

Risks in Halal Supply Chains

The halal integrity of a brand (and its products) is a function of its supply chain, where a breakage in halal integrity anywhere in a supply chain becomes a breakage of its halal integrity. Indonesia is implementing law 33, which requires the halal certification of the brand owner, but also its supply chain partners. This is being implemented in stages, starting with food by this October 2024. Indonesia
is hereby the first country that makes halal supply chain management mandatory. It is expected that this example will be followed in the coming years by other Muslim countries with advanced halal standards, like Malaysia and Brunei. Also non- Muslim countries like Singapore and Thailand have already advanced halal standards and have been certifying logistics and trading companies.

Several leading brand owners have already started with assessing their halal

supply chain and phased implementation of end-to-end halal supply chains years ago. The remaining industry players (read: followers) need to start this process urgently in order to protect their licence to operate in leading Muslim (majority) countries. This requires first of all an audit of the supply chain: a documentation audit and physical audit. The documentation audit will assess amongst others the halal assurance system of the brand owner and contracts with its supply chain partners. To what degree addresses the halal assurance system the supply chain in both sourcing and distribution? In our role as supply chain advisor for big brand owners, we see an absence of halal control points and measures throughout the supply chain in both sourcing and distribution.

What halal clauses are mentioned in contracts with halal critical first/second tier suppliers, depending on the halal risk category of products/ services/and works sourced, as well as the logistics service providers used in sourcing of raw materials, packaging, etc? I am currently involved in academic research on halal procurement strategy in Indonesia in both the food and pharmaceutical industry. Halal requirements are having far reaching consequences for the sourcing of halal critical items (products, services and works).

What halal clauses are mentioned in contracts in distribution, with logistics service providers, distributors, retailers, e-commerce players, etc? Different from retailers, e-commerce is less mature
on halal, resulting in mixing halal and non-halal in its distribution centre and/or in the last mile delivery. Second, some components of the last mile delivery are visible to the Muslim consumer, where a halal issue could easily snowball into a full-flesh crisis for a brand owner. Several of these incidents happened in Indonesia and Malaysia over the past 5 years.

The physical audit will look at halal standard operating procedures (SOPs) and practices of key supply chain partners, better known as managed process links. Upstream we talk about ingredient suppliers, slaughter houses, packaging suppliers. Downstream this relates to the national distribution centre, distributors, retail chains, and e-commerce.

The level of halal education and preparedness highly varies along the supply chain. The better halal supply chains are aligned end-to-end to the brand owner halal SOPs. The future of halal supply chain risk management will be halal supply chain blueprints founded on solid supply chain partner contracts and solid measurement of both halal integrity and reputation performance. The logistics service provider could play a critical role in organising and orchestrating end-to-end halal supply chains for the brand owner.

Halal Ecosystems

As halal is moving towards a supply chain and value chain approach, halal supply chains become more complex for brand owners to organise. Hence, there is a need for halal ecosystems to simplify halal supply chains for brand owners. Halal ecosystems, through geographical, clustering of halal industries together, could create synergy advantages for brand owner’s supply chain and improving halal risk control of their halal supply chains. Next to synergy also sustainability regulations can be better met when working together from a halal ecosystem.

A recent global halal ecosystem assessment study undertaken by the Islamic Development Bank shows the value of halal ecosystems for halal industries and for capacity development in Muslim (majority) countries. Solid halal ecosystems could be attractive locations, future proof, for big brand owners and well as supplying and supporting industries.

An example of an advanced halal ecosystem is Modern Halal Valley in Banten, Indonesia. This is a 500 hectares dedicated halal industrial cluster, which is connected through a halal cluster network with other halal clusters locally, regionally, and globally. Also Malaysia has dedicated halal parks, 22 in total, supported by halal park guidelines and incentives.

Conclusion

Halal supply chain risks need to be on the radar screen of companies in order to protect their halal integrity and corporate reputation. Consumer and regulation pressure have fast-tracked the importance of the end-to-end halal supply chain and addressing halal in the business value chain. Halal supply chain blueprints and key performance indicators will be critical for brand owners in the years to come to secure their licence to operate in Muslim countries.

Halal ecosystems will be important, future proof, locations to produce and cluster halal production for brand owners. Next to Indonesia and Malaysia, halal ecosystems developments are expected in other Muslim countries in Asia, Middle East and Africa.

About the Authors

Dr Marco Tieman
Chief Executive Officer
LBB International

Dr. Marco Tieman

is the CEO of LBB International, a supply chain strategy consultancy and research firm, advising companies and governments on supply chain analysis, supply chain design, and market research. He is also an Adjunct Professor with Saito University College in Malaysia and a Senior Fellow with IPMI International Business School in Indonesia, conducting research on halal procurement strategy, halal supply chain management, and halal risk and reputation management. He is the author of ‘Halal Business Management: A Guide to Achieving Halal Excellence’.

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