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Food Supply Chains in 2015: A Banquet of Risk

The food industry has a lot on its plate these days.

Food Supply Chains in 2015: A Banquet of Risk

Product recalls, quality issues, tougher regulations, new industry standards, rising costs – they're all impacting food and beverage supply chains across the globe.

The recall issue, for one, appears to present something of a contradiction. Although the number of incidents is on the rise, overall food safety is improving, according to Keri Dawson, vice president of industry solutions and advisory services with MetricStream, a vendor of governance, risk and compliance software.

Last year, the U.S. Food and Drug Administration registered 253 food recalls in the first two quarters of the year alone. And there were hundreds more recalls, withdrawals and safety alerts throughout the year. They included multiple instances of expired or adulterated meat, as well as contamination by E. coli, salmonella and listeria.

Any one such incident can quickly become front-page news and make it appear as though food-supply chains are highly vulnerable. Indeed, says Dawson, many companies struggled last year to maintain adequate levels of quality and safety in their products.

But that state of affairs doesn’t necessarily reflect the bigger picture. Last year saw a lot of publicity around certain quality-related failures, “but when you actually look at the statistics, they suggest that food safety is actually improving in the supply chain,” says Dawson.

Or maybe it’s no contradiction at all. Perhaps it’s those very incidents that have prompted food producers to tighten up control over their goods. In addition, the rise of social media has heightened the industry’s profile. Twitter, Facebook and news feeds showing up on mobile phones have kept the issue squarely in the public eye. “Whether food companies like it or not,” says Dawson, “consumers are paying attention.”

So is the government. In 2015, U.S. regulators will be stepping up their oversight and inspection of food, Dawson says. Although federal budgets are continually constrained, states will likely be increasing expenditures and headcount to beef up enforcement.

There’s no question that the globalization of food supply chains has made them more susceptible to lapses in quality. Suppliers are reaching into all corners of the world to satisfy consumer demand for year-round availability of fresh produce, notes Dawson. As a result, it’s becoming more difficult to track food items through every link in the chain.

At the same time, the requirements for doing so are growing tougher. In early 2011, President Obama signed into law the Food Safety Modernization Act, which mandates a series of strict “prevention-based” controls across the supply chain. Food sellers are being called on to do a better job of tracing the origins of their products, right down to the individual ingredients. And FDA is stepping up inspections and enforcement to make sure that happens.

For their part, consumers are demanding more information about food items containing genetically modified organisms (GMOs), even if many of those products haven’t been shown to pose a health or safety issue. The same level of sensitivity applies to the use by food manufacturers of the “organic” label, which they are under increasing pressure to justify.

Industry has responded to consumer concerns by creating the Global Food Safety Initiative, under the auspices of the Consumer Goods Forum. Launched in 2000 in response to numerous incidents of food contamination, the GFSI incorporates a number of existing safety and quality schemes, with an eye toward crafting controls that reach across global supply chains.

The full implications of these initiatives by industry and government have yet to be felt. “It’s going to take a while for the tenets of it to shake out,” says Dawson, citing the phase-in of the U.S. Security and Exchange Commission’s new reporting rule on conflict minerals in manufactured products.

What’s certain is that industry must adopt a “culture of quality” that promotes a deep understanding by all employees of the health and safety issue. They must be incentivized to behave properly, even if that means shutting down a production line or disclosing details that could potentially harm a company’s short-term profits. “You can’t just measure productivity without also measuring the quality dimension,” says Dawson. “Otherwise, people are taking shortcuts, turning a blind eye and making poor decisions.”

Yet the bottom line can’t be ignored. Food producers today are grappling with rising prices, especially for beef, veal, pork and eggs. The pain is being felt by growers, manufacturers, retailers and, ultimately, the consumer.

You might think the plunge in oil prices would have triggered a corresponding dip in production and transportation expense. But higher minimum wages and the effects of a drought in the western U.S. have more than made up for lower fuel costs, according to Mickey North Rizza, vice president of strategic services with spend-analysis firm BravoSolution.

Consumers will feel the pinch, but food retailers can’t pass on the full amount of the increases. Mitigating strategies include modifying the length of purchasing contracts in line with expectations of future pricing trends, says Rizza. It’s the same kind of hedging practice that airlines and other carriers have adopted to guard against big price hikes in fuel. (They risk, of course, paying too much if the price goes down.)

Rizza says it’s essential for retailers to know exactly what they’re paying, and how that amount compares with the broader industry price index. They should be aware of the total cost of their products, including charges related to freight, inventory carrying and refrigeration. Even so, she says, the science of pricing and purchasing “is always a gamble.”

An even bigger gamble, though, is to cut corners on health, safety and quality controls. Each year, according to FDA, one in six Americans – about 48 million people – become ill, are hospitalized or even die from food-borne illnesses.

Food producers and retailers need to tackle the issues of risk and quality head on. “It’s a challenge that every organization faces,” says Dawson, “how to address what could be an infinite set of problems with a finite set of resources.”

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Product recalls, quality issues, tougher regulations, new industry standards, rising costs – they're all impacting food and beverage supply chains across the globe.

The recall issue, for one, appears to present something of a contradiction. Although the number of incidents is on the rise, overall food safety is improving, according to Keri Dawson, vice president of industry solutions and advisory services with MetricStream, a vendor of governance, risk and compliance software.

Last year, the U.S. Food and Drug Administration registered 253 food recalls in the first two quarters of the year alone. And there were hundreds more recalls, withdrawals and safety alerts throughout the year. They included multiple instances of expired or adulterated meat, as well as contamination by E. coli, salmonella and listeria.

Any one such incident can quickly become front-page news and make it appear as though food-supply chains are highly vulnerable. Indeed, says Dawson, many companies struggled last year to maintain adequate levels of quality and safety in their products.

But that state of affairs doesn’t necessarily reflect the bigger picture. Last year saw a lot of publicity around certain quality-related failures, “but when you actually look at the statistics, they suggest that food safety is actually improving in the supply chain,” says Dawson.

Or maybe it’s no contradiction at all. Perhaps it’s those very incidents that have prompted food producers to tighten up control over their goods. In addition, the rise of social media has heightened the industry’s profile. Twitter, Facebook and news feeds showing up on mobile phones have kept the issue squarely in the public eye. “Whether food companies like it or not,” says Dawson, “consumers are paying attention.”

So is the government. In 2015, U.S. regulators will be stepping up their oversight and inspection of food, Dawson says. Although federal budgets are continually constrained, states will likely be increasing expenditures and headcount to beef up enforcement.

There’s no question that the globalization of food supply chains has made them more susceptible to lapses in quality. Suppliers are reaching into all corners of the world to satisfy consumer demand for year-round availability of fresh produce, notes Dawson. As a result, it’s becoming more difficult to track food items through every link in the chain.

At the same time, the requirements for doing so are growing tougher. In early 2011, President Obama signed into law the Food Safety Modernization Act, which mandates a series of strict “prevention-based” controls across the supply chain. Food sellers are being called on to do a better job of tracing the origins of their products, right down to the individual ingredients. And FDA is stepping up inspections and enforcement to make sure that happens.

For their part, consumers are demanding more information about food items containing genetically modified organisms (GMOs), even if many of those products haven’t been shown to pose a health or safety issue. The same level of sensitivity applies to the use by food manufacturers of the “organic” label, which they are under increasing pressure to justify.

Industry has responded to consumer concerns by creating the Global Food Safety Initiative, under the auspices of the Consumer Goods Forum. Launched in 2000 in response to numerous incidents of food contamination, the GFSI incorporates a number of existing safety and quality schemes, with an eye toward crafting controls that reach across global supply chains.

The full implications of these initiatives by industry and government have yet to be felt. “It’s going to take a while for the tenets of it to shake out,” says Dawson, citing the phase-in of the U.S. Security and Exchange Commission’s new reporting rule on conflict minerals in manufactured products.

What’s certain is that industry must adopt a “culture of quality” that promotes a deep understanding by all employees of the health and safety issue. They must be incentivized to behave properly, even if that means shutting down a production line or disclosing details that could potentially harm a company’s short-term profits. “You can’t just measure productivity without also measuring the quality dimension,” says Dawson. “Otherwise, people are taking shortcuts, turning a blind eye and making poor decisions.”

Yet the bottom line can’t be ignored. Food producers today are grappling with rising prices, especially for beef, veal, pork and eggs. The pain is being felt by growers, manufacturers, retailers and, ultimately, the consumer.

You might think the plunge in oil prices would have triggered a corresponding dip in production and transportation expense. But higher minimum wages and the effects of a drought in the western U.S. have more than made up for lower fuel costs, according to Mickey North Rizza, vice president of strategic services with spend-analysis firm BravoSolution.

Consumers will feel the pinch, but food retailers can’t pass on the full amount of the increases. Mitigating strategies include modifying the length of purchasing contracts in line with expectations of future pricing trends, says Rizza. It’s the same kind of hedging practice that airlines and other carriers have adopted to guard against big price hikes in fuel. (They risk, of course, paying too much if the price goes down.)

Rizza says it’s essential for retailers to know exactly what they’re paying, and how that amount compares with the broader industry price index. They should be aware of the total cost of their products, including charges related to freight, inventory carrying and refrigeration. Even so, she says, the science of pricing and purchasing “is always a gamble.”

An even bigger gamble, though, is to cut corners on health, safety and quality controls. Each year, according to FDA, one in six Americans – about 48 million people – become ill, are hospitalized or even die from food-borne illnesses.

Food producers and retailers need to tackle the issues of risk and quality head on. “It’s a challenge that every organization faces,” says Dawson, “how to address what could be an infinite set of problems with a finite set of resources.”

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Food Supply Chains in 2015: A Banquet of Risk