Assessing and Managing Risk Becomes an Enterprise-wide Pursuit in Food and Beverage

Anticipating what can go wrong and devising systems that minimize threats to a business’ viability are the essence of risk management, and food companies have multiple options to accomplish that.

By Kevin T. Higgins, Managing Editor

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Innovation, sales growth, increased throughput -- there are many issues that stimulate thought and discussion in the food industry.

Then there’s risk management.

An essential part of the tool kit of military planners and financial managers, the identification and quantification of risk is gradually spreading to the day-to-day operations of North American food manufacturers. In a very real sense, the FDA's Food Safety Modernization Act codifies the assessment and management of the risks of contamination in human consumables and extends responsibility for checks, controls and verification throughout the organization.

While a wide range of employees is involved in monitoring safety risks, the broader need to identify and assess events that could upset operations remains a responsibility of top management. In a veiled reference to the existential poet D.H. Rumsfeld, Moss Adams LLP’s Shirley Komoto advises food processors to “push thinking beyond the ‘known knowns’ and improve the quality of thinking in your risk assessment.”

As senior manager in the public accounting firm’s Irvine, Calif., office, Komoto has orchestrated numerous enterprise-wide risk assessments for senior management and governing boards at middle-market food companies.

Essentially, the process entails four steps: identification, analysis, response and monitoring of risks and opportunities. Depending on an organization’s appetite for risk, the assessment can result in forceful action, as demonstrated by the food industry’s response to food safety risks, or no action at all, a known unknown response. “If you accept a risk, at least monitor it,” Komoto advises.

Heavy reliance on one supplier or one customer constitutes a risk, which is why publicly traded food companies routinely disclose their percentage of sales to Walmart. “It’s definitely included in the risk assessment of all my clients,” she says. “You can’t rely on them, you have to continue to find new customers who feel they are just as important to you as Walmart.”

A number of methods can be applied to the assessment process, from brainstorming to scenario analysis and the Delphi method, but it all begins at the top. “The longer you ruminate, the longer the list gets,” acknowledges Komoto, but that’s simply good due diligence.

Citing a Tyco report...the average U.S. food recall costs companies $10 million in direct costs.

– Ian Harrison, Lockton Cos. LLC

Spreading an identified risk is a growing trend, and food companies are beginning to follow the lead of the automotive industry when it comes to product recalls. If a $5 part triggers a recall for an engine, some automakers’ supply chain contracts stipulate that the parts supplier is liable for the gross cost, according to Ian Harrison, global practice leader for product recall and brand protection at Lockton Cos. LLC, a London-based insurance underwriter.

Liability policies rarely if ever cover those costs, and the claims can be staggering: Fonterra, a New Zealand  dairy supplier, faces a $270 million compensation claim from the Danone Group in France stemming from a 2013 recall that “turned out to be a false alarm,” Harrison told the American Society of Baking at March’s Bake-Tech 2014 conference in Chicago. The incident also resulted in a temporary ban on exports to six countries, including China, Fonterra’s largest customer.

Ingredient suppliers in particular face high risks in today’s business environment. Even the materials used by packaging firms are being scrutinized, as in the case of the March 4 recall of 12,000 cases of Plum Organics pouched baby food. The Campbell Soup Co. subsidiary ordered the recall after receiving 14 consumer complaints about frayed spout fitments that could pose a choking hazard.

U.S. retailers have shown restraint in imposing punitive financial penalties on private label suppliers, but that could change. Four retailers control 80 percent of the grocery market in the U.K., “and they have always been very protective of their own-label products,” observes Harrison. Cost-plus penalties for suppliers who produce foods that later are recalled has resulted in divestitures and loss of ownership of several food firms, he adds.

Citing a Tyco report, he says the average U.S. food recall costs companies $10 million in direct costs. With the number and scope of recalls increasing, those costs are trending upwards. Harrison has firsthand knowledge of seven recalls in Canada and the U.S. with losses totaling $30-130 million.

Litigation motivation

Iron-clad supplier contracts are an impetus for more rigorous risk assessments, but the threat of litigation may be a bigger one. While some risk specialists downplay the significance of isolated incidents of worker injury, others point to those events as an example of the trade-offs between prudent management and affordable actions.

Mike DeRosier is a machine safety specialist with AH&T Insurance (www.ahtins.com), Leesburg, Va., who reviews OEM equipment and validates its compliance with domestic and international standards. Workers compensation is basically no-fault insurance that shields an employer from liability claims by the injured party. That is beginning to change, however. In the meantime, OEMs rely on safety standard validation to demonstrate they were reasonably prudent when designing and installing guarding, according to DeRosier, director of safety in the manufacturing division of AH&T.

“There is no zero risk,” he emphasizes. “You can only reduce the potential to a tolerable risk.” Industry standards are essential guides for OEMs in drawing a line between what is feasible and prudent and steps that would increase prices to a noncompetitive level.

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