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Reducing Risk, Fortifying Supply Chains to Counteract the Crippling Effect of Food Recalls

To mitigate the risks associated with food recalls, the food industry needs to approach sourcing holistically and implement four important best practices.

Food recalls have doubled since 2002, wreaking havoc for many food industry businesses around the world.

Nestle India recently reported its first quarterly loss in 15 years after having to recall its popular Maggi noodles following tests that showed excess lead. Both Wal-Mart and Kroger are pulling cilantro sourced from Mexico off their shelves after an investigation linked the herb to annual outbreaks of cyclosporiasis caused by highly unsanitary working conditions. And those selling chicken and beef certainly aren’t immune to this havoc, with many products subject to recall due to salmonella.

The culprits: A slew of regulatory changes and the nature of the globalized food supply chain.

Today, products are manufactured and distributed globally, creating major challenges for regulatory agencies, manufacturers and retailers everywhere. Regulatory agencies are struggling with bringing countries up to speed on acceptable food safety standards. Manufacturers are tasked with ensuring their raw ingredients, often sourced from the other side of the world, reach their facilities void of contamination, and retailers are trying to keep up with consumer demands for food transparency by implementing better quality controls throughout their supply chains.

In addition, a globalized supply chain introduces far greater exposure to pathogens, foreign materials, allergens, and contamination, putting lives at risk, and the future of the food industry businesses involved in jeopardy. Ensuring the highest level of food safety — while extremely challenging — has never been more important, and calls for deeper supply chain traceability across the board.

The financial impact of just one mistake — the mislabeling of packaging, exposure to contamination — resulting in a recall can cost a food manufacturer millions of dollars, and their reputation. In fact, 52% of all food recalls cost the affected U.S. companies more than $10 million each, with additional potential losses up to more than $100 million.

To mitigate the risks associated with food recalls, the food industry needs to approach sourcing holistically and implement four important best practices.

1. Ask the right questions.

Knowing the ins and outs of all suppliers — including the second and third tier — and asking questions beyond those pertaining to strictly cost at the outset of the relationship is crucial. Risk should be one of the first factors sourcing professionals consider when evaluating a supplier – and the discussion needs to happen way before the contract is signed.

Knowing the locations of suppliers’ manufacturing plants and understanding where ingredients are actually produced will help predict risky situations before they occur, and mitigate challenges down the road.

Sourcing teams should ask questions around suppliers’ safety policies, plan of action in the event of a crisis and chain of command structures, so they have an idea of the potential impact a disruption could have on the supply base and how long it will take to recover.  

2. Conduct more audits.

Routinely visiting supplier facilities — announced or unannounced — to inspect the premises and production process ensures quality standards and contract terms are being met. By interacting with suppliers in the field, sourcing teams can identify exposure to risks and work with them in real time to mitigate problems before they turn into a disruption. If suppliers know they are going to be held accountable for meeting quality assurance and contract specifications, they’ll be more likely to deliver on their promises.

3. Strengthen supplier networks.

Suppliers are an important component of sourcing strategy and planning and can contribute to a company’s competitive edge in the event of a crisis. Only having one to two supplier relationships in a particular category is risky. If the supplier’s products are exposed to a pathogen and a recall is issued, sourcing teams will be scrambling to find another source of supply at the last minute, leaving themselves vulnerable to undesirable terms.

For example, grocers and restaurants should have multiple fresh fruit suppliers — one in California, one in Florida, and a backup elsewhere, to hedge against the impact of a recall — or natural disaster -- hitting one particular area.

It’s also important to cultivate long-lasting and meaningful relationships with strategic suppliers. A mutually beneficial relationship can mitigate overall risk, not only by reducing the likelihood of contract violations, but when a crisis arises and supplies are low, suppliers will be more apt to provide an appropriate substitute or give you preference, if possible.

4. Partner with external experts.

Successful risk mitigation requires deep category expertise, expansive supplier relationships and smart sourcing practices. In many cases, partnering with a team of outside sourcing experts can help augment the internal sourcing team and build out these sourcing strategies from beginning to end, giving procurement teams the extra support they need to both reduce and monitor risky situations effectively.

Every food industry business faces recall-related risks. By implementing these tried-and-true sourcing strategies and partnering with external sourcing experts, companies and manufacturers in the food industry can significantly reduce the risks and impact these disruptions can have on their supply base, bottom-line and brand reputation.