Todd Southerland: Many of the issues are the result of an increasingly complex and global food supply chain. As consolidation and the level of integration among growers, manufacturers, and distributors has increased, food products (and the ingredients associated with them) are being supplied to a much larger base of consumers and end markets. When a food safety issue arises, it tends to be more far reaching than the ones we experienced decades ago.

Consumer tastes and preferences are also evolving and have become more distinguished. In an attempt to differentiate their offerings, many food companies are sourcing products and ingredients more broadly. This may include non-traditional ingredients used for flavor profiles or foreign-grown items that contribute to the more robust culinary experiences that many consumers are demanding. All of this has the effect of broadening our food supply but at the same time, exposing American culture to new origins of risk.

Significant advancements in technology are enabling companies to improve the level of oversight employed throughout the supply chain. Many of these technologies have been developed or are employed for the purpose of increasing the efficiency of businesses; they can relate to inventory controls, costing practices, purchasing and sales decisions, shipping routes, or any number of operational factors that can be improved through the availability of data and analytics, which in turn drives additional profitability. However, many of these technologies can also improve food safety protocols through advancements in traceability, monitoring, and testing. These benefits are vital to the success of food businesses, but they don’t always produce incremental revenues or profits; rather, they often result in added costs. The challenge for many food companies is how to bridge the gap between the two so that they achieve operational benefits from the costs that are being absorbed to institute these added requirements for food safety oversight.

LP: How should businesses prepare for product recalls and other food safety issues, especially from a financial or budgeting perspective?

TS: Many companies view the money that is being invested in food safety programs as risk mitigation, which is generally appropriate. But many of the technologies and tools that can be employed for food safety purposes can also be very powerful in improving operational decisions and working capital management. I always encourage companies to embrace the benefits of these tools and the powerful nature of the information associated with having an increased level of visibility into the supply chain. The money that companies invest to improve food safety practices does not have to be a sunk cost, and I am continually amazed at the ways in which businesses are utilizing these tools to be more efficient. 

In a similar fashion, the employment of heightened food safety protocols can and should be used as a marketing platform. Consumers care about how their food is grown, raised, processed, handled and stored. A company’s awareness around food safety can differentiate its products in the marketplace.  The use of traceability standards has been particularly impactful over the last few years; for example, some dairy companies display the farm from which fluid milk was sourced on the side of each milk carton.

From a financial perspective, I encourage all companies to seek guidance on risks that are insurable, but the cost/benefit analysis is always the key because many policies can be exorbitantly expensive. For risks that can be insured, it is critical to review the policy language to understand what events are covered or excluded. The cause of an event can be a determining factor in coverage decisions within a policy, and it’s important to understand whether you are insuring against controllable or manageable risks.  

Absent the ability or decision to insure certain risks, businesses should spend time developing business continuity plans in an attempt to quantify the financial impact one could have on the business. Only when those impacts are quantified can a business understand the balance sheet implications and whether it is adequately prepared to absorb them. We perform this type of consultative work on a routine basis not only to protect our interests as a lender, but also to help companies develop strategies to mitigate these risks.

LP: What best practices do you recommend for businesses? 

TS: The best risk management technique ahead of a food safety event is preparedness. Most companies train employees on the steps that should be taken in the event that a problem occurs, but two additional steps are often overlooked: (1) be sure that each employee understands why he or she is performing a task and how it contributes to the broader effort of the team; and (2) practice your emergency responses through mock situations that simulate real world possibilities. These steps can materially contribute to workforce engagement and successful outcomes in situations where small failures can have sizable consequences.

LP: Why is traceability often done more efficiently from smaller companies, and how can larger companies learn from this?

TS: The simple answer is that smaller companies tend to have smaller supply bases and/or fewer products to track, which by nature is an easier task to manage. But there are three other factors that I observe to varying degrees and across different sectors of the food industry that I find compelling, as follows:

1. In an attempt to compete with larger peers or to differentiate product offerings, smaller companies have a tendency to better leverage their traceability and sourcing capabilities through marketing and advertising. This often drives consumer interest and appeal, which commonly results in premium selling prices due to perceived quality advantages. Quite simply, smaller companies have embraced the benefits of traceability standards and found ways to use them to their advantage.
2. Smaller companies are not burdened by age-old practices or systems that are oftentimes obsolete; further, smaller companies can deploy modern technology across a smaller footprint or scale at a reasonable cost and without disrupting an entire supply chain.
3. Smaller companies don’t have the same margin for error that larger companies enjoy due to the relative strength of their balance sheet. Small companies tend to be keenly focused on controlling these risks and preparing for a negative event because it could risk insolvency. Larger companies have more resources, financial or otherwise, to absorb a similar event, so the consequences are less dire.