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Traceability: Supply Chain Blind Spots Carry High Costs

Mon, 04/26/2010 - 4:47am
George Young, Founding Partner, Kalypso

Food safety issues are increasingly front-page news as consumers over the last several years have read about food contamination crises such as ground beef, spinach, peanuts, and cookie dough. Each incident poses a safety issue for consumers and a high cost in both dollars and brand reputation for food and beverage (F&B) manufacturers. Take for instance the peanut butter salmonella outbreak in 2009. It killed eight people and sparked one of the largest food recalls in history, costing the F&B industry more than $1 billion.

It’s no surprise then that only 49 percent of Americans are confident in the safety of the U.S. food supply, according to a recent study by the International Food Information Council Foundation. Because consumers are more compelled than ever to ask, “Is what I’m eating safe?” food safety is arguably the most critical of the four demands of the new consumer reality that F&B manufacturers must meet.

Good intentions are not enough to promote food safety, government compliance, and consumer trust. F&B companies must implement a formal traceability system to limit liability.  Here is a closer look at the food safety challenges driving the demand for traceability.

Complexity Hinders Visibility

Supply chain complexity presents the number one hurdle to avoiding and containing food quality breaches. Statistics reveal that the average company has 3,200 unique items, and, notably, small to mid-sized companies ($1-$20 billion in revenue) have 30 percent more items than larger companies with a lower likelihood of automation (1).  And 33 percent of consumer products are co-packed or outsourced to third-party manufacturers, where over 50 percent of the ingredients are purchased directly by the contract manufacturer for the brand owner (2).

Today, many F&B manufacturers lack a system that enables rapid traceability from the formula and packaging ingredient statement through to their own plants to identify the source of the contamination. However, manufacturers are increasingly interested in enhancing their visibility with traceability to determine the impact of proposed regulations on existing products, evaluate substitute ingredients, and improve formulation.

In the upcoming years, traceability throughout the extended supply chain is an almost certain regulatory reality. Furthermore, with the continued growth of global supply chains, complexity is only going to increase. To head off source contamination issues, guarantee the use of suppliers, rapidly respond to issues, and determine regulatory impact, F&B companies must implement an internal system for automating product traceability.

Rapid Response is Required

F&B manufacturers need to respond rapidly to food contamination issues in order to control and resolve them, or else the problem can grow exponentially. Consider the March 2009 recall of a salmonella-tainted pistachio nut lot. A distributor didn’t realize it had received the contaminated lot that had been recalled by the FDA, so it repackaged the nuts and launched them back into the food chain. The error forced the FDA to expand the initial recall to include more than 660 products and millions of pounds of pistachios.

How quickly manufacturers can resolve product contamination is determined by their ability to trace back through the supply chain to identify and isolate each ingredient, such as the contaminated pistachios. Some manufacturers have improved their supply chain governance—through for example, the implementation of consistent sets of standards and terminology for batch control and the interface between enterprise and control systems. However, most F&B companies struggle to automate the systems that manage product data from the formula or recipe development stage through manufacturing and out to their raw material suppliers.

A key enabler to ingredient traceability is the adoption of ISO standards like ANSI/ISA S88 and S95, which drive safety and compliance through the automation of data collection and exchange between different parts of the supply chain. Because these standards provide both suppliers and manufacturers with consistent terminology for production and batch control processes, they create the necessary foundation and a consistent model to bridge their “information worlds.”

Closing Visibility Gaps Has Clear ROI

The costs related to recalls are ugly; the average one carries a $20 million price tag, and 14 percent of companies have write-offs in excess of $50 million. Beyond the material expense is the equally damaging cost in lost consumer confidence. Consumers want to purchase and use products with confidence, and they expect manufacturers to demonstrate complete control of their supply chains. When companies fail to quickly resolve product recalls, consumer confidence is shattered and enormous harm is caused to brand equity and a company’s reputation.

Clearly recalls hurt F&B companies that have received contaminated ingredients. However, they often affect a lot of “innocent bystanders” as well. Those bystanders may be manufacturers who don’t have the systems in place to verify that their food sources aren’t contaminated. Innocent bystanders also are brands deemed “guilty by association.” For example, peanut butter sales dropped 13 percent across the board even for brands that were able to guarantee that their products were safe. When a category has a recall, AMR Research observes that 57 percent of consumers reconsider buying the affected product for at least a year.

Traceability is critical then because it empowers manufacturers to confirm which products are—and are not—contaminated. This can significantly mitigate consumer concern, protect brand value, and eliminate the need to dispose of millions of dollars in safe food items.

F&B companies that have not yet implemented systems to support traceability, such as product lifecycle management (PLM), should consider adoption now. These systems significantly facilitate timely compliance with government regulatory and reporting requirements and the ability to address consumer concerns with concrete facts. Moreover, with a range of PLM solutions available for small to medium companies, F&B manufacturers of all sizes have an affordable means for ensuring consumer safety, brand protection, and consumer confidence.

Last month: Collaborative Innovation: How To Partner For Profit With Retailers

Next month: How PLM systems support traceability with the product data record and the functionality to consider in evaluating PLM solutions.

Sources:
(1) Cecere, Lora (2009 May 22). The ABCs of Packaging Don’t Add Up for Value. AMR Research.
(2) Cecere, Lora (2009 April 29). Going Bananas. AMR Research.

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