This morning, I'd like to welcome Ariba's Jason Wolf and Kris Colby to Spend Matters. They've written a great -- albeit long -- post on a curious issue that even non restaurant / CPG companies will enjoy reading. This is the first in a two-part series.
Proactive Spend Management Techniques to Reduce the Risk of a Public Relations Nightmare for your Company
The Morning Paper
Except for a great earnings report or a blockbuster new product, restaurants, supermarkets and other companies in the food industry would prefer to stay out of the news. Perhaps the worst headline for a supermarket, restaurant or food service company is a food safety scare.
The Centers for Disease Control estimates that food-borne disease kills 5,000 Americans per year and puts 325,000 in the hospital. While most of the illness can be traced to meat products, changes in the production and distribution of fresh vegetables (especially centralization and larger production facilities) have led to increases in illness as well. In recent years, some of the biggest names in the food service industry have been the victims of food safety issues that have spiraled into crises on a national scale, including:
- Jack-in-the-Box (1993) -- E. Coli outbreak in ground beef causes 2 deaths and hundreds of illnesses; source of outbreak traced to supplier; 35 percent sales decline; and a stock price drop from nearly $10 to under $4 per share
- Chi-Chi's (1993) -- 4 deaths and hundreds of illnesses from a Hepatitis outbreak; source of outbreak traced to supplier (but never proven); more than 300 lawsuits and tens of millions of dollars in settlements and legal fees; ultimately, the company went bankrupt and was liquidated
- Taco Bell (November 2006) -- E. Coli outbreak in lettuce; source of outbreak traced to supply base; $1.3 billion (8% of total) market capitalization loss for parent YUM! Brands despite the fact that Taco Bell represents less than 20 percent of total YUM sales
- Bagged Spinach (September 2006) -- E. Coli outbreak sickens more than 200 people; source of outbreak traced to supplier; nearly all bagged spinach nationally pulled from supermarket shelves and destroyed; full recovery for sales expected to take a minimum of six months
The costs associated with such events are enormous and can have a significant long-term negative impact. A food safety scare can not only hurt current financial performance through reduced sales and product disposal losses, but long-term results due to litigation and remedial measure costs. Additionally, food safety scares can increase political pressure for heightened regulation, driving up retailer and supplier costs. Perhaps most importantly, these incidents can harm standing with customers and damage brand names -- and the cost of this can't be calculated.
Given how much effort and resources companies invest in building brands, they must be protected at any cost. And believe it or not, procurement can play a critical role in this. With the right spend management solutions and strategy, procurement can lead the charge in reducing the risk of food safety incidents and minimizing any negative impact should a crisis occur. How you ask?
Start with Suppliers By carefully selecting suppliers and setting clear and enforceable expectations about performance and compliance, you can significantly reduce your company’s exposure. And use of a structured strategic sourcing process, appropriate questioning and testing during the RFx period, and the right tools to communication with and evaluate suppliers will only enhance your results. Already have systems in place for supplier selection and sourcing? Consider adding the following steps:
- Include detailed questions about food safety practices and certifications in the RFI
- Include food safety expectations in official documented vendor selection criteria to potential suppliers
- Provide a consistent and structured process via an online system for collecting supplier responses to all RFx's
- Allow for multi-variant bidding during an online event so that bidders can provide bids on other factors as well as price
- Develop and implement scoring mechanisms for supplier selection that include food safety attributes. For example, award decision criteria could be driven 40% by price, 20% by service, 25% by food safety compliance and 15% by quality metrics
- Set the expectation early on product testing, site inspections and certificate renewals before or after event award
- Include product warranty clauses in the RFI, RFP and final agreements
- Educate potential suppliers about the exact systems and processes that will be used to judge ongoing performance once selected as a vendor for your company (e.g. scorecarding)
Spend Matters would like to thank Ariba's Jason Wolf and Kris Colby for contributing their thoughts. Come back tomorrow afternoon as they conclude their series with additional practical tips for staying out trouble.