Costly Lessons for Supply Chains

Posted by Ian Harrison on February 15, 2012 under Product Recall, Risk Management | Be the First to Comment

The risk management community is learning painful and costly lessons about the impact of damage to supply chains. The most visible impact has been from the Thai floods and Japanese quake on industrial manufacturers.

A less visible but equally damaging exposure exists in the unlikely area of food manufacturing. Before World War II, manufacturing was intensely local. But the demands of a global conflict brought new technology allowing far more intensive manufacturing and longer shelf-life (think Spam).

An unseen revolution during the past 10 years has seen a huge growth in the sophistication of supply chains for certain key ingredients (think melamine from China.)

The US has seen a number of ‘systemic’ food recalls where a critical and widely used ingredient has caused far wider recalls of food than is normal. Most recalls are derived from the last link in the manufacturing chain and so retailers can readily identify the small amount of affected batches using electronic point of sale technology and bar code labels.

In a systemic recall, a raw ingredient causes the whole supply chain to convulse. The FDA treats such incidents so seriously it has a section of its website devoted to ‘major recalls’. http://www.fda.gov/Safety/Recalls/MajorProductRecalls/default.htm

The latest of these may well be the case of Michael’s foods. http://www.fda.gov/Safety/Recalls/ucm289920.htm
Michaels is a dominant player in the supply of hard shelled eggs to the food service industry.

The incident is causing a cascade recall amongst the products using that raw ingredient. For example, all of Wegman’s deli products containing egg. http://www.fda.gov/Safety/Recalls/ucm290198.htm

For the specialist recall insurance community clustered in London this exposure is not unanticipated. Indeed many actively track aggregation issues for events such as these.

It does however create a greater financial exposure for these ingredient suppliers as both insurers and end manufacturers examine this exposure’’.