United Kingdom

Details

  • Service: Advisory, Risk Consulting
  • Type: Business and industry issue
  • Date: 15/02/2013

Food contamination: Responding to supply chain failure 

Cows in a field
The Food Standards Agency (FSA) recently ordered all food companies to test their beef products and report their findings by 15 February in the wake of what it has called “the horse meat issue”. There have so far been two reported cases of contaminated meat products found to contain a significant amount of horse meat, both of which have received significant press attention. Burgers stocked by a number of UK supermarket chains were recalled earlier this month, followed by a recall of lasagnes produced under several brandsthat in some cases contained up to 100% horse meat. The FSA has also ordered some companies to test its products for phenylbutazone, or ‘bute’, a veterinary anti-inflammatory drug which poses serious health risks to humans.

The importance of supply chain risk management

 

Following this news and the suggestion that the inclusion of horsemeat in some food products may have happened through gross negligence or deliberate contamination, Hitesh Patel, Forensic Partner at KPMG commented in the press:

 

“This situation offers a stark illustration of the risk of supply chain failure and should serve as a large wake up call for all organisations, not just those in the food sector. Regardless of whether horsemeat entered food products through criminal activity, fraud or mistaken contamination, this situation starkly illustrates the importance of robust counterparty due diligence for organisations in today’s market and poses some stark questions as to how far down the chain those procedures should go. 

 

“A drive to cut costs through the supply chain can have unintended consequences. The unfolding situation offers a clear warning to organisations that they have a duty to assure their supply chain for their end consumers. At a time when trust – from customers, regulators and government - is an important issue across many sectors, relinquishing control over suppliers can have considerable ramifications.”

 

Key considerations for the business

 

There are a number of key considerations for any company that finds itself at the centre of, or affected by, a contamination event.  These include:

 

  • Mitigating the loss of consumer confidence;
  • Crisis management and related PR management;
  • Product recall;
  • Assessment of the short to medium-term financial implications for both the company and its suppliers;
  • Management of stakeholders such as customers, regulators, bankers, shareholders and criminal authorities;
  • Redesigning the approach to supply chain risk management.

 

Formulating an appropriate and considered response is therefore paramount to meeting the challenges of a contamination event.

 

Responding to supply chain failure

 

Investigation of the event It is important to prepare the full facts of what happened, including:

  • why and when it happened;
  • who was involved and aware, or should have been so;
  • what controls were in place and how they were circumvented.

Of equal importance is establishing whether any other supplies or products could be contaminated?

 

Financial Restructuring 

Refinancing, administration and contingency plans should be constructed and implemented to support key suppliers while alternatives are sought.

 

For example, some suppliers may run out of cash quickly if customers withhold payments or they lose other customer contracts.  Suppliers relying on asset-backed lending facilities such factoring present increased risk as they may cause the triggering of covenant breaches and potentially fall into administration.

 

Quantification of Loss 

Quantify the loss not only of volume and value of recalled product lines but also future loss of profits due to the impact of the event.  There will be additional costs incurred during the recall such as transportation, goods destruction, advertising, and media spend; all of which will need to be captured also.

 

Due diligence and assessment of supply chain 

By stratifying and risk-rating suppliers for structured financial and non-financial due diligence risks can be pre-empted by looking through the supply chain.

 

Claims management

Establishing operations to capture sufficient documentary evidence and manage the claims process both from consumers and claims against counterparties under any insurance policies and contractual arrangements should be commenced as soon as possible.

 

Litigation readiness 

Prepare for litigation early by capturing, processing, analysing and managing relevant electronic data to support claims made or legal action taken by legal counsel.  This can help prepare informed defences as part of any litigation including regulatory, civil and criminal enquiries.

 

Prevention of future events 

The threat of future events can be mitigated by building a holistic capability with respect to the supply chain risk management system which should include security, food safety, traceability, compliance, integrity, efficiency and capability.

 

Return of products to market 

There will be additional costs incurred in returning these and other product lines to customers; the appropriateness of this expenditure should be assessed prior to embarking upon a new product strategy.

 

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Contact

Hitesh Patel

Hitesh Patel

KPMG in the UK

+44 (0) 20 7311 3571

hitesh.patel3@kpmg.co.uk

The Food Standards Agency