In January, Supply Chain Matters called reader attention to Chipotle Mexican Grill’s bold adherence to staunch standards for high quality, ethically based food ingredients served at its various restaurants. Chipotle boldly suspended the use of pork sourced from an unnamed regionally based pork supplier evoking broad media headlines. According to Chipotle, a routine audit discovered that the supplier violated declared humane-based standards for the housing of pigs with access to the outdoors. The restaurant chain, which was decisive in its decision to stop supply, indicated that this was the first time it had suspended supplies because of a violation of standards.
This week, the restaurant provider reported financial results for its third quarter that somewhat disappointed the investment community by indicating that future growth would be modest through next year, as opposed to the double-digit growth rates of quarters past. For its latest quarter, Chipotle’s same stores sales growth was a modest 2.6 percent, far below the nearly 20 percent growth rate of a year ago. The recent number further reflects across-the-board price increases on menu items.
Wall Street attributes this declining sales trend as a reflection of growing competition from competing outlets, the need for more workers, and problems securing inbound ingredients that meet the high standards of an ethically based supply chain.
In a prior April blog commentary, we observed that consumers are now, more than ever, interested in knowing where their food originated, the ingredients within food and how food is produced with sustainable methods. Well known producers, food service providers and suppliers such as Hershey, Nestle, MacDonald’s, Tyson Foods, Costco, Yum Brands and others have all embarked on initiatives directed at curbing the use of antibiotics in animals, artificial food coloring within food, and higher quality standards for suppliers. This week, sandwich chain Subway, the largest U.S. restaurant chain by number of outlets, joined this chorus, announcing plans to eliminate antibiotics use in all U.S. meat supplies over the next several years. In 2016, the chain will introduce turkey and chicken raised without antibiotics with plans to address antibiotic free pork and beef supplies down the road.
That commentary in April was triggered by a Wall Street Journal report indicating the increasing need among consumers for more organic foods is literally: “hampering the growth of one of the hottest categories of the U.S. food industry.” Farmers, dairies and ranchers face significant costs and risks in attempting to convert from conventional to organic farming or animal production techniques. “While organic produce or livestock can command prices as high as three to four times that of conventional food, farmers generally have to sell their food at conventional prices during the transition.”
Supply Chain Matters increasingly believes that as more food producers and restaurant chains require and transition to the use of such ethically sourced and organically grown foods, the time to transition the entire food supply chain will be a perplexing problem. Chains such as Chipotle who were pioneers in the sourcing of healthy food could well have their near-term growth plans constrained by the reality of constrained supply. There is a classic excess demand and restricted supply condition occurring as the supply chains attempt to transition from conventional to more organic and sustainable food supplies.
This condition will present added challenges for food sourcing and purchasing teams and buying cooperatives. Ranchers, farmers, poultry and meat producers require adequate time to transition to a more healthy food supply, and that comes with the need for the financial flexibility to fund such a transition. Providers who have practiced organic food standards since their inception understand this need, and took the time to work collaboratively and financially with food suppliers to build-up adequate supply through long-term buying commitments. With more and larger global players now demanding organic and antibiotic-free supply in far larger volumes, the demand and supply equation likely becomes chaotic without added collaboration, training, financial and buying incentives. Buying scale could cloud needs for stronger and more responsive supplier relationships.
The takeaway is that food purveyors cannot just buy or dictate their way into organic, more-healthy supply contracts. This will take time and it is rather important that providers, consumers and investors understand such realities, and develop the patience and understanding that the global food supply chain does not transform itself overnight.
We would appreciate hearing from readers residing in various tiers of existing food supply chains.
What are reasonable expectations for transition?
What added financial incentives are required?
Whom do you consider to be a leader in these efforts?
In our continuing efforts to provide broader market education, Supply Chain Matters provides broader awareness to advanced technology approaches that are making their way to industry settings. In this commentary, we focus on a rather unique software-centric approach to product authentication across various tiers of the finished product supply chain.
The challenges for overcoming fraudulent and counterfeit products that exist across the global supply chain remains significant. This is especially of-concern for manufacturers and/or distributors whose supply chains reside in a regulated industry or whose products are of high brand or product value. There have been many attempts to address such challenges, often resulting in added expense for marginal mitigation. Counterfeiters themselves have become far more sophisticated in their methods and in their presence.
Systech International, a long-established technology provider addressing brand protection needs, recently launched its UniSecure application. We were somewhat intrigued by this application and underlying technology and subsequently conducted a product briefing with Systech executives.
This provider has been in existence for decades, with a prior focus on manufacturing automation and vision systems that evolved into support for manufacturing item-level product serialization needs. Much of this support was focused in support of pharmaceutical, life sciences, and food and beverage manufacturers in their needs for unique product identification. Beyond these efforts, Systech began to recognize that counterfeiters have become far more sophisticated in their methods, and there was growing a need for a less infrastructure-intensive approach to supporting product authentication needs for products flowing across global supply chains.
Scientists recognized that every printed label or barcode has character and signature-unique characteristics that vary with the make and model of the specific printer at the time of printing. According to this vendor, no two labels or printed data carriers are identical and are affected by environmental factors that produce small-scale variations. The UniSecure approach is to capture these unique character elements of the printed identifier signature and store this in the Cloud, for future authentication in subsequent movements through the supply chain. Further along the supply chain, a mobile or smartphone based reader can read the existing barcode utilizing the UniScan mobile app, which sends the image to the Cloud for authentication to the original label signature to determine if that product is authentic. This unique scanning capability can also be utilized by clients to enable point-of-sale, consumer engagement or loyalty as well as product security focused processes.
Supply Chain Matters has previously highlighted newer smart labeling technology just coming to market that opens opportunities to address both supply chain authentication and consumer engagement processes by leveraging existing near-field cellular (NFC) and other internal Wi-Fi communication networks
Thus far, pilots involve scanning of products by wholesalers and distributors, but some customers have plans to deploy the technology further into fulfillment channels. We probed whether existing high-speed label readers could be leveraged for volume scanning but that seems to be a work-in-progress at this point, subject to customer and vendor investment needs.
A further promising use of this technology is described in product recall situations where products can be scanned to determine if specific products are subject to withdrawal from the supply chain.
Industry pilots of the UniSecure technology are underway across multiple industry verticals to including pharmaceutical, animal health, precious metals and consumer goods focused supply chain settings.
UniSecure is a unique approach, one that bears watching for broader deployment use cases and overall scalability. The uniqueness stems from its software-centric emphasis along with its leveraging of existing item-level identification processes across the supply chain.
When it comes to certain cases related to food safety, the wheels of justice turn mighty slow. But recently, the judicial system has sent a powerful and far-reaching message to the food and other consumer products focused industry and to their respective supply chain partners.
In early 2009, there was an incident involving a salmonella outbreak linked to peanuts and peanut butter products distributed by Peanut Corporation of America (PCA). That salmonella outbreak sickened over 700 people and led to the liquidation of PCA.
Four former executives of PCA and a related company faced criminal charges for covering up information that peanut butter produced was contaminated with salmonella bacteria. The 76 count indictment included charges of conspiracy, mail and wire fraud, obstruction of justice, among others related to distributing adulterated or misbranded food. Federal officials alleged that certain executives at PCA were aware of salmonella testing results, failed to alert consumers, and lied about test results to inspectors from the U.S. Food and Drug Administration (FDA).
This week, a U.S. District Court judge sentenced two former plant managers at the PCA Georgia peanut processing plant identified in the 2009 incident to six year and three year prison sentences. Both would have probably faced higher sentences if they had faced trial and not pleaded guilty. Both made deals with prosecutors to testify against Stewart Parnell, the owner of PCA. The Georgia plant’s quality control manager received a five year prison sentence.
Last week, Parnell was sentenced to 28 years in prison after being found guilty on 67 criminal counts. Some noted that the Parnell sentence was too harsh, especially in the light of convictions in similar salmonella related cases.
According to a published AP report syndicated on Manufacturing.net:
“Investigators discovered the Georgia plant had a leaky roof, roaches and evidence of rodents, all ingredients for brewing salmonella. They also uncovered emails and records showing food confirmed by lab tests to contain salmonella was shipped to customers anyway. Other batches were never tested at all, but got shipped with fake lab records stating that salmonella screenings turned out negative.”
Once more, tainted peanut products were shipped up the supply chain to other producers who used them to make snack crackers and other products.
Parnell’s attorneys blamed the scheming on the two former plant mangers. They argued Parnell, who ran the business from his home, was a poor manager who failed to keep up with his employees’ actions.
It may indeed seem that the wheels of justice do turn slow, six years in this case. But a strong and powerful message has been administered, one that will reverberate across food and consumer goods supply chains. Food safety is paramount and knowingly and willingly supporting or advocating the shipment of tainted food or improper quality monitoring processes will have a consequence, one that has taken on even more meaning.
There is an expression that is often cited in business and military situations: “We are so, so screwed”
That expression likely describes current conversations among the halls and facilities of Volkswagen.
The U.S. Justice Department has begun a wide ranging investigation into alleged use of software installed in nearly a half-million diesel powered cars that make these vehicles appear to have cleaner air emissions than they actually do in operation. The auto producer has now acknowledged that the vehicle software installed in some U.S. diesel powered passenger cars make it appear that the vehicles conform to U.S. emissions standards.
According to various media reports, the German automaker could be subject to fines and penalties amount to $18 billion. That of course, does not include the costs involved in mitigating and correcting the problem of non-conforming vehicles currently being driven by U.S. consumers.’
The Wall Street Journal reports that Volkswagen stock has declined nearly 35 percent since Friday, when word began to spread that the U.S. Environmental Protection Agency (EPA) would accuse the company of cheating. The publication is further reporting this evening that CEO Martin Winterkorn is literally fighting for his job. Today, Volkswagen indicated that it would take a $7.2 billion charge to earnings and cut its full-year outlook, with an indication that as much as 11 million vehicles could be affected by this development.
While business media continues to dive into the implications and consequences to Volkswagen, this blog commentary briefly dwells on the implications from our product design and supply chain management lens.
First and foremost, Volkswagen has the risk of losing the trust and loyalty of its U.S. and global customers if this crisis is not proactively managed. Thus far, it seems that Volkswagen senior management has been candid and forthcoming in issuing a public apology for violating consumer trust. That cannot be said about other automakers recently involved in government investigations alleging wrongdoing.
Beyond words, the automaker has to now expediciously develop a set of action plans to address several supply chain challenges. One relates to a growing inventory of unsold diesel cars that now have their U.S. sales suspended. The auto maker has made great strides in overcoming prior U.S. consumer pre-conceived impressions that diesel powered cars were noisy and dirty. About a year ago, this author test drove a new diesel powered Passat and I was impressed. Now, all of that market education effort could be compromised if proactive management of this crisis does not occur.
Another challenge relates to all of the sold vehicles currently in-service, that are probably now deemed as violating air emissions standards. Both a mechanical and software fix, if one can be economically developed, must be engineered and expeditiously deployed.
In past cases involving vehicles that do not meet air emissions standards, U.S. regulators have either ordered them off the roads or imposed stiff daily fines. The clock is now ticking.
It is no secret that Volkswagen has struggled with its vehicle line-up for the U.S. market. As noted, the U.S. designed Passat is an impressive vehicle but has failed to capture wider interest among buyers. Competitive models are laden with more on-board electronics and entertainment features. The automaker has further lacked any competitive mid-sized SUV model which is essential for competing in the U.S. market. In 2014, the automaker committed to produce a competitive 7 passenger SUV model by 2016 along with a $600 million investment in a new vehicle design research center. The design included fuel-efficient diesel powered models.
The coming weeks and months promise to provide Volkswagen with a leadership and response crisis with significant product development, product and service focused supply chain implications. These are significant challenges requiring proactive actions.
Similar to past consumer trust incidents involving Toyota and sudden unintended acceleration, we all get to observe and learn how a global automotive leader responds to brand, product design and consequent supply chain response crisis.
Roughly four months after Blue Bell Creameries voluntarily recalled most of its ice cream and frozen yogurt products and suspended operations after listeria outbreak concerns, the Texas based producer has now resumed selling and distributing its products in select locations.
In April, Blue Bell widened a series of voluntary recalls to now involving all of its branded ice cream, frozen yogurt, sherbet and frozen snacks branded products distributed among 23 states and various international locations. The recall was prompted after samples of Blue Bell Ice Cream chocolate chip cookie dough ice cream tested positive for the potentially deadly disease, listeria. The illness was tracked by health officials to a Blue Bell production line in Texas, and later to another production line in Oklahoma. Three deaths were linked to the outbreak.
Production plants in Alabama, Oklahoma and Texas have since undergone extensive cleaning and decontamination under regulatory oversight. Alabama Public health officials gave Blue Bell the OK to resume production and sale of ice cream manufactured at its Alabama plant in early August.
At the time of the voluntary recall, Blue Bell took relatively swift action by actively removing products from retailers and other food service facilities it served. A statement from Blue Bell’s CEO Paul Kruse apologized to consumers along with a firm commitment to fix the problem.
Today’s visit to the Blue Bell web site features a prominent commitment to consumers for producing safe, high quality, great tasting ice cream as well a statement related to upgrading of procedures and employee training. Blue Bell notes that it continues to retain an independent microbiology expert for ongoing evaluation and has implemented a “test and hold” process where production runs are tested and held until results are received before distribution to markets.
The company remains very active on Twitter and Facebook, thanking consumers for their patience and providing updates as to which flavors of ice creams are currently available and in which states.
However, the cost of this recall, as has been the case with many other product recalls, remains troublesome. Four months of limited revenues can do that.
In July, Blue Bell management reached out to a prominent Texas billionaire investor for an added infusion of cash. That investment was reported as “significant” and came with a partnership arrangement with the company.
Hopefully, with new processes, training and revamped production facilities, consumers can look forward to enjoying a popular brand of ice cream.
This week brought significant and perhaps troubling news to food and consumer product goods producers and their respective suppliers distributing products throughout the U.S.. Business headlines noted that a ConAgra Foods business unit agreed to plead guilty to a federal misdemeanor charge and pay an $11.2 million fine in conjunction with 2006-2007 salmonella outbreak involving the firm’s Peter Pan and Great Value branded peanut butter products.
At the time, the salmonella outbreak occurred across 47 states and sickened a reported 700 people. The outbreak was eventually traced to a manufacturing facility in the state of Georgia. As part of this week’s plea agreement, ConAgra admitted it had been aware of some risk of contamination prior to its voluntary recall. After this outbreak, ConAgra subsequently made was is reported to be significant upgrades to its manufacturing facility along with instituting advanced safety protocols.
This news is significant for this industry in a couple of rather important dimensions. This week’s fine, although meager by today’s liability standards, is noted as the largest fine levied to-date in a food safety case. Once more, over these past months, federal authorities are now demonstrating intent to hold both companies and their individual executives accountable for food safety. According to The Wall Street Journal, since 2013 the Justice Department has won convictions or guilty pleas involving four criminal cases against food companies or the executives that run them. The WSJ notes that in most of the recent cases, successful prosecution occurred even without proof that officials acted with criminal intent, which was a difficult hurdle for investigators to previously overcome. The significant nuance of holding executives accountable without proofing criminal intent has reportedly jolted the food industry, given its broad implications. That implies that executives are now legally accountable for food safety, and that might be interpreted to include senior supply chain executives. Certainly, we are not lawyers, and industry supply chain leaders are advised to seek out specific opinion from in-house legal counsel.
Food companies are now stepping-up efforts to improve food safety including investments in new technologies to monitor any signs of contamination or erosion in quality and to speed-up data analysis. That, in reality, may be good. However, it opens the doors to added sensitivities as to when manufacturers should recall food products, and the types or levels of internal documentation required as proof of proactive response to suspected contamination and/or disease. The industry may well experience an increased rate of recall actions out of abundance of caution, as these new nuances are more fully understood.
The takeaway for consumers is hopefully safer food products in the coming months. For supply chain management teams, the implication is added cautions and increased scrutiny of individual production, storage and distribution practices related to food production. Any notion that assuring proactive food safety practices is not my job is now null and void. Food safety is every executive’s and every employee’s concern.