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Chipotle’s Consumer Trust Crisis Enters a New Critical Phase

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In mid-December, Supply Chain Matters published our commentary: How Events Can Change in a Matter of Months- Time for Chipotle to Openly Demonstrate Resolve. In our posting, we outlined from a supply chain lens the crisis that Chipotle Mexican Grill was involved in after hundreds of consumers were sickened by a series of varying incidents ranging from E-coli outbreaks to norovirus that date back to last summer.   Chipotle logo

In our commentary, we declared what most consumers and general media have since concluded that Chipotle needed to rebuild trust in its brand and in its restaurant and supply chain food handling practices. We called for, among other actions, a temporary nationwide suspension of all outlets to perform top to bottom cleaning and rigorous employee training at each and every Chipotle outlet.

Yesterday, all Chipotle restaurants were closed for four hours during traditional lunchtime hours in order for all employees to participate in a company-wide meeting concerning food safety.

Thanks for listening.

According to reports, yesterday’s company-wide meeting included a briefing addressing the improved “farm to fork” food safety efforts that are being implemented, an announcement of paid sick leave to insure that sick employees stay home when they are ill, and a series of changes related to food preparation practices and protocols. There are a host of new protocols being implemented to include more preparation of food at central kitchens, DNA based testing of supply chain ingredients before being shipped to restaurants and new ways of marinating meats. In essence, Chipotle has little choice but to revert to a model of more centralized food supply chain control to restore trust and added food safety for the chain’s brand. Further announced was $10 million set aside to help smaller local farmers meet the restaurant chain’s new food safety standards and protocols.

The U.S. Centers for Disease Control (CDC) concluded its investigation of the recent nationwide E-coli outbreak last week without any conclusive findings.  That was not good for the restaurant chain since it leaves consumers with additional doubts. The Wall Street Journal recently reported that behind the scenes, Chipotle disagreed with health officials on the likely source of the infection.  While officials suspected some form of produce, Chipotle concluded it was imported Australian beef that must have been contaminated. But that does not fully explain the outbreaks not related to E-Coli infection.

The economic cost of Chipotle’s food crisis has also become far more visible. Sales at existing restaurants fell 14.6 percent in the fourth quarter while stock has fallen more than 25 percent in value since October. New costs incurred to mitigate food safety risks are yet to be totally quantified. This is yet more current day evidence that a supply chain focused disruption or snafu does and will directly affect both shareholder and brand value.

This crisis remains ongoing and Chipotle must now convince it’s once loyal customers that it serves safe food with integrity.

This author recently conducted an interview with Chloe Demrovsky, Executive Director at Disaster Recovery Institute International (DRI), a noted foremost authority on business continuity and risk management. Our interview generally touched upon a trend toward lack of consumer trust in food related supply chains which has been come about from a new resurgence of food, drug and other related product recalls or food safety incidents.  While discussing the implications of these trends on food supply chains, we could not avoid discussing the ongoing Chipotle situation.

Ms. Demrovsky stressed how important and difficult it can be to restore consumer trust in a brand once it has tainted by unfortunate incidents. She also reminded me of how important it is for businesses to have business continuity and supply chain disruption plans in-place before any crisis occurs. We both touched upon business media reports that are concluding that for the past few months, Chipotle has been playing defense, trying to respond to one report after another. Any organization, especially those associated with food, needs to be prepared as to how to respond, and how to protect consumers and the brand when a major snafu or incident occurs. In helping companies with business continuity planning, DRI advocates a thorough risk assessment that includes both internal and external dimensions, coupled with a business impact analysis as cause and effect impact.

Consumer trust is hard won, but also hard to get back when consumers believe that trust has been violated. Consulting firm Deloitte recently partnered with the Food Marketing Institute and the Grocery Manufacturers Association (GMA) on a recent survey of 5000 consumers nationwide regarding food buying decisions.  One of the stated conclusions of this survey was that consumers not only want toxin and pathogen-free food but also more transparency from food producers and retailers about food safety. Another stated finding of this survey was that consumers want accountability and transparency across the entire food supply chain. Other food safety concerns identified by respondents included clear information on ingredients and sourcing, clear and accurate labeling, added visibility to the nutritional content of food.

Chipotle management is now planning to launch an extensive nationwide marketing plan to convince consumers that Chipotle outlets will be the “safest restaurant to eat at” and that the chain’s goal is to reduce risk of another infection outbreak “as near zero as possible.” The Wall Street Journal recently disclosed (Paid subscription required) an interview with a former Chipotle operations executive. According to that executive, Chipotle’s stated mission of “food with integrity” was always the prime emphasis, and when translated to supplier management; “they’d never talk about food safety. It doesn’t mean it wasn’t checked, but the discussion was always about the story behind the supplier and keeping up with growth.

A director of the University of Georgia’s Center for Food Safety indicated to The Wall Street Journal that claiming the risk of another outbreak is near zero is: “really going out on a limb.”

We concur.

Supply chain risk mitigation is not a marketing exercise, it is rather a comprehensive plan addressing area of supply risk, internal process shortfalls or vulnerabilities, and action plans to resolve such risks.

We would instead offer one further recommendation to Chipotle. That would be weekly and monthly management updates on progress obtained in the mitigation of food safety risks both within each and every restaurant and within the supply chain. That is not marketing but rather management’s efforts to continually inform consumers as well as shareholders on what is being done and how progress is being measured and achieved. Restoring consumer trust in a badly damaged brand is not a marketing challenge. Now is the time for straight talk not marketing spin.

Bob Ferrari

© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Boeing Agrees to Pay Fine and Submit to Enhanced Quality Compliance Systems

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In what is being reported as a first-of-its kind settlement with U.S. federal regulators, Boeing has agreed to pay $12 million in penalties as part of a settlement mandating Boeing 737Max Linetighter oversight of suppliers and tighter quality controls inside its own production facilities.

This settlement resolves 13 pending or potential civil enforcement cases with the Federal Aviation Administration (FAA).  According to reports, the settlement subjects Boeing to as much as $24 million in additional penalties if manufacturing, auditing and regulatory reporting improvements are not implemented in the coming five years.

In its announcement, the FAA stressed the importance of internal corporate controls to insure that the design-to-manufacturing to maintenance processes are “operating according to the highest standards.” FAA Administrator Michael Huerta stated:

Compliance requires all certificate holders to develop and implement internal controls that ensure they’re operating according to the highest standards. “Boeing has agreed to implement improvements in its design, planning, production and maintenance planning processes, and has already implemented several of these improvements.”

Process areas cited for attention include, among others:

  • Improved management and accountability systems including a requirement that Boeing managers review regulatory compliance performance.
  • Improvement in internal audit processes across designated processes with audit teams reporting directly to Boeing’s Vice President of Quality.
  • Enhanced supplier management to determine whether incomplete work is being accepted.
  • Review and simplify at least 15 process specifications used to design, build, deliver and support Boeing products.
  • Report to the FAA at least on an annual basis on the effectiveness of Boeing’s regulatory compliance activities including a final comprehensive report after the fifth year of the agreement.

According to the FAA statement, prior issues involved installation of fuel tank flammability reduction equipment on Boeing 747 and 757 aircraft and insufficient corrective action after discovering that a supplier was providing incorrectly shaped fasteners. Details related to other specific enforcement matters were not released by the FAA.

Supply Chain Matters readers might recall that in March of 2014, after the FAA initiated a thorough formal joint review of Boeing’s 787 Dreamliner aircraft program, a subsequent report indicated that Boeing had placed too much reliance on suppliers for the overall quality of 787 components and systems.  It further stated that Boeing’s sometimes ambiguity in stating what was required of partners led suppliers to believe that they had met requirements.

Certain suppliers within Boeing’s supply chain will likely feel the effects of this new announced compliance agreement with the FAA. It comes as Boeing continues to ramp-up its production cadence for delivery of booked customer orders involving newly designed aircraft that stretch out over the enhanced conformance period.

This development is yet another reinforcement of the importance of effectively integrating product lifecycle management, manufacturing and quality management systems together in a continuous information and decision-making flow.


How Events Can Change in a Matter of Months- Time for Chipotle to Openly Demonstrate Resolve

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In a January 2015 Supply Chain Matters commentary, we praised Mexican food restaurant chain Chipotle for adherence to established food quality standards and taking decisive action when a regional supplier of pork was not adhering to humane animal standards. According to Chipotle at that time, a routine audit discovered that Chipotle logothis regional supplier violated declared humane-based standards for the housing of pigs with access to the outdoors.  The chain suspended its Carnitas menu offering in upwards of one-third of its 1700 establishments until a substitute supplier adhering to Chipotle quality standards could provide new supply.

At the time, business and general media were quick to feature headlines of this chain’s decisive action. The chain would stand behind its stated Mission as: Serving Food with Integrity. A spokesperson indicated to media outlets: “This is fundamentally an animal welfare decision, and is rooted in our unwillingness to compromise our standards where animal welfare is concerned.”

We at Supply Chain Matters  stated at the time: “One has to admire a company that is willing to adhere to its supply standards in spite of the consequences, especially in the light of the realities of mass food production and of Wall Street’s short-term focus on profits.”

Supply Chain Matters is not of this admiration at this time.

Most readers are probably now well aware, the restaurant chain is struggling with its worse crisis ever involving food safety and quality which has resulted in hundreds of sickened people who all ate at a Chipotle establishments across various U.S. states.

Initial reported incidents began in August when 80 customers and 13 employees were sickened as a result of eating at the company’s restaurant in Simi California. The illness was determined to be norovirus.

In October and November, upwards of 80 people took seriously ill after eating in establishments in Oregon and Washington State.  That was determined to be E.coli infection, a very  serious illness. Government agencies broadened the outbreak to include establishments in eight other U.S. states.

Earlier this month, upwards of 150 people were sickened after eating at Chipotle in Boston’s Brookline district.  That illness was confirmed as the presence of Norovirus, likely spread from a sick person serving food. The Wall Street Journal recently indicated that since July, there have been five outbreaks involving either norovirus, salmonella or E.coli illnesses.

Which each incident, Chipotle’s PR team attempted to place a positive spin to each incident assuring consumers of the chain’s concerns.

Chipotle itself was compelled to warn investors that the current episodes of illness outbreak could negatively impact its quarterly earnings by as much as eleven percent in the fourth quarter.  That was before the Boston incident, and the company’s stock has suffered free-fall with every announcement of a temporary closing of a restaurant. This is an obvious crisis of confidence from many dimensions.

Last week, the chain’s Founder, Chairman and Co-CEO Steve Ellis traveled to Boston and appeared on the nationally televised NBC News Today show to publically apologize to customers. That by our lens, was far too late in this ongoing crisis. That persona, presence and commitment to action would have been far more meaningful during the suspected E.coli incidents.

The firm’s web site includes a Commitment to Food Safety page. It states in-part:

In the wake of recent food safety-related incidents at a number of Chipotle restaurants, we have taken aggressive actions to implement pioneering food safety practices. We have carefully examined our operations—from the farms that produce our ingredients, to the partners that deliver them to our restaurants, to the cooking techniques used by our restaurant crews—and determined the steps necessary to make the food served at Chipotle as safe as possible.”

Directly concerning food supply, the statement goes on to declare:

To accomplish this goal, we have partnered with Seattle-based IEH Laboratories and Consulting Group, a preeminent food safety testing and consulting company. Led by company founder and CEO Dr. Mansour Samadpour, IEH is working directly with Chipotle’s Supply Chain and Operations departments to implement a set of industry-leading practices, including some changes to our previous protocols.”

Further outlined are actions related to food handling and preparation at restaurants, crew education and training and audits and assessments. In essence, Chipotle has decided to reverse a prior practice of preparing raw vegetables and produce at local restaurants. Instead, the chain will revert back to a centralized produce preparation process where washing, preparation and more sophisticated pathogen inspection will be performed, prior to shipping produce to local establishments. Stricter quality standards further imply that the chain’s mission to source locally grown produce will have to change since some local farmers will not be able to adhere to stricter and far more expensive standards.

These are all worthy actions but they in-aggregate will take weeks and months to fully take effect. Newly outlined food preparation and handling practices for local restaurants call into question why were these standards not originally adhered to in a restaurant chain that has a mission statement of high quality food with integrity. The revised audits and assessment section begs the question of frequency and resources dedicated to that effort. All the safeguards of the food supply chain can be neutered by improper food handling and lax supervision at the point of serving. In other words, food with integrity does not end at the receiving door.

What is fairly obvious is that Chipotle needs to rebuild trust and consumer confidence. That includes an admission that a locally sourced food supply chain that can meet strict and consistent quality standards will take time to implement, especially considering the nationwide size of this chain. The boldness and commitment displayed in January needs to be openly demonstrated NOW.

Why not a temporary nationwide suspension of all outlets to perform top to bottom cleaning and rigorous employee training at each and every Chipotle outlet?

What about a moratorium on the opening of any new restaurants until the existing and planned future food supply chain can meet stricter quality standards?

What about an objective  third-party firm being engaged to conduct audits and assessments in the first year of this program to assure consumers of added trust?

Inform all of your patrons, this author and his family included, where exactly Chipotle sources each of produce supply.

By our lens, Chipotle needs to get in front of this crisis and demonstrate to all consumers, this author included, that its mission is not to satisfy Wall Street and bottom-line short-term interests but rather to preserve its reputation as serving food with upmost quality and integrity. Fresh should not equate to expanded risk and expansion should not outpace the ability of the supply chain to meet high standards of food safety in fresh natural or organic food.

Bob Ferrari

 


Report Card for Supply Chain Matters 2015 Annual Predictions for Industry and Global Supply Chains- Part Five

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While industry supply chain teams wrap-up their various 2015 strategic, tactical, and operational line-of-business and supply chain focused performance objectives, we continue with our series of Supply Chain Matters postings looking back on our 2015 Predictions for Industry and Global Supply Chains that we published in December of 2014.  Supply Chain Matters Blog

Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008.  Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Thus, not only do we publish our annualized predictions, but every year in November, look-back and score the predictions that we published for the year.  After we conclude the self-rating process, we will then unveil our 2016 predictions for the upcoming year.

As has been our custom, our scoring process will be based on a four point scale.  Four will be the highest score, an indicator that we totally nailed the prediction.  One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.

In the initial posting of this Predictions Score Card series, we looked back at both Prediction One– global supply chain activity during the year, and Prediction Two– trends in overall commodity and supply chain inbound costs.

In our Part Two posting, we revisited Prediction Three– the momentum in U.S. and North America based production and supply chain activity, as well as Prediction Four– wide multi-industry interest in Internet of Things.

In our Part Three posting, we revisited our supply chain industry-specific predictions.

In Part Four, we revisited our prediction on smarter data and predictive analytics and our prediction of a turbulent year in global transportation.

In this final scorecard commentary, we revisit our final two predictions.

2015 Prediction Eight: Industry Supply Chains Step-up Efforts Towards Supply Chain Vertical Integration and Modular Platform Strategies

Self-Rating:  3.0 (Max Score 4.0)

Our prediction was a belief that industry or company specific vertical integration and modular product platform strategies would accelerate in 2015. Our reasoning was that as manufacturers pursue a need for more agile and flexible global manufacturing sourcing strategies, that modularity in product and supporting process platforms will become more prominent.  This strategy further supports needed flexibilities in geographical and individual customer fulfillment for various market channels. Such strategies have been well demonstrated in high-tech, consumer electronics and in automotive environments, and our prediction was that these efforts would expand both in these industries and in others as well.

Our belief was that vertical integration strategy shifts would impact contract manufacturing models in the latter-half of this year, and indeed there are signs of this occurring.  In a Supply Chain Matters commentary in late August, we provided evidence of a changing contract manufacturing model within the high-tech industry. CMS firms such as Foxconn and Flex are steadily executing vertical integration and product modularity strategies. Foxconn is believed to be finalizing plans for investing in a massive electronic display manufacturing facility in China that would serve display needs for smartphones, consumer electronics and other industry needs. The leading CMS is also involved in a number of other strategies that integrate the high tech component supply chain. Flex itself is remaking itself to be a leading manufacturer of Internet of Things (IoT) enabled connected products that feature common components. That strategy has provided Flex with entry into other industrial verticals including medical devices and home appliances.

In the automotive sector, Tier One suppliers such as Johnson Controls and others are actively pursuing strategies to be one-stop suppliers for major motor vehicle functionality such as safety systems, on-board electronics, or alternative energy propulsion and regenerative systems.

We believe that these are two meaningful examples of more vertical integration as well as common platform that will evolve across other industries as manufacturers continue to revisit their contracted arrangements with contract manufacturers, suppliers and owned manufacturing.  While the timing related to our prediction may arguably be challenged, the evidence of strategy remains.

 

2015 Prediction Ten: Service Supply Chains Garner Increased Attention and New Investment Interest.

Self-Rating:  3.8 (Max Score 4.0)

This final prediction was somewhat obvious as-well. The prediction was that because of two primary motivations, multiple equipment manufacturers and services providers will place added emphasis in evaluating their service focused supply chains. That included after-market business process services, parts, service delivery, supply and demand networks.

One motivation was the increasing incidents and broader occurrence of product recalls brought about by tighter global regulation. Manufacturers have no choice but to protect the brand and customer retention.  The most obvious example was reflective in the automotive industry where a massive volume of high-visibility product recalls remain even as we pen our scorecard.  GM’s faulty ignition switch and other component problems, the multiple ongoing vehicle recalls among multiple global brands involving defective Takata airbag inflators continue to stress service supply chains. Even Tesla is not immune, having just recently recalled its entire on-the-road vehicle fleet to repair faulty seat belt connectors. The unpredicted bombshell in 2015 was Volkswagen’s alleged tampering with emissions from its small and mid-range diesel engines that is currently providing major challenges to its brand.  Yet to play out is the timetable for how all of the current effected vehicles on-the-road will be repaired or retro-fitted. In commercial aerospace, a continued aging fleet of aircraft operating around the clock adds more exposure to timely service and parts needs.   Where airlines have discovered more cost-effective models for outsourcing service needs, service providers themselves, whether independent or OEM, continue to experience the need for investment in processes and systems.

The other driver we predicted was building interest in IoT and connected networks which present new business models where equipment serves as the demand signal for maintenance, repair or consumable parts. Throughout 2015, there was high interest in this area, and General Electric was again the benchmark for how money can be made with a connected equipment business model.  Moving into 2016, we anticipate that interest will turn toward more discernable deployment of integrated product and service platforms.

 

This concludes our series of looking back on 2015 to assess how our Supply Chain Matters Predictions fared.  Once again, we trust our readers were able to gain benefits from following our series.  Again, feel free to share your own observations regarding our predictions, along with other important key supply chain, procurement and B2B developments that were meaningful in 2015.

As we move toward the latter stages of December, keep your browser pointed to Supply Chain Matters as we will shift our attention toward unveiling our 2016 annual predictions for industry and global supply chains.

Bob Ferrari

©2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

 

 


The Building Realities of Transforming to More Organic and Sustainable Food Supply Chains

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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?

Bob Ferrari

 


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