Reorganizing Food Safety & Quality Accounting - Key to Minimizing "Explosions"
Hydrolized vegetable protein, spices, instantized milk powders, peanuts and peanut products.
Hydrolized vegetable protein, spices, instantized milk powders, peanuts and peanut products. Who would have guessed that the most significant food safety problem for the U.S. food industry would be ingredients?
In most companies, the responsibility of safe, wholesome, high-quality foods falls to quality assurance and quality control departments. Unless senior management ingrains food safety and quality into the culture of food companies and makes it everyone’s responsibility, there is a higher risk of market withdrawals, recalls, loss of customers and lawsuits by consumers (check out my article in the April issue). Creating and maintaining a food safety culture, including fostering behavior changes by production employees, requires an investment of company resources. However, senior management is under constant pressure to continually decrease expense, including expenditures for food safety and quality programs.
How can the dilemma of these two powerful “currents” flowing in opposite directions be resolved?
One approach is to use concepts like “lean manufacturing” to drive out unnecessary operational expenses that do not have a positive impact on the company’s bottom line. Unfortunately, such an approach can go too far as demonstrated by a certain oil company’s refinery and off-shore drilling operations, both of which exploded within the last five years. No one in the food business wants our “refineries and oil rigs” - plants and products - to “explode.” Yet we see evidence of this almost every week, with food industry “explosions” - market withdrawals, recalls, consumer illness and lawsuits. Fortunately for dairy companies, risk management tools are available to avoid “explosions.”
In the financial world, companies use insurance as a way to reduce current and future risk to the company. Insurance premiums pay for this risk management tool. While premiums are a current expense, the protection provided offsets a future potential loss of income and a reduction in company assets. In a very similar fashion, a company’s expenditures on food safety and quality programs are conceptually similar to an insurance premium that is intended to reduce the company’s financial risk resulting from food safety and quality failures. This reduced risk needs to be measured in some manner, but few companies do so.
A simple formula to do this is to determine the true cost of food safety and quality by measuring the total cost of production minus the cost of production if there was no rework, reprocessing, destruction of product, shrinkage, market withdrawals and recalls; in other words, getting it right the first time. The other food safety and quality measurement tool is to divide the annual expenditures for food safety and quality into prevention, appraisal, internal failure and external failure costs. According to the Aberdeen Group in their paper, “Cost of Quality - 2008,” the various costs of quality for different companies compared against total revenue are as follows:
Where does your company fall within the ranges listed above? In most cases, a company’s food safety and quality program falls under the prevention and appraisal cost, while market withdrawals, recalls, customer returns and loss of markets are categorized as internal and external failure costs. It is important to understand that prevention and appraisal costs should significantly exceed internal and external failure costs, yet the opposite is normally true. Adequately funded food safety and quality programs will drive down failure costs, allowing expenditures for prevention and appraisal cost to increase while achieving an overall reduction in food safety and quality costs (see graph below - outstanding companies). The reverse also is true. For example, underfunded food safety and quality programs will increase failure cost and reduce a company’s overall net profit (see graph below - average company).
Where does your company fall within the ranges listed above? In most cases, a company’s food safety and quality program falls under the prevention and appraisal cost, while market withdrawals, recalls, customer returns and loss of markets are categorized as internal and external failure costs. It is important to understand that prevention and appraisal costs should significantly exceed internal and external failure costs, yet the opposite is normally true. Adequately funded food safety and quality programs will drive down failure costs, allowing expenditures for prevention and appraisal cost to increase while achieving an overall reduction in food safety and quality costs (see graph below - outstanding companies). The reverse also is true. For example, underfunded food safety and quality programs will increase failure cost and reduce a company’s overall net profit (see graph below - average company).
Allen Sayler can be reached at asayler@idfa.org.
In most companies, the responsibility of safe, wholesome, high-quality foods falls to quality assurance and quality control departments. Unless senior management ingrains food safety and quality into the culture of food companies and makes it everyone’s responsibility, there is a higher risk of market withdrawals, recalls, loss of customers and lawsuits by consumers (check out my article in the April issue). Creating and maintaining a food safety culture, including fostering behavior changes by production employees, requires an investment of company resources. However, senior management is under constant pressure to continually decrease expense, including expenditures for food safety and quality programs.
How can the dilemma of these two powerful “currents” flowing in opposite directions be resolved?
One approach is to use concepts like “lean manufacturing” to drive out unnecessary operational expenses that do not have a positive impact on the company’s bottom line. Unfortunately, such an approach can go too far as demonstrated by a certain oil company’s refinery and off-shore drilling operations, both of which exploded within the last five years. No one in the food business wants our “refineries and oil rigs” - plants and products - to “explode.” Yet we see evidence of this almost every week, with food industry “explosions” - market withdrawals, recalls, consumer illness and lawsuits. Fortunately for dairy companies, risk management tools are available to avoid “explosions.”
In the financial world, companies use insurance as a way to reduce current and future risk to the company. Insurance premiums pay for this risk management tool. While premiums are a current expense, the protection provided offsets a future potential loss of income and a reduction in company assets. In a very similar fashion, a company’s expenditures on food safety and quality programs are conceptually similar to an insurance premium that is intended to reduce the company’s financial risk resulting from food safety and quality failures. This reduced risk needs to be measured in some manner, but few companies do so.
A simple formula to do this is to determine the true cost of food safety and quality by measuring the total cost of production minus the cost of production if there was no rework, reprocessing, destruction of product, shrinkage, market withdrawals and recalls; in other words, getting it right the first time. The other food safety and quality measurement tool is to divide the annual expenditures for food safety and quality into prevention, appraisal, internal failure and external failure costs. According to the Aberdeen Group in their paper, “Cost of Quality - 2008,” the various costs of quality for different companies compared against total revenue are as follows:
Where does your company fall within the ranges listed above? In most cases, a company’s food safety and quality program falls under the prevention and appraisal cost, while market withdrawals, recalls, customer returns and loss of markets are categorized as internal and external failure costs. It is important to understand that prevention and appraisal costs should significantly exceed internal and external failure costs, yet the opposite is normally true. Adequately funded food safety and quality programs will drive down failure costs, allowing expenditures for prevention and appraisal cost to increase while achieving an overall reduction in food safety and quality costs (see graph below - outstanding companies). The reverse also is true. For example, underfunded food safety and quality programs will increase failure cost and reduce a company’s overall net profit (see graph below - average company).
Where does your company fall within the ranges listed above? In most cases, a company’s food safety and quality program falls under the prevention and appraisal cost, while market withdrawals, recalls, customer returns and loss of markets are categorized as internal and external failure costs. It is important to understand that prevention and appraisal costs should significantly exceed internal and external failure costs, yet the opposite is normally true. Adequately funded food safety and quality programs will drive down failure costs, allowing expenditures for prevention and appraisal cost to increase while achieving an overall reduction in food safety and quality costs (see graph below - outstanding companies). The reverse also is true. For example, underfunded food safety and quality programs will increase failure cost and reduce a company’s overall net profit (see graph below - average company).
Allen Sayler can be reached at asayler@idfa.org.
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