Partners Business Council

Alert Code Orange – The Demand Chain Risks

Alert Code Orange – The Demand Chain Risks

CAT EGGS

Company Value, Traceability and Recall.

They can wreck havoc on company reputation and brand value (intangible assets), with a consequent large loss in the market financial value of the company, as discussed in the article “Liabilities Zombies – The Risks Poorly Dimensioned“.

The Food & Beverage market in Brazil consists of a universe of 32,000 formal processing companies (ABIA 2012). At the other end of the chain it presents numbers ranging from 200,000 points of sale (Elma Chips- snacks Pepsico) up to 1 million POS (beer – Ambev).

This chain of distribution in a territory of continental dimensions, and absurd deficiencies in logistics infrastructure such as Brazil, presents a high level of complexity. The complexity comes from the need of multiple channels and some with several intermediate levels, i.e. between the producer and the consumer there are different formal and informal economic agents (e.g.: representative, distributor level 1, distributor level 2, distributor level 3 , retail level 1, retail level 2)..

The food products contamination risks in the distribution, by physical, microbiological or chemical agents are numerous. In transportation, for example, lack of cleanliness of the various vehicles used in the chain, cargo mishandling, lack of temperature control for refrigerated products or the use of a same vehicle for transporting food products along with contaminants materials.

All the factors listed above plus the lack of pest controls programs (rats, insects, etc.) can also be cited for storage conditions both in the distributors’ warehouses and in the sales points (retail stores, etc.).

Important to emphasize that the packaging protects, but does not perform miracles.

Large companies in the Food & Beverage sector have systems and partnerships that guarantee good control of these risks only up to the first level of the chain. That is, the standards procedures cover the carriers authorized to collect cargos in their industrial plants and the 1st level distributors. From that point hardly there are real guarantees.

In the case of the need to recall a product, the manufacturer’s traceability system reaches at maximum the customer of its first level distributors.
However, according to the regulatory agency (ANVISA), which approved in June the publication of a new Regulation about recall, it will be the responsibility of the owner of the brand / owner of the product register, to guarantee the process till the consumer.

Regardless the regulation, for the consumer the responsibility for any problem with the product is always from the owner of the brand. The more important the brand, the greater the scandal in the media. As well as the long lasting negative repercussions in the social networks (Facebook, Instagram, etc.).

Therefore it is necessary an appropriate risk analysis to the business concerning the demand chain. The diagnosis and measurement of financial impacts should consider not only the tangible assets but also include the intangible assets (that represent 60% of the total value of the company). This analysis will profoundly change the vision of demand chain management. Various processes become necessary:

– Review of contracts with distributors of 1st level, defining the responsibility for the financial losses caused by product problems for consumers, arising from failures in transportation and storage;

– Revaluation of partners in the demand chain with the elimination of non-conforming ones;

– Securitization of distribution contracts/agreements;

– Increase the investments in packaging with higher mechanical resistance, and better barriers to contaminants;

– Revaluation of investments in quality systems based on the total cost of a recall (considering tangible + intangible impacts);

– Securitization of the risk of recalls processes.

 

 Article authorLuiz Azevedo

BSc. Chemical Engineering, MBA Marketing, MSc. Economics, Director of Profiler Business Consulting and  Partner of PBC – Food & Beverages Consultants.