More on "The High Cost of Saving Money"

On February 17, 2009, we published an article by food safety expert David Troster entitled "The High Cost of Saving Money". We received the following comment from a concerned buyer.

L.M said...
"What happens when you pay extra and are assured that product is inspected multiple times? Is that still the buyers fault? Going to the top packers paying extra and still having a problem?"

David Troster responded with further clarification on why it is so important that high standards be maintained at each processing step, and how this saves both money and reduces risk to buyer and seller alike.

Here is David's response:

"Dear LM,

Thanks for your comment.

What I am arguing for is actually a reduction in expensive post production testing: "Quality Control" as it is known. Rather, we should be using systems of "Quality Assurance".

Quality Control vs. Quality Assurance

Quality Control by its nature is expensive and not very accurate. Example, in a container we may have 1600 x 12.5kg cartons. Let's say that one of those cartons contains a defect that would cause a recall. The only way to find that carton is to test all 1600 cartons. Result: You find the problem carton but you have probably lost the entire load – Wonderful? Sampling say five or ten cartons would probably not find the defect, so do you use that lot and risk your reputation? Of course not!

In Quality Assurance we look to:

• The systems of production;
• Identify real potential hazards;
• Make sure that proper preventative measures are implemented.

The way that you as a buyer would understand that these proper preventative measures are in place is to have your supplier(s) audited and to have a targeted regime of testing as verification that the systems are working.

Quality Assurance through Third Party Auditing

Your real problem is that without a third party audit you really have no way of knowing who are the good shippers in terms of food safety. I know many factories that are owned and operated by very good and honourable people. They never default, test result are always excellent. They are top packers, but their products still cause product recalls. Why? They may be good at business , but with regards to food safety they are only beginners.

Proper third party, independent auditing and the help and advice that can go with it can give both sides confidence. For the seller, they have increased confidence that their product is the right product for the buyer, and the buyer can understand that they have purchased the right product for them.

In many cases if I can get the factory 'sorted' the risk and therefore the associated higher costs can be eliminated without detriment to anybody's bottom line. So if we get it right, profits can be maintained or improved, costs lowered and that is a great help to sales. Not to mention happier consumers!

____________________________________________________________

David Troster is a Food Safety Consultant with thirty years experience in many areas of the food and hospitality industries. David's areas of work include:

• A practical approach to developing working HACCP systems integrated into your operating system.
• Training Directors and Managers in Food Safety.
• Supply chain auditing, identifying the hazards and helping you eliminate them.Factory design.
• Advice on European legal requirements.

If you need more details or have a specific question then please e-mail David at troster@netone.com.tr

The Cashew Market...Not a Laughing Matter

This year's Cashew Market Update at the recent Peanut and Tree Nut Processors' Convention ended with a segment that included a tongue in cheek version of financial acronyms, substituting their meaning with phrases illustrating the recent debacles in the cashew industry: CD = Contract Defaults, MBS = Might Be Shipped, etc. There were also joking references as to what constitutes a "Top Tier Shipper", "Medium Shipper" etc. - "a top tier shipper ships good quality product that arrives on time..." No mention was made of the standards adhered to by the facility itself, in terms of sanitation, Good Manufacturing Practices, etc. This is certainly not the time to simplify the supplier selection and screening procedure.

$40 Million in Lost Trade Differentials is No Joke

Although presented in the spirit of comic relief, the reality is not a laughing matter. The fact is that over 2000 containers of cashews were defaulted on last year, which resulted in over $40 million in lost trade differentials during 2008. The dramatic price increases that resulted caused added problems in our industry at a time when we did not need another obstacle to dissuade retailers from purchasing nut products.

We have seen how devastating it can be if we are unaware of conditions in facilities that directly affect the integrity of the food products produced (the recent peanut recall is an all too painful example). We have seen the result of purchasing based on pricing only, with limited information on the caliber of the facilities or the integrity of the supplier.

It's time that we started to learn more about where and from whom we source our food products. We need to know our suppliers, and be certain that the agricultural products we import and offer for public consumption are processed under acceptable conditions. The fact is, conditions in these facilities directly affect the integrity of the food products we offer to consumers. We also have a moral responsibility to do everything in our power to ensure that workers who produce the goods we import are fairly treated and compensated.

A More Holistic Business Philosophy

The business models that have been recently in fashion have emphasized the maximization of short term profits. Perhaps it is time to revisit a business philosophy that is more comprehensive, one that has a basis in psychology, sociology, economics, and statistics. I'm referring to the teachings of the late Dr. W. Edwards Deming, who is widely credited with being a major factor in Japan's amazing recovery and rise to becoming a world economic power after the devastation of World War II.

14 Key Principles and The Seven Wastes

Dr. Deming developed a management system based on 14 key principles designed to increase business effectiveness. He also cited seven obstacles to development "The Seven Wastes" which could cause a business or business sector to stall. Among the most important of the 14 principles is "Build quality into a product throughout production". Another key principle is "End the practice of awarding business on the basis of price tag alone; instead, try a long-term relationship based on established loyalty and trust."

Impromptu Fixes Are Costly

Increasingly, in the cashew business, price became the driving factor behind every transaction. Even when there were quality problems, even when there had been devastating defaults, the supplier who could offer the lowest price was the one who got the business. Quality problems were common, but were dealt with on a case by case basis. Infestation? Freeze it for two weeks and hope you don't miss the retailers deadline. Scorched? Do your best to fix it in the roast. Foreign material? Hope that your added production costs for unanticipated refinement don't eat too much into your profit margin. You've been advised that your supplier will not ship the cashews you contracted? Quick, try to find some on the spot market (probably at a significantly higher price), or devise a delaying tactic and see how long you can keep your customer at bay. It's impossible to guess how much these impromptu 'fixes' may have cost the industry, but we do know that the price tag for the defaults, which were mostly by Vietnam, was in the neighborhood of $40 million.

Stop Stamping Out Fires

The second part of Dr. Deming's management system,"The Seven Wastes" contains another principle that could have avoided the default disaster ; "One of the worst mistakes a company can make is to focus on short term profits, as opposed to long term goals." In the short term, "buy cheap" may look like the way to go. But the road to true success lies in developing a steady, reliable supply, and consistently delivering high quality to our customers.
It is outside the scope of this article to delineate Dr. Deming's management principles in their entirety, but they merit consideration. It would be appropriate to end this article with one of his best known quotes "Stamping out fires is a lot of fun, but it is only putting things back the way they were." Many in the cashew industry have become adept at dealing with crisis after crisis. Isn't it time we became proactive and improved things at the source?

Forging Strategic Partnerships

The CCC is a means to forge strategic partnerships with quality overseas suppliers. It empowers the buyer with the knowledge that their product has been handled responsibly at the source, and can be traced back with accuracy.

The CCC has come under a great deal of resistance from segments of the American importing community. The next time you are on the phone with your importer, ask the question "Why would you be against an initiative to support responsible sourcing from facilities that maintain good manufacturing practices and fair labor conditions?". Let them give you an answer and feel free to post it in this blog .

If you have any specific questions about our program, please feel free to call either David Rosenthal or Mary Smith at 804-745-2848.