Costs Climb as Companies Move to Mitigate Supply Chain Interruptions

Some 70% of companies have experienced at least one supply chain interruption during the past year, with an unplanned IT or telecommunications outage the leading cause, according to the eighth edition of the Business Continuity Institute’s (BCI) Supply Chain Resiliency Report, produced in association with Zurich Insurance Group.

Covering 526 respondents in 64 countries, the report studies the causes, costs, and frequency of such events while also looking at companies’ progress in responding to supply chain interruptions and mitigating further occurrences.

While 70% of respondents reported at least one supply chain interruption during the past 12 months, only 17% said they have had no supply chain disruptions, with 13% saying they did not know. Perhaps more alarming is the increase to 13%—from 3% previously—of respondents reporting more than 20 such incidents.

Also alarming is the upward trajectory of costs associated with supply chain disruptions. The portion of respondents reporting cumulative losses of more than € 1 million ($1,058,171.30) resulting from supply chain interruptions jumped to 34% in this year’s survey from just 14% previously.

An unplanned IT or telecommunications outage was the leading cause of a supply chain disruption for the fifth consecutive year, followed by a loss of talent or skills, which jumped to second place from fifth, and then cyberattack or data breach, which dropped to third place from second. Despite this drop, the portion of respondents which said that cyberattacks and data breach had a ‘high impact’ on their supply chains increased from 14% to 17%.

Reaching the top 10 for the first time was terrorism, which moved to ninth from eleventh, while currency exchange rate volatility had the largest move up the list of event causes, jumping to seventh from 20th last year and cracking the top 10 for the first time since 2012. Insolvency in a company’s supply chain also reentered the top 10 for the first time since 2012, moving from 14th to 10th.

Lost productivity (68%), increased cost of working (53%), and customer complaints received (40%) were listed as the top three consequences of a supply chain interruption by respondents. The perception of such incidents can also hurt a company, with damage to brand reputation/image (38%), shareholder/stakeholder concern (30%), and share price fall (7%) all named by respondents as consequences of a supply chain disruption.

“It is crucial to note that the percentage of organizations reporting reputational damage as a result of supply chain disruption is at its highest level since the survey began. As this coincides with greater media scrutiny and social media discussions related to organizations, this result might be a good opportunity to reflect on reputation management and how supply chain disruptions might translate into adverse publicity for a given organization,” said the report.

As threats and costs grow, there appears to have been at least some progress in more closely addressing the issue.

While the percentage of respondents without firm-wide reporting of supply-chain incidents remains high at 66%, the portion of those using firm-wide reporting has grown steadily across the past five reports, rising from just 25% of respondents in 2012 to 34% in the 2016 report, the latest. Similarly, the portion of respondents which employ no reporting has declined steadily from 39% in 2012 to 28% in 2016.

As reporting is on the rise, so too is the complexity of interruption incidents as external supply chains cause more incidents. The portion of respondents which said the majority of their interruptions came from external supply chains jumped to 24% from 9% previously, and the portion attributing at least a quarter of interruptions to external suppliers more than doubled to 34% from just 15% previously.

Even with reporting on the increase, however, insurance uptake appears to be declining. Just 4% of respondents said they were fully insured against supply chain losses, down from 10% previously, with small and medium-sized enterprises more likely to be uninsured, at just 39%, than large organizations at 62%.

“These variations in insurance uptake may indicate a need to revisit business continuity arrangements and risk transfer strategies pertaining to supply chain disruptions,” according to the report.

Switzerland, Norway Rank Highest in Supply Chain Resilience

Plummeting oil prices, natural catastrophes and political disruption in a borderless business environment are some of the threats to the resilience of countries that can impact supply chains, according to the 2016 FM Global Resilience Index, which aggregates data to help companies identify their key supply chain risks. The Index ranked the resilience of 130 countries to supply chain disruption based on drivers in three categories: economic, risk quality and supply chain factors.

This year’s top-rated country, Switzerland, traded places with Norway—a reflection of Norway’s drop in oil revenue at a time of falling crude oil prices. Rounding out the top 10 in the Index, in descending order, are Ireland, Germany, Luxembourg, the Netherlands, the central United States, Canada, Australia and Denmark.

The lowest-ranked country in 2016 is Venezuela (ranked 130) for the second year in a row. It is followed in ascending order by the Dominican Republic, Kyrgyz Republic, Nicaragua, Mauritania, Ukraine, Egypt, Algeria, Jamaica and Honduras.

For the second consecutive year, Ukraine (ranked 125, down from 107) was among the countries with the biggest drop, reflecting the high degree of tension the remains within the country as well as with Russia (ranked 75).

FM Global also noted:

Venezuela’s position at the bottom reflects its exposure to the natural hazards of wind and earthquake, perceptions of its lack of control of corruption and poor infrastructure and its ill-perceived local supplier quality.

France (ranked 19) and the United Kingdom (ranked 20) retained their positions from last year, while Germany (ranked 4) rose by two places.

The United States is segmented into three regions to reflect disparate natural hazards exposure:

Region 1, encompassing much of the East Coast, is ranked 11 in the Index.

Region 2, primarily the Western United States, is ranked 21.

Region 3, which includes most of the central portion of the country, is ranked 7 in the Index.
FM Global-infographic

Legal Woes Highlight Dangers of the Food Industry Supply Chain

chipotle

A spate of recent cases offers a clear warning for the food industry about the legal and reputational perils of not getting more serious about supply chain control.

On Monday, the U.S. Supreme Court declined to consider an appeal from Nestle, Archer Daniel Midlands Co. and Cargill Inc., allowing a slave and child labor lawsuit to proceed against the three food industry giants.

Three plaintiffs who claim they were trafficked from Mali as child slaves and forced to work harvesting and cultivating beans in Cote d’Ivoire, and allege that the companies aided, abetted or failed to prevent the torture, forced labor and arbitrary detention they suffered.

According to Reuters:

The plaintiffs, who were originally from Mali, contend the companies aided and abetted human rights violations through their active involvement in purchasing cocoa from Ivory Coast. While aware of the child slavery problem, the companies offered financial and technical assistance to local farmers in a bid to guarantee the cheapest source of cocoa, the plaintiffs said.

The defendants knew about the child slavery problems in the region and offered both financial and technical farming assistance to support the agriculture methods in place, the plaintiffs claim. What’s more, they say, the defendants could have used their leverage in the cocoa market to stop or limit the alleged child labor practices and failed to do so.

According to the Wall Street Journal:

Mark Theodore, a partner at Proskauer Rose, said that the ruling reinforces to companies that they need to be socially responsible employers. And while there is no way to ever completely prevent such risks, he said the ruling is a reminder to companies that they “should be monitoring and also maybe doing a little bit of introspective thinking about their own practices to avoid these things, or prevent them from happening, or to put themselves in legally defensible position if they can’t prevent them.”

In September, the Justice Department finalized a landmark conviction of the former head of the Peanut Corporation of America, who was sentenced to 28 years in prison for knowingly shipping salmonella-tainted products that sickened 714 people and killed nine. That may be the department’s first step in a new approach to taking food industry product safety more seriously, and more aggressively pursuing wrongdoing on a criminal level. The Justice Department has now opened formal investigations into the e. coli outbreak at Chipotle and the listeria outbreak at Blue Bell Creameries, both of which sickened hundreds of consumers.

The department has already signaled a broad intention to focus more efforts on individual law-breakers in corporate crimes. Now, the government appears to be showing the food industry that things are changing in terms of corporate responsibility and food safety, according to Andrew Lankler, partner at Baker Botts. Lankler told the Wall Street Journal that the Department of Justice is signaling that whatever standard the food industry thought it needed to meet for food safety, the bar is higher. “The department is going to step up enforcement in areas where they can prove they sold tainted product,” he said.

And the trouble at Chipotle shows little sign of abating. The CDC is still investigating multiple outbreaks, and the chain has now been served a subpoena as part of a criminal probe by the U.S. Attorney’s Office and the Food and Drug Administration’s Office of Criminal Investigations regarding an isolated norovirus incident in August.

A fourth lawsuit was recently filed by a customer who claims he was sickened by the same strain of e. coli linked to Chipotle, but this case dates back to July, meaning far more people may have been affected in the outbreaks. At least nine suits have been filed by customers, and Bill Marler, a food and safety litigator in Seattle, claims more are coming from the 75 Chipotle-related clients he represents.

At this week’s ICR conference this week, CEO Steve Ells said he is hopeful that the CDC will soon declare the restaurant’s e. coli outbreak over, adding, “we know that Chipotle is as safe as it’s ever been before.”

To that end, Chipotle announced today that it will close all of its stores on Feb. 8 to have a corporation-wide meeting with all staff regarding food safety.

But customers remain extremely wary. Indeed, while it may be an e. coli cliché, it would not at all be a stretch to say public opinion about the brand remains in the toilet, with YouGov’s BrandIndex score for the company seeing a drop equal to that of GM during its crisis.

yougov poll chipotle

To combat that, the company also announced plans to launch a sizable new marketing campaign to win back customers, using direct mail and traditional advertising to attempt to win back consumer confidence. As Fortune reported, executives said the campaign will attempt to provide a “detailed story of what happened” to explain to customers why they are now safe, and that it will not focus overtly on food safety, but will have “an undertone” of humility.

Chipotle’s stock dropped nearly 42% in the wake of the outbreaks, and according to an SEC filing, sales at stores open more than a year were down 30% last month. Ells and his team admitted they could not guess how much the fallout will impact 2016 financial results, but expect it will be a “messy” year. Costs are expected to go up from the marketing campaign and new food safety measures, including processing more food through centralized kitchens in an attempt to better control the conditions of ingredients.

The company darkened its outlook for Q4 results, and As Wells Fargo Securities wrote in a recent research note, “We expect CMG to point to a hard-fought and long-tailed [same-store sales] recovery across 2016, and to stress that there is still much work to be done in assessing the sizeable costs associated with the company’s supply chain overhaul.”

For more about food safety crises and product recall, check out the following articles from Risk Management:

Feeding an Appetite for Trust, A Q&A with Center for Food Integrity CEO Charlie Arnot

Food Safety Updates Stalled by Funding

Maximizing Coverage for a Product Recall

Chipotle Food-Borne Illness Outbreaks Highlight Supply Chain, Reputation Risks

For the past month, Chipotle Mexican Grill has been mired in a food safety crisis. An e. coli outbreak linked to Chipotle has sickened at least 52 people in nine states. In a seemingly unrelated outbreak, 120 people in Boston – most of them students at Boston College – also fell ill after contracting norovirus from eating at the quick-service chain.

While food safety and product recall concerns are always a major liability for industry players, the spate of infections poses even more of a threat to Chipotle as the company has built its reputation on the foundation of a healthy, responsible supply chain, boasting its use of fresh produce, meat raised without antibiotics, and a network of hundreds of small, independent farmers. As Bloomberg put it, the company’s biggest strength is suddenly its biggest weakness. Given the chain’s 1,900 locations and the rate at which it has expanded (about 200 new locations every year), its supply chain is already under significant pressure. When an audit found unacceptable practices earlier this year, the company suspended a primary pork supplier, pulling carnitas from the menu at about a third of its restaurants nationwide. The company pointed to its decisive action as proof of its commitment to sustainable agriculture, but many analysts said it highlighted the company’s inherent vulnerability to supply chain issues.

“You can never eliminate all risk, regardless of the size of suppliers, but the program we have put in place since the incident began is designed to eliminate or mitigate risk to a level near zero,” Chris Arnold, the company’s director of communications, told Bloomberg.

Now, as the number and geographical spread of E. coli cases grows, the company has closed dozens of restaurants for what it promises will be thorough investigation and cleaning. Steve Ells, the company’s co-chief executive, went on the “Today” show to publicly apologize and vow that reforms currently being put into place would turn Chipotle into a leader in food safety. “The procedures we’re putting in place today are so above industry norms that we are going to be the safest place to eat,” he said.

But consumers are not so sure, leading sales to fall 16% in November, and its stock price has dropped almost 30% since the outbreak was first detected, the Washington Post reports. Analysts and the company itself have said they expect the outbreak to continue to cause a drop in sales. Take a look at how the ongoing crisis has impacted the company’s stock:

chipotle stock e coli

These doubts may have long-term impacts on Chipotle and may even extend to other food industry stakeholders.

“Fast-food companies are 100 percent reliant on their food supply to send them something that is pathogen-free, but the supply chain is still extremely reluctant to test every [food] product it provides,” food safety consultant Mansour Samadpour told the Washington Post. “Many companies are starting to do it, but the reluctance is real and it’s problematic — and that’s getting in the way of food safety.”

“I worry that [consumers] look at food safety from the organic, non-GMO, sustainability, animal welfare standpoint,” Bill Marler, a lawyer specializing in food-borne illness, told the Post. “And a lot of people in that space, in that agricultural movement, tend to believe that because they do those things their food is automatically safer than food that’s served at McDonald’s or Jack in the Box or Walmart. But that’s just not the case.”

For more about food safety crises and product recall, check out the following articles from Risk Management:
Feeding an Appetite for Trust, A Q&A with Center for Food Integrity CEO Charlie Arnot
Food Safety Updates Stalled by Funding
Maximizing Coverage for a Product Recall