Issue 133 - Control Costs of Product Recall

Thank you for joining us again. We're going to take a step out of our discussion on order accuracy this week to review the costs of recalls. This comes on the heels of the announcement by Topps of the second largest beef recall in U.S. history and the subsequent closing of Topps less than a week later.

The Costs of Product Recall

For those of you who might have missed the recent developments. Let me share some of the story points:

Topps Meat Co. LLC was a 67 year old privately held company which CEO Anthony D'Urso said "the was largest U.S. manufacturer of frozen hamburgers"
On September 25th Topps recalled 330,000+ pounds of frozen hamburgers after the New York State Department of Health issued an alert linking its patties to illnesses.
On September 29th this was expanded to 21.7 million pounds of frozen ground beef product that may have been contaminated with the potentially fatal E. coli bacteria strain O157:H7
Less than a week later, on Friday October 5th Topps Meat Co. LLC Closed.
To date 30+ people have been hospitalized, two lawsuits have already been filed, and the USDA is still researching the source of the E. coli.

Along with the obviously hard hit Topps supplier nine other Brands or Private Labels have been named. MSN reported these as: Sold under Topps brand as well as Pathmark, ShopRite, Mike's, Kohler Foods, Rastelli's Fine Foods, Roma-Topps, Sam's Choice, Sand Castle, and West Side labels.

67 years in business and an estimated $29.3 million, according to Capital IQ, a division of Standard & Poor's weren't enough to keep the doors open at Topps, let's take a look at some of the things that can help processors and distributors prevent and survive a recall.

"What happened to Topps was a shame, but this is an industry wide problem and it's just a matter of waiting to see who is going to be next. It won't change until we get better safety standards all the way back to the farm." Guy Giordano, President of Vincent Giordano Corp

Reduce Risk – Not everyone in the industry needs the multi-million dollar pasteurization system the Vincent Giordano Corp has invested in, but everyone can benefit by taking steps to reduce the risk of foodborn illness and contamination. As we discussed in Article 119 there are a number of methods to keep bacteria at bay. One of the most important is simple hygiene and thorough sanitization. If you're looking for a refresher on the temperatures and chemicals recommended for sanitization take a look at the resources provided by Penn State.

Segment Exposure – Topps has issued recalls on over nearly 21 million pounds of ground beef, nearly an entire year worth of patty production. While details on what conditions caused this widespread contamination have not yet been released, you can take steps to prevent a similar occurrence. Review your workflow, concentrate on finding an eliminating any chances of cross contamination. Common sense items like knives, hooks, cutting blocks, aprons and machinery are addressed frequently, but when was the last time you cleaned the stocker's box cutter, washed down the pallet jack controls, tried to sanitize your salesperson's neck-tie, or scrub up the supervisor's clip-board. While this might provide a funny visual, if it represents a cross contamination concern (which all of these could) it quickly becomes no laughing matter.

Prepare Traceability– The more information you have about where your product went, the more efficiently it can be recalled. Reducing risks to consumers and lessening the impact a recall will have on your business. Distributors who track inventory movement manually will be presented with two choices at time of a recall. Call every customer and tell them all to hold product while you sort it out, or try to sort through the drawer full of invoices and POs quickly, hopefully before someone else gets sick. We reviewed some ways to track based on UCC128 codes in Article 95.

Be Ready for the Worst – No matter how well prepared there will always be a chance that something will go wrong. When it does, your company needs to be prepared. Before a recall occurs you should:

Train personnel to look up clients that may be affected.
Prepare a recall or hold script for your employees to use while calling clients
Prepare a recall or hold form to fax or email to your clients
Review the steps you will need to take to work with the USDA's Food Safety and Inspection Service to resolve matters quickly.

You know what kind of things can go wrong in your business: Spoilage, contamination, wrong formula mix, tampering, wrong product label, etc. Take a moment to think through each in a worst case scenario, and make sure you're ready to handle it.

Recall Insurance – The last topic of note is product recall insurance. Product Recall insurance provides protection for you in the event you must recall any of your products. We know of one processor who has a $1,000,000 policy with a $250,000 deductible and pays $50,000 a year . This might not have kept Topps in business, but it can take the edge off if you can keep the recall narrowed down with good recall practices. Coverage can include product recall expenses and liability to third parties seeking damages because your product recall could cause a loss of income or damage their reputation. If your product poses an imminent threat of property damage or bodily injury, Products Recall Coverage should respond. It will respond to voluntary or involuntary (government or 3rd party-imposed) recalls that satisfy the policy trigger. Product-recall insurance policies take the form of extra-expense coverage rather than legal-liability coverage. I've included a partial list of the expenses you might incur during a product recall in our Thinking Inside the Box section.

Thinking inside the box:

Cost associated with notifying customers
Labor Hours Researching Customers Phone, Fax, Email
Postage and Printing Expenses
Radio, Television, Newspaper Announcements
Shipping Cost
Labor to Re-Pack
Labor to Receive and Track
Extra warehouse and storage expense Separate from "un-contaminated" product
May require refrigeration
Actual cost to dispose of the products
The cost of extra personnel required to conduct the recall
The recall expenses of any third party for the recall of any product that incorporates your product including the cost to repair or replace such product
- Pre-made Meals
- Canned or Bottled Foods
Business Interruption losses of others resulting from the covered incident
- Restaurants and Hotels
- Processors and Assembly Shortages
The cost to repair and rehabilitate brand reputation
The additional cost to purchase substitute goods to replace your products

This is of course on top of the expenses that may occur due to lawsuits and liability from the recalled product itself.

While checking to see if a source of contamination at Topps has been released, I notice that Cargill has recalled some 840,000 pounds of ground beef already this month with ConsumerAffairs.com headlining it as "More Beef Recalled Because Of E. Coli Concerns." They report that "The recall is voluntary, initiated by Cargill following Wal-Mart's report of the E. coli illnesses." This is in sharp contrast to the reporting on the Topps story where they indicate "USDA inspectors forced the (Topps) plant to close last week after the agency said safety inspectors found inadequate measures to prevent contamination of the meat." A quick response by Cargill, with a well executed recall plan is helping take the edge off of a recall coming at a very bad time.

Next week we resume our look at controlling the costs of inaccurate orders, focusing on the picking process.

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