Top 5 tips for mitigating Supply Chain risk in food and drink businesses

Being in the food and drink business is tough. Margins, as ever, are under pressure with both increasing commodity costs and currency pressures.

Typically, we see food businesses are squeezed between large commodity ingredients suppliers to the one side and customers in the retail or food service trades who are tough negotiators on the other.

It is vital to try and mitigate the risks faced by your business and here are Castlemead’s top five steps you should take.

Purchase Terms –legal requirement rather than moral duty is always better

Purchasing terms and conditions should attempt to pass down the the costs of recall or product replacement to your suppliers if they provide defective product. There are a number of regional lawyers who have model terms readily available at modest cost typically around £1,000. Typically a supplier’s terms limit their liability to the value of the goods provided. Make sure your purchase orders are supplied with your terms – easier to achieve now with digital communications.

Suppliers Product Liability – a little housekeeping could be invaluable

Where possible obtain copies of your supplier’s product liability insurance.

By having a system in place to maintain this information, in the event of the supplier’s insolvency you acquire rights under the Third Party Rights Against Insurers Act to claim directly against the insurer. An annual completed questionnaire is all that is required.

Product testing & checking – anticipate what may happen and manage the risk

We are seeing an increasing number of problems with inbound products being supplied that are non-compliant what the label’s specification.

We suggest a risk assessment is done for key ingredients to cover what may go wrong in the manufacturing process. Consider screening for allergens or contamination that may interfere with your production processes and a related system of testing and inbound positive release adopted.

Pay particular attention to products sourced through overseas supply chains outside of the European Union.

We have seen issues with enzymes, bacterial contamination and production machinery contamination in the last 12 months. Defective packaging with printing errors and ingredient omissions is more common than you might imagine. Inbound quality testing and checking of packing materials again is well worth considering in line with other products.

End of line testing is something most businesses will consider. There is plenty of technology available for mitigating metal contamination and mislabelling.

Your own Insurance – question what you buy – review the detail

Products liability

Insurance that all food businesses will carry. However most firms do not realise that a standard policy excludes:-

  1. liability for your product as a defective ingredient
  2. financial losses incurred by your customers.

These can be purchased but awareness is limited to relatively small number of specialist food and drink brokers

Product Recall

We believe that product recall is essential for any firm working with retailers. A standard policy covers recall where instigated by the policyholder. We are seeing a trend where the Food Standards Agency are issuing recall instructions to manufacturers particularly in respect of labelling issues even when there is little likelihood of injury. There are insurers who will extend their products recall cover to include this contingency.

Recall wordings can now include loss of margin, market, brand damage and third party retailer recall cost but each of these may need extending.

We recommend that losses and volumes are financially modelled to ensure the right level of cover & self insurance is maintained

Customer Terms – be aware of what you sign

There is an increase in USA style contracts that require subrogation waivers and joint names provisions, particularly in ingredients supply agreements.

If you enter into these terms you may inadvertently void your insurance policies. Try to restrict your liability for Consequential Loss and Recall to the values that you have insured.

We recommend that any significant customer’s terms be shared with your insurance advisor and potentially your solicitor for their comments if you are unsure of any terms.

In summary, risk mitigation and management are as important if not more important than a robust insurance portfolio.

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