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Managing Supplier Risk: A Lesson from Parnell and Peanuts

October 07, 2015 by Hillary Ohlmann

peanuts in a miniature burlap bag

The Peanut Corporation of America Salmonella Scandal

Let’s talk supplier risk management. As you’ve likely heard by now, late last month, Stuart Parnell, the 61-year-old owner, president, and CEO of the now-defunct Peanut Corporation of America, was handed a 28-year prison sentence after being found guilty on 71 criminal counts, including conspiracy, fraud, and other federal charges. The sentence comes as a result of the late 2008-2009 salmonella outbreak linked back to PCA plants in Texas and Georgia.

 

The 2008-2009 outbreak was no minor outbreak (and even if it had been, should that matter?). Nine people died and more than 700 became ill in 46 different states after consuming products made with the salmonella-tainted peanut paste. The outbreak led to the most extensive food recall ever in the history of the United States: over 350 companies and nearly 4,000 different food products were involved. To make matters worse, most of PCA’s products were designated for the low-end consumer market; they were sold to food manufacturers who made products to be consumed by schoolchildren and the elderly in nursing homes - some of the most vulnerable members of society.

As food safety lawyer Bill Marler said, “This sentence is going to send a stiff, cold wind through boardrooms across the U.S.” And it should. A recent New Yorker article states that Parnell is the first food executive to be the subject of a federal felony conviction in connection with an outbreak, and unless manufacturers and government regulators take measures to make sure this doesn’t happen again, he likely won’t be the last.

The effects of a rotten supplier

PCA had a reputation as a weak link in the supply chain. They were sued at least twice in the 1990’s for providing manufacturers with shipments found to have high-levels of contaminants. But could have increased supplier oversight prevented the disastrous 2008-2009 outbreak? What can you do when you have a supplier who knowingly ships a contaminated product (the infamous “Just ship it” email) and falsifies documents? How can you protect yourself from this type of risk?

Even if your company is found to be entirely ignorant of a supplier’s fraudulent actions, you know full well that your company will still be affected. While you may not face federal charges, you may risk your reputation and market shares. When a product is recalled, consumers tend to avoid similar products on the market. During the 2009 PCA product recall, sales of all brands of peanut butter - including those who did not use PCA as a supplier - dropped by nearly 25 percent. The scandal affected the entire US peanut industry with losses estimated to be around $1 billion dollars. This goes to show how one rotten supplier can spoil sales for an entire market.

Corporate virtualization

In a 2013 study by FTI Consulting, nearly 70% of revenues were spent on non-labor costs. This “corporate virtualization” means that suppliers are increasingly providing materials and labor previously taken care of in-house. Supplier risk management and supplier qualification and evaluation have become more important than ever. Long gone are the days when one company provides raw materials that another company manufactures into a product to sell.

Now more than ever, suppliers have their own suppliers, and it can be difficult to follow the supply chain back all the way in order to manage, let alone identify, the original source. Take the companies affected by the Dodd-Frank Act, for example. In a presentation by Kent Sharp at the ISM conference last spring, he said that in 2014, of the about 1,300 who filed a report to the SEC, two thirds did not include even a basic description of the extent to which their products contain 3TG minerals because thousands of products were potentially affected. This underlines the importance of reaching out to tier 2 suppliers and beyond when you’re looking to mitigate supply chain risk.

"Trust but verify."

Increasingly, consumers are using their purchasing power to support socially responsible companies. In Nielsen’s 2014 Global Survey of Corporate Social Responsibility, 55% of the consumers surveyed said they would pay more for sustainable products. Of that 55%, Millennials account for 51%. Surpassing Baby Boomers as the largest living generation in the United States, Millennials pack a lot of purchasing power. As the most-connected generation, will they negatively review companies who fail to fulfil socially responsible values? You bet they will. If you have suppliers who might be a risk to your reputation and CSR, it’s time to re-evaluate that relationship. At the same time, if you can cultivate CSR in your suppliers, your company will also reap the benefits.

Suppliers can be a boon to both innovation and value creation in a company. If suppliers are treated as an extension of your business and more as collaborators than as a providers, then much can be done to mitigate supply chain risk. That being said, suppliers should be moved into the position of strategic partner where they can be responsible for helping your company soar. However, if they're not managed carefully, they can cause your company to sink into a downward spiral. As Ronald Reagan liked to say, “Trust but verify.” Make sure the appropriate steps are in place to qualify and evaluate suppliers, and identify alternatives whenever possible, to avoid the risk of a major supply chain failure.

Hillary Ohlmann

Written by Hillary Ohlmann

Hillary is DeltaBid's resident writer, copy editor, researcher, and all-around procurement enthusiast. She holds a degree in Journalism and Spanish from UW-Madison.

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