[Food Safety] Dollars and Sense

Editor's note: According to a 2004 report on the meat industry by USDA’s Economic Research Service (ERS), the food industry itself has developed a number of mechanisms to stimulate investment. Click here to read eight of them.

You may save three cents a pound by switching your ingredient supplier, but be careful you don’t end up costing yourself 30 cents a pound to make sure it’s right or $3 a pound — and your reputation — on a product recall.

With virtually no industry, company or department immune from budget reviews in today’s economy, many quality assurance managers are having to justify expenses that never got a second look in more prosperous times. “The economic downturn makes a real challenge for the quality assurance people,” said food safety consultant Gale Prince. But, he cautioned, changing an ingredient supplier without thorough investigation is not the place to implement cuts.

What do you know about the ingredient or the supplier, Prince asks. Why is the product less expensive? Plants should pay particular attention to tracking and traceability, he said. “They may be skimping on the QA program and paying less attention to detail.” 

Rather than abruptly changing packaging or ingredient suppliers to save a few cents today, a processor should take the time visit the supplier’s facility, determine its capability to produce to the level needed and look at the long-term impacts of a change.  “The brand name is one of the most valuable assets the company owns,” Prince said. And it is the responsibility of quality assurance to keep that image high.

USDA Agricultural Economist Michael Ollinger agrees. Putting himself in the position of a quality assurance manager, Ollinger said, “If I were trying to fight for my budget, I’d say maybe the chance is small that we’d go out of business, but it is there. Do you want to go out of business?” All one has to do is call to mind the Westland/Hallmark or Topps Meat Co. incidents. “If you make a mistake in food safety it can cost you the company.” In fact, investigation showed that Topps had cut back on its testing, Ollinger said. “So there’s a big mistake.”

It is particularly critical for a processor to perform a complete assessment with foreign suppliers. “Too often management assumes that the product is coming in to the U.S. under the oversight of the FDA,” Prince said. “You cannot depend upon regulatory oversight in a foreign country or at our ports. The safety of your product is your responsibility and you cannot delegate it to a regulatory agency.” Thus, anytime a processor is purchasing ingredients from another country — or in fact, anytime any supplier is changed at all, the plant should conduct authenticity testing to ensure that the product is that which is expected.

THE STUDIES SHOW. Ollinger, who has been with USDA’s Economic Research Service for almost 20 years and holds a Ph.D. in economics, has researched and published various reports on the economics of food safety and structural change. One such study included a 2004 survey that analyzed the effects of the HACCP rule on plant choices for food safety investment and technologies beyond the HACCP requirements. While the per pound costs to the consumer have remained fairly low, the study found, the costs of implementing and maintaining an effective food safety program can be quite significant for the manufacturer. Other key findings of the study include:

• Consumer costs. Survey data showed that the HACCP rule raised consumer prices of meat and poultry products by only about a third of a penny per pound.
• Plant size. A plant’s size was a strong predictor of its choice of food safety technology. Large plants tended to choose equipment and testing technologies; small plants relied more on manual sanitation and adjusting plant operations. However, small plants still had much higher average costs than the very large plants.
• Market influences. Because retail and restaurant customers and officials receiving exported meat products encouraged the use of more sophisticated food safety technologies, an expanded array of food safety practices and a higher level of investment, plants supplying these customers made greater investments in food safety operations than did other plants.
• Encouraging diligence. The role played by markets in imposing strict food safety standards on meat and poultry producers suggests that information about plant food safety performance provided by FSIS, such as plant quality control performance ratings, could be used by meat and poultry buyers in their purchasing decisions, may encourage greater diligence in performing food safety-related tasks and may elicit greater investment in food safety technologies.

The effect buyers have on food safety through the chain and the adoption of new technology is particularly significant in meat production, Ollinger said. Seeking to protect their own brand name, buyers often will give incentives (such as contracted annual purchase amounts) for adherence to strict food safety standards. And more and more often, buyers — both large and small — will purchase only from suppliers who are willing to meet all their requirements, with the result that food safety practices at supplying plants often rise well above regulatory standards. “Buyers play a big role,” Ollinger said. “They are really strong influencers.”

THE COST OF REGULATION. Ollinger’s studies have found that costs of food safety do tend to be higher for smaller plants than that for larger ones and that it can be more difficult for smaller plants to track incoming goods. For example, major meat and poultry buyers can evaluate food safety because they know the conditions under which the products were produced and can conduct their own pathogen tests. However, low-volume buyers and consumers do not always have such capabilities.

That is not to say, though, that small plants are in trouble when it comes to food safety.

“The thing that gets the big companies in trouble to begin with is the speed of their lines,” Ollinger said. Smaller companies, on the other hand, often can maintain more control over their lines and take more time for production. “If a small company is careful about what they do, they’re going to stay in business.”

But, he added, that a small plant also needs to differentiate itself and its product on something other than price. “Any small producer that’s trying to beat a big plant on cost right now is playing a no-win game. They need to compete in some different way.”

Regulations are often simply common sense practices, Prince added. “But it can also be a benefit in that it provides a level playing field across the industry.” A small food safety problem in one company can end up dictating a new set of regulations for the entire industry, he explained. Although it is changing, the industry is still primarily reactive in nature, so a producer must know its own product and its inherent and potential risks in detail.

EMERGING ISSUES. With all the challenges of a slowing economy, how does a quality assurance manager stay ahead of the curve to anticipate and be proactive toward emerging food safety issues?

It can be very difficult to try to forecast pathogen contamination issues, Ollinger said. “The ones that cause the biggest problem are almost random.” The only way you can protect against it is to produce and hold the product and conduct frequent sampling. Although this can be costly, it is also beginning to be required by some buyers.

An innovation that Ollinger sees as being most helpful — and inevitable — to the future of food safety is that of quicker test results. “The industry would like a test that can give them a result instantaneously. That’s where the advances are coming — and where they will have to come.”

Keeping an eye on industry incidents can help a producer be proactive with emerging issues, Prince added. “I think of it as intelligence, the same as the military or the CIA. You have to keep your eyes and ears open with food safety.” Know what recalls have occurred; pay attention to hot issues on other parts of the world; attend scientific meetings and read trade publications — then ask yourself how any of these  could impact your product. “Apply the intelligence that is in the news these days,” he said.

While the economy is challenging quality assurance departments across the industry, Prince sees this as also having a positive effect.

“I think it’s kind of a wake-up call in this period of economic downturn,” he said. “It’s at this time that the job becomes more important to the company in fulfilling consumer expectations of ensuring a safe product.”

The author is Staff Editor of QA magazine.

The Meat and Poultry Plant’s Food Safety Investments Survey from USDA: Stimulating Innovation

Though private industry has historically had little market incentive for innovation in food safety, the food industry itself has developed a number of mechanisms to stimulate this investment. According to a 2004 report on the meat industry by USDA’s Economic Research Service (ERS), these include:

1. Customer requirements. With their stringent requirements on product safety and quality, large fast food restaurants have become the dominant drivers of innovation and have successfully created markets for food safety. The success of these restaurants rests on their enforcement of standards through testing and process audits, and meat processors are willing to make the needed investment in food safety to reap the contractual rewards.

2. Branding. Name-brand recognition can be a double-edged sword — while it enables consumers and regulators to identify and reward firms that produce high-quality, safe products, it also increases their ability to identify firms that are guilty of safety lapses. Branding reduces the chances of remaining anonymous in case of a foodborne outbreak, thereby further strengthening the incentives to invest in food safety.

3. International trade. By demanding high safety standards in testing product for safety, and then paying premiums or guaranteeing sales for safe producers, foreign buyers fuel the growth of markets for food safety and stimulate safety innovation.

4. First movers. The first company to adopt a new technology often can appropriate the benefits of innovation. The Texas American Foodservice Corporation, for example, did not patent its newly developed Bacterial Pathogen Sampling and Testing Program or seek any other sort of protection for the innovation. In fact, the company sought to disseminate the technology, explaining that anything that helps reduce the possibility of outbreaks associated with hamburgers is good for business. Firms might also share new technologies with competitors and government regulators to influence the industry standard. Setting a standard that is difficult to meet can help set a barrier to entry that benefits first adopters.

5. Collaboration. If performance of the industry as a whole affects the reputation and profitability of all firms, then it is beneficial for firms to collaborate to improve overall industry performance. In two cases studied where the innovative process was dependent on collaboration, the technical and managerial expertise of the collaborators combined to facilitate the development of the innovation and ensure that it would be effective in a commercial setting. In addition, collaboration can also provide risk-sharing benefits.

6. Market conditions. While economies of scale play a large role in plant adoption of capital-intensive food safety technologies, market conditions factor in. In the beef industry, for example, large and small slaughter plants face different markets. Large plants tend to supply large, homogeneous markets with relatively elastic demand, while smaller plants tend to serve smaller markets with less elastic demand. Thus, to protect their markets, large plants may have more incentive to adopt food safety innovations. In addition, large firms may invest more in food safety because lapses have the potential to be more costly for them because they may involve larger amounts of product.

7. Foodborne disease outbreaks. As recent history has shown, outbreaks continuously lead to increased consumer awareness of food safety issues and trigger a spike in demand for food safety. For many consumers, news about foodborne illness outbreaks is their only information about food safety. As a result, the market is susceptible to large fluctuations after foodborne illness outbreaks, as consumers reassess their buying decisions.

8. Third-party validation. Research results have also shown that the design and fabrication of a technology may be secondary to technological validation in determining its ultimate success. Not only is it difficult to measure pathogen control and technological efficacy, but even the best technology can be undermined by deficiencies in the overall safety system. The actual efficacy of the technology may vary greatly from plant to plant, thus innovators may have a difficult time certifying or otherwise guaranteeing the efficacy of the technology for controlling pathogen contamination.