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Perishable Pundit
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Produce Business

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American Food & Ag Exporter

Cheese Connoisseur

Economic Reality Trumps
Official Policy Every Time

Our piece, Pundit’s Mailbag — Mike Stuart Of FFVA Speaks Out On Ballantine And Buyer/Seller Relations, included these words from Mike Stuart:

At the end of the day, how are these firms going to make significant investments in food safety, traceability, sustainability and other important industry initiatives if the profitability of the business is squeezed to the breaking point? How are they going to survive at all?

Interestingly enough, we received a number of phone calls and notes from retailers in complete agreement. They basically said that the corporate priorities, particularly of publicly held companies, simply made it very difficult to act in the way they felt would both serve the industry and their own companies in the long run.

This issue of organizations pronouncing one policy but acting in a way that serves a different policy is not new and it is not confined to produce.

Some years ago, in a situation we’ve written about previously, Domino’s Pizza had a similar situation. It had an official policy saying that delivery drivers were never to speed but a public offer that pizzas would be free if delivered after 30 minutes. This offer set up a whole bunch of economic and personal incentives that put an awful lot of pressure on individual drivers to make the deadline — speeding if necessary. It took a death, and a lawsuit, to have Domino’s drop its half-hour delivery guarantee.

Equally if you read the news stories about the crash of the Colgan Air/Continental Connection flight that crashed in February outside Buffalo, you see the same point.

Although the airline had official policies making safety its top priority, its desire to hire first officers and pay them $16,000 a year or even $25,000 a year made it impossible to require that employees live in the hub cities where they were based. This makes a mockery of all the FAA minimum rest rules, which do not contemplate MASSIVE COMMUTES. Here are some notes from a USA Today reporter:

USA TODAY’s Alan Levin is reporting on the second day of National Transportation Safety Board hearings over the crash of a Colgan Air-operated regional plane near Buffalo in February that killed 50 people.

He reports, among other things, that the 24-year-old co-pilot, Rebecca Shaw, earned $16,000 a year and may have been suffering from fatigue for having to “commute” to her job from her home in Seattle.

From Levin’s file:

Shaw had flown from Seattle to Newark on two overnight connecting flights on cargo carrier FedEx before reporting to work the day of the accident, he reports. She stayed at a crew rest area in Memphis from midnight to 4 a.m., according to the safety board.

“It sounds pretty horrible to me,” said NTSB member Debbie Hersman.

“I think it violates the professionalism of a crew member,” said Colgan Vice President Harry Mitchel under questioning by Hersman.

Mitchel said it is the responsibility of pilots to report to work well rested, but Hersman questioned whether airline policies contribute to the problem of fatigue.

The NTSB estimated that Shaw, who had been hired a year before the crash, earned an annual salary of about $16,000. Some board members suggested it would have been difficult for her to afford to live in the Newark area, where she was based.

Out of 137 pilots based at Colgan’s Newark operation, 93 of them live outside the local area, according to the NTSB.

The pilot, Capt. Marvin Renslow, 47, who lived in Florida, did not have a place to stay in the Newark area, according to the safety board. He slept the night before the accident in a Colgan crew rest room, despite a company policy prohibiting sleeping overnight in the room. At 3 a.m., he logged into a company computer system, the NTSB found.

The low pay, lengthy commutes and lack of areas where pilots could rest added up to a risk to passengers, said NTSB member Kitty Higgins.

“I think it’s a recipe for an accident and that’s what we have here,” Higgins said.

The airline is at least feigning outrage, claiming that the pilot would have been terminated had the airline been aware he had incompletely listed the number of times he had failed certain tests on his job application. Now The New York Times reports that the airline didn’t exactly bend over backwards to make sure it had all the information possible about its new hires:

Colgan had not taken the step that some safety board experts pointed out, asking pilots to sign privacy waivers so the Federal Aviation Administration could divulge their records to the company.

It is, of course, impossible to make a direct link between any of these problems — long commutes, lack of “crash pads” in hub cities, poor training, lack of aptitude — with this particular crash. It is, however, clear that there is a race to the bottom going on and that the overwhelming priority — keeping the pipeline of first officers and pilots full with people willing to work cheap — discouraged executives from proposing common sense requirements.

Think of the executive at Colgan who would have stood up in a meeting and suggested that Colgan require proof such as signed leases, utility bills, etc., that pilots and first officers had local places to sleep at the hub city where they were based. Every executive at the table would know that the consequence of such a requirement would be that they would have to pay more to attract a work force. That is specifically why they didn’t propose it. And all the high falutin language about safety first simply bent before that economic reality.

Way back in the spinach crisis, one of our most e-mailed pieces was titled, Tale of Two Buyers. We think it is worth reprinting today:

Tale Of Two Buyers

Jim Prevor’s Perishable Pundit, November 17, 2006

One of the most difficult things to do is to align corporate culture and compensation programs with the goals of management. When we speak to VPs of Perishables or VPs of Produce at major retailers, all are very focused right now on food safety..

But we are also hearing from shippers about a “disconnect” between the goals that executives are setting for their organizations and the way the actual buyers are reacting.

Here is a fairly common scenario:

A team from a shipper flies into a retail headquarters to do an account review and discuss business concerns. The initial meeting includes high executives who emphasize that the chains wants exemplary food safety practices.

In the past, this chain’s supply might have been met via a hybrid mix of sources. The vendor grew some produce, represented some growers exclusively, bought some product in the field or on the trees that the vendor had packed to the retailer’s specifications, some of the product was bought from other shippers and, when things were tight the vendor might have bought some produce off the terminal markets to keep the retailer well supplied.

The vendor never had an actual contract, but over the years had come to be the primary supplier on his lines.

Well, this mechanism had served the chain well through the years. The stores were rarely if ever short of product and it was always priced competitively for the market.

But this model couldn’t sustain the kind of food safety scrutiny that the VP now is talking about in the meeting.

As we dealt with this before, via a letter we received from a reputable grower/shipper, to provide a certainty of food safety standards, you really need an asset-based solution. The vendor has to either grow it all itself or secure, in advance, certain growing deals that can be done under its control and according to the standards it specifies.

The vendor, being flexible, suggests to the VP that if the chain would contract for its requirements, the contract could specify any food safety standards the chain desires and the vendor would be happy to execute to those standards.

It is not a 100% perfect solution. After all, if a hurricane comes and wipes out a growing region where the contracted product was planted, the chain will still have to make a decision as to whether it is willing to accept product from another growing region that may not have been grown to the retailer’s specifications.

Still, barring natural disasters, if a chain needs ten trailers of product a week, the chain contracts for them and they can be certified to meet any standard the retailer wants.

Heads are nodded in agreement, hand shakes are given all around, the VPs leave the room to let the buyers work out the plan and then it happens… The buyer says something like this:

“This is a great plan, we are all on board with this. Just one thing: How are we going to be able to take advantage of markets when the price dips below the contracted price? You know, sometimes the market can get a lot lower than the contract price and our competitors would under price us and we can’t let that happen.”

Of course, a good vendor will try to come up with creative solutions in terms of how the contract can be structured that might make the buyer feel better. But, basically, the “magic is gone” — the vendor really wants to say “Look, you are getting a fixed price for exactly what you want. Some weeks it may be a bargain and you make extra; other weeks it may be expensive and you have to lose some back. Probably, overall, you will have higher costs than the free market, because you are asking for specially food safety certified product. So the product you will be getting is not comparable to product bought from the cheapest vendor every week.”

Although it is frustrating to hear these stories — and we are hearing them a lot from many vendors — it strikes us that to “blame” the buyers is futile. They are responding to the culture and compensation practices of the organization.

If the VPs are sincere about wanting the buyers to place food safety first, the VPs have the responsibility for changing the culture and the economic incentive systems.

Because, let us talk straight and imagine two buyers:

1. The buyer in the little story above buys into the contracting idea and, as a result, gets the food safety standards the chain wants but, even though the grower worked closely, the contracted price turned out to be higher this season than the market price so, all season long, the chain had to either price higher than its competitors, which reduced sales or had to accept substandard margins or a loss.

2. The buyer in the little story above resists contracting because he wants market-priced produce and as a result his product, though meeting all legal requirements, is produced with no extra food safety protocols. The chain is not always aware of exactly where it is grown and packed, but they deal with a good supplier and they did a field inspection once a year, although the actual crop used may not come from that field. The vendor signs lots of representations and warranties as to the way the product is grown and packed. Fortunately there were no outbreaks and buying at market price, the chain was consistently priced competitively to consumers and made decent margins.

Ok, now here is the test: Which buyer gets a bonus this year? Buyer #1 — who put food safety first, or Buyer #2 — who put profitability first?

If your answer is the same as the Pundit’s, you realize why solving this problem depends on a lot more than the intentions of retail VPs. Until the culture and compensation systems change, this is a problem that will stay with us.

Broaden this story to encompass not just food safety, but traceability, sustainability and other industry priorities, and one sees why Mike Stuart is concerned… and so is the Pundit.

Testing Sprout Seed Before It Ships

When we published our piece, Alfalfa Seed Company, FDA, USDA And Supporting Cast Comment On Seed Withdrawal, which highlighted an interview with Lyle Orwig, a PR professional who was functioning as a spokesperson for Caudill Seed Company, we expressed some skepticism regarding some of the claims being made in the interview. Later we ran another piece that demonstrated the company’s claim to not have been “conclusively tied” to the outbreak was, at best, questionable.

The Quality Assurance Manager for the North American Division of one of the largest food buyers on the planet also was skeptical and sent us this note:

I read your articles about the sprout seed supplier and I wanted to add to Mr. Orwig’s story. With all due respect, he forgot to mention that some of the seed sold on American market is Australian seed grown in paddocks, scarified seed for better germination, from mixed lots etc.

Coincidentally, while this latest alfalfa recall was going on, I was visiting sprout growers while learning about that industry and trying to figure out if our company will be able to release raw sprouts that we stopped serving back in 1999.

After weighing all facts, I don’t see any chance of releasing alfalfa sprouts while I feel differently about mung bean sprouts. Major sprout growers such as Fuji Natural Foods, Salad Cosmo, LA Calco etc., abandoned alfalfa and are concentrating on mung bean only. I was told that Dr. Devon Zagory will be new food safety director for Salad Cosmo — that shows how serious they are about food safety.

It is very interesting and worth mentioning the efforts that Bob Rust from International Specialty Supply (ISS) has implemented.

He is screening and sometimes even pre-screening seed (before he buys them from farmers) that he sells.

Screening includes sampling every lot of seed until it gives him 99.9999 % certainty (at 4 cfu/kg — which is extremely light contamination) that the pathogen will be discovered.

He is implementing mastication, testing for Shigella and some other interesting steps that definitely add to sprout safety.

The problem is that not all sprout growers are buying seed from ISS; most of them are buying it from multiple suppliers and the worst part is that many sprout growers don’t even follow FDA recommendations for growing and testing.

To add to this mess, sprout growers are buying sprouts from each other and selling them under their own label. The recall that LA Calco had recently was caused by Arizona Hydroponic Farming LLC product sold by LA Calco.

Interestingly enough, it seems that out of all seed suppliers, one major supplier was responsible for most outbreaks that occurred in last 10 years. Something for you to check out?!

Dan Lasic, MS, MPH, REHS
Quality Assurance Manager

We appreciate Dan’s comprehensive and enlightening letter. Much of the FDA’s focus has been on what sprouters can do in the way of testing. We raised the issue of ensuring the seed is grown under conditions that assume it will be used for human consumption. Dan points to an innovative and comprehensive program one seed company has for testing seed before it ships to sprouters.

We are most intrigued by the ISS process, and it certainly provides another barrier against a food safety problem. If seed companies follow the ISS procedure and sprouters follow FDA recommendations, that would be enormous progress, although, we reiterate our position that seed should be planted with the knowledge that the seed is being raised for human consumption and that appropriate GAPs should thus be followed.

We found news that Dr. Devon Zagory would be lending his expertise to a sprout company significant. Dr. Zagory had been interim head of the Center for Produce Safety and has contributed to the Pundit, including this letter. We asked Dr. Zagory for a confirmation:

Well yes, I think it is true. My contract with NSF Davis Fresh was up at the end of 2008. We have agreed that I will continue as a strategic advisor to NSF Davis Fresh on a limited basis. This leaves me free to pursue other opportunities.

I have been working with a sprout company, Salad Cosmo, in Dixon California, just a few miles from my home in Davis. They have had some problems with contaminated sprouts in the past and have asked me to help them revamp their food safety programs. We are currently waiting for approval from the CA State Dept. of Public Health that my associate Gwain Evans and I serve as Directors of Quality and Safety for Salad Cosmo. This would be a part time job for both Gwain and for me. In essence we would tag team to maintain a presence at Salad Cosmo. Our goal is for Salad Cosmo to become a model for food safety assurance in the sprout industry, no mean task.

Assuming the State of CA approves our written plan, we will assume those duties shortly. In the mean time we are already instituting a program that includes adherence to FDA test-and-hold procedures and goes well beyond FDA guidelines in terms of seed testing, water testing, environmental sampling, hazard analysis, development of detailed SOPs and validation of food safety programs and processes. Of course we are investigating seed sources to try to find seed produced following GAPs. It is a challenge that we relish. I don’t eat sprouts unless I know where and how they were produced. I eat sprouts from Salad Cosmo.

— Devon Zagory, Ph.D.
Devon Zagory & Associates LLC

So some progress is being made on many fronts. Two key questions: How can we make sure sprouters use seeds grown under GAPs, and who are the buyers of all the sprouts from facilities not following FDA regulations?

Pundit’s Mailbag — Financial
Shake-Ups And South Pacific

We received a nice note and a reading recommendation that we thought we would pass along:

Thanks so much for the Perishable Pundit. I learn something every time I read it. I’ve found it especially useful for my policy class.

Regarding the financial crises, I would recommend reading:

The Ascent of Money: A Financial History of the Worldby Niall Ferguson.

The lesson I got from it is we’ve been through this before and we’ll pick up the pieces and go on. But it will shake up the world order. And we’re extremely short-sighted about these “crises.” Historically, greed has tended to eventually overcome good sense.

James L. Novak
Extension Economist and Professor
Department of Agricultural Economics and Rural Sociology
Auburn University
Auburn, Alabama

We appreciate the kind words and are pleased to know we have helped Professor Novak’s policy class. We need good policy very much so if we can make a contribution that is terrific.

We haven’t read Professor Ferguson’s new book, but the comments Professor Novak makes reminds us of two things:

First, there is a hint of some of the work of Columbia University’s Joseph E. Stiglitz, a Nobel Prize-winning economist whose work has revolved around “Information Economics” and specifically the notion that markets operate with imperfect information and imperfect competition. He suggests that capitalism has a tendency toward instability, because during the good times people are prepared to assume greater and greater risks. The longer the good times last, the more risk they are willing to assume, until it all comes crashing down. But rather than attributing this to greed, as Professor Novak implies, Stiglitz attributes it to imperfect information. Much of the presentation the Pundit gave on food safety at Cornell University at the very first Produce Executive Development Program drew on the thought of George Akerlof, whose seminal work, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism," dealt not with the fruit but second-hand cars and evaluated a market in which asymmetrical information is typical, specifically that sellers know more about the product than buyers. It was this work that really launched the whole field of thought.

Second, Professor Novak’s comment about “shaking up the world order” reminds us of a scene from the Rodgers and Hammerstein musical South Pacific, based on James A. Michener’s Tales of the South Pacific.

The Jr. Pundit Primo, aka William, age 7, has been appearing in a school production of South Pacific, so we’ve been watching the classic film version of South Pacific. There is a scene in which the Mitzi Gaynor character (Mary Martin in the Broadway show) explains that she just can’t buy into the notion that the war is the end of the world, and she goes on to sing A Cockeyed Optimist. The more worldly character of Emile De Becque, a French plantation owner, played on Broadway by Metropolitan Opera star Ezio Pinza and in the film by Rossano Brazzi, enjoys her exuberance but knows the truth. When she says that she refuses to believe it is the end of the world, he responds with agreement but qualifies it by saying: “The end of some worlds, perhaps.”

So it strikes us that the world doesn’t end, but many worlds do end in a crisis, such as this financial experience. Hopes and dreams of individual people and families, maybe whole countries, are shattered and changed forever.

Long after the recovery comes and overall levels of prosperity may be as high as ever, there will be dreams stolen, hopes crushed and people forgotten.

As we said, good policy is very important. We wish Professor Novak and his students well.

Of course, getting all maudlin doesn’t help either, so we leave you with Ezio Pinza and Mary Martin in a 1954 television special sponsored by General Foods reviving their classic Broadway rendition of Some Enchanted Evening:

Perishable Thoughts — Wasted Turnips

“A lot of chefs don’t have a natural sense of economy. I was with one guy the other day and I had to show him how to peel a turnip, because the way he was peeling turnips, he was throwing half of it in the garbage. It’s not about being cheap. It’s about being proper.”

Daniel Boulud
Former executive Chef at Le Cirque
Founder, Daniel, Café Boulud
DB Bistro Moderne, Bar Boulud, DBGB
Co-Founder Dinex Group
Winner James Beard Award Restaurateur of the Year 2006

We stumbled across this quote in an article inThe New York Times, titled From Frisée to Finance, It Has to Be Perfect. The article focuses on the prospective opening of DBGB. Daniel Boulud is famous for his upscale restaurants but this new place, on the lower east side of Manhattan, offers less expensive food and a more casual atmosphere.

We thought it a worthwhile quote because it epitomizes what we have said so many times over the years and what we encourage friends in the industry to think of when they are confronting a recession.

When times were good, we would sometimes get approached by retailers looking to run a shrink-reduction program. We saw quite a few of these in action over the years and never saw one work — not if by work you mean increase profitability of the retail operation.

Part of the issue is that one shouldn’t actually aim to reduce shrink; one should aim to increase profitability. In floral, if one puts all the flowers behind closed-door cases, one may reduce shrink by extending shelf life, but one so reduces movement by putting up a glass barrier between the flowers and the consumer that sales and profits typically decline substantially. So, in cases such as this, shrink is a good thing… one wants more shrink… one wants those flowers out where consumers can grab them easily.

Similar losses are found in produce. If you incentivize produce managers to reduce shrink, they reduce assortment, buy less of everything and order the bananas grass green. Yes, shrink may go down, but so do sales and profits.

The right way, or as Daniel Boulud explains it, the “proper” way to reduce shrink is to ensure that the whole operation is following good operational practices. Is ordering being done properly? Is rotation being done properly? Are the coolers all checked to be operating properly? Are markdowns and sales handled properly? Looking for mistakes in the operation is more likely to reduce shrink while maintaining sales and profits than looking to reduce shrink.

Of course, this retail lesson applies equally to all business. If sales aren’t what they should be, don’t just hysterically cut things, look strategically at your organization. Is it running “properly”? Perhaps you have a division that really should have been closed 10 years ago! Now you don’t have the excess cash flow to support it, so you have to look at it with clear eyes.

But that is the goal, looking at your business with clear eyes to identify what is being done properly and what is not. If we do it right, we come out of the recession with a solid base to build on.

In good times or bad, there is no reason to waste a turnip. What a shame that it takes a recession to get us to pay attention to the wasted turnip in our operations.

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