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Pundit’s Mailbag — Improving Buyer Oversight And Responsibility

In recent days we have focused much attention on the issue of audits. We’ve run pieces such as Lessons From The Peanut Salmonella Outbreak: Audit System Broken and Pundit’s Mailbag — Audit Disconnect, and we’ve also published — in the Star Tribune under the title, Who’s Guarding Our Commerce — a more general thought piece, tying together food safety auditing, mortgage appraisers and bond rating agencies on Wall Street.

Now we have received a letter from an important participant in this field and one generous enough to have contributed to our efforts many times in the past:

The current Minsky Moment and after-effects that the global banking system is going through is a confirmation that a yes-no or pass-fail auditing system leaves a lot of “value in the table”. Even with all of those government and pseudo-government auditors, and government-approved rating agencies, they could not identify a systemic risk. One well defined by more than one school of economics.

A large number of banks refused to participate in the high risk financial tools, rather their conservative management sacrificed short term gain for long term value. Others participated and/or failed to regulate because there was no consensus regarding the level of risk these innovative financial instruments presented. The fresh produce industry shares a number of similarities with the banking system.

No sector of the food industry is audited by as many agencies with auditors as sophisticated as the US banking industry. Let’s take the comparison to an industry less audited than banking but still far more subject to government oversight than the fresh produce industry — the beef industry. Despite a 24/7 USDA presence and with most of their product being exposed to a “kill step” just prior to serving, there are still outbreaks in the beef industry and outbreaks that have destroyed some of that industry’s largest players.

While each and every incidence of food borne illness is unacceptable, the number of incidences of illness being vectored by fresh produce is small as measured against the number of successfully delivered servings. In fact, it would not be a stretch to refer to an incidence of illness vectored by fresh produce as the fresh produce industry’s “Black Swan” event(s), an event that can be considered an outlier by a statistician but cannot be ignored by a practitioner. The consequences are too catastrophic to be ignored. Today it takes a naive individual or someone unconcerned with credibility to make a blanket claim regarding one’s ability to guarantee against “Black Swan” events.

Primus will continue to utilize the “under promise, over perform” philosophy.

The Centers for Disease Control (CDC) has utilized computers to find the “needle in the hay stack” through PulseNet. The fresh produce industry needs to exploit the same technologies to prevent “the needle from falling into the hay stack”. Not only does the enhanced computing and communication capability improve the buyers’ oversight of suppliers but also the buyer’s oversight of the auditing firms and their individual auditors. This transparency results in the suppliers and the auditors being subject to competitive market conditions that force continuous improvement or failure.

Computerized audit review systems can and have been developed for buyers of varying sizes. Frequently, these systems emphasize concerns specific firms want to address as part of their unique corporate culture or in response to their client base’s concerns. While virtually each system is customized to the buyer’s specifications, all have a series of features that provide confirmations that: operations are audited, minimum requirements are met and corrective measures are implemented and in a timely fashion. In addition, all reporting systems are displayed in a management by exception manner.

Giving buyers a free pass regarding their responsibility for providing oversight would be a mistake and certainly a disservice to suppliers and buyers who have been working together for years to perfect various oversight systems. In fact it is a safe bet that the fresh produce industry is large enough and diverse enough that what is defined as safe production and handling practices will come in more than one form.

Certainly consolidators that are very small can piggyback off the efforts of industry leaders. This type of recognition of excellence has been going on for years when a buyer approved a supply based on the supplier’s current client list. What firm is not proud of their success in selling to demanding clients?

Robert F. Stovicek, PhD.
Primus Group
Santa Maria, California

We think Bob makes several crucial points:

First, people may be looking to audits for more than audits can provide. His point that all the auditors surrounding the banking sector could not assure solvency is telling indeed.

Second, round-the-clock USDA inspectors and the fact that the product is cooked have not prevented foodborne illnesses from beef. Why believe that any amount of inspections could end foodborne illness for produce?

Third, foodborne illness is such a rare result of produce consumption that any normal “advance” — a 10% improvement in some metric or other — can only have a statistically inconsequential impact on food safety outcomes.

Fourth, perhaps most pointedly, Bob also points to the importance of keeping the buyer involved in food safety. With a new administration in Washington, one more inclined to put government in the forefront of food safety solutions, there is real chance that the role of buyers in food safety could be depreciated. After all, if the government makes everything safe, why spend money on safety?

Indeed we’ve been disappointed as the President has sometimes downplayed the important contributions of the industry on food safety and given excessive credit to government employees.

In fact, in a piece we wrote for The Weekly Standard that was subtitled, Obama’s ‘Government First’ Attitude puts Food Safety at Risk, we explained:

President Obama showed he is blinded by the liberal conceit that the government is the most important factor in food safety: “There are certain things only a government can do. And one of those things is ensuring that the foods we eat are safe and don’t cause us harm.”

This is nonsense. The government does not farm or process anything, it does not distribute, market or cook, and it cannot possibly monitor the hundreds of millions of people in over 100 countries and every state, from field to fork, that have a role in food safety.

Food in the United States is generally safe for four reasons: First, because there are moral precepts that make the vast majority of producers intent on doing no harm to their customers. Second, because the value of a brand and a company dissipate rapidly if they sicken or kill their customers. Third, because those who prepare meals at home mostly love those they cook for and so try to serve wholesome foods. Fourth, because the United States is an affluent, western society with advanced technologies and procedures for making foods safe and we are both willing and able to spend money to have safer food.

Of course, government is important. It sets up the legal and economic ground rules within which we operate. But its specific effect on food safety is dramatically overstated by those, like the president, who seem able to identify virtue only in public employees.

What else could the president mean when he says, “The men and women who inspect our foods it is because of the work they do each and every day that the United States is one of the safest places in the world to buy groceries”? It seems the president has this notion that the entire private sector for food production and distribution is filled with bad actors being held back by an army of federal inspectors.

The president says this but in the same address he contradicts himself by pointing out that “the FDA has been underfunded and understaffed in recent years, leaving the agency with the resources to inspect just 7,000 of our 150,000 food processing plants and warehouses each year. That means roughly 95% of them go uninspected.” Obviously it is impossible to both hold that we barely inspect anything and yet it is these inspections that are responsible for the overwhelmingly safe food we have in America.

In the end the government has a role, the auditor has a role, the buyer has a role but it is, in fact, always the producer and the preparer of food that really makes it safe.

Even then, even with maximum care, as Bob says, only a fool would assume that safety is guaranteed. Food safety events in produce are outliers, but, as Bob indicates, they are of such consequence that neither a company nor the industry can ignore the possibility of such an event.

We have written before about the terrible flaw in thinking that people fall under when considering regulation. If you give a responsibility to business, the assumption is that businesspeople have many divergent interests and that, therefore, the responsibility may not be honored.

But just as fools thought that by “outlawing war” through the Kellogg Briand Pact, so people, exceedingly skeptical of the ability of the private sector to obtain food safety, assume that the mere passage of a law ensures food safety.

Yet, here at the Pundit we’ve looked at the controversy over the 7th Street Market in Los Angeles and the Taco Bell/KFC with the rats in New York, and we see clearly that merely passing a law or hiring an inspector, assures nothing.

One wonders if instead of deemphasizing the role of buyers in food safety we shouldn’t increase their legal responsibility. After all, in the aftermath of the spinach crisis, we interviewed Jo McDonald of the British Retail Consortium, who made a specific claim:

“I believe that if all companies had adopted BRC standards, the spinach E. coli outbreak very well could have been avoided.”

— Jo McDonald
Technical Services Manager
British Retail Consortium

The BRC standards, though, were developed in a different legal environment, in which a combination of common use of private label combined with legal requirements for due diligence made buyers more deeply involved. In the US system, buyers have often focused on indemnifications and making sure vendors have adequate insurance because it is the producer that is typically liable.

One wonders if looking at legal changes, reshuffling liability, might be the key to safer food.

Many thanks to Bob Stovicek and to Primus for contributing such a thought-provoking letter on this important subject.

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