Risk Insider Steve Simmons

3 Risks That Can Cripple a Food Production Company

By: Steve Simmons | June 20, 2018 • 3 min read
Steve Simmons is the Associate Vice President of Risk Management for Nationwide’s agribusiness and food operations. Steve has been with Nationwide for 32 years and has served as the leader of agribusiness loss control for over 12 years. He can be reached at riskletters@lrp.com.

There are no small losses in the food industry. Food production losses are one of the most detrimental issues an agribusiness can face.

In 2017, food production losses were among the top five most common agribusiness insurance claims received by our company. While insurance can cover the damage caused to food-related equipment and products, it doesn’t guarantee that a food production business will survive the aftereffects. A business’s reputation can face major scrutiny if a simple product mistake affects the production of a major food brand with which it does business.

The key to avoiding these reputational risks is to identify the possible causes of food loss before they happen. The following are scenarios that can cripple a food production business and the risk management methods that businesses can take to prevent them:

1) Quality Assurance/Quality Control (QA/QC)

The specifics of food quality have evolved in recent history and companies must adapt to new categories that may not have existed years ago. With classifications such as organic or non-GMO, it’s important for food distribution businesses to heavily monitor their products.

A simple mix-up, such as providing beet sugar instead of cane sugar as an ingredient to a large company, can lead to mammoth losses for the sugar distributor. Furthermore, if a business is relying on one major brand as their main client, a quality control mistake could ruin that relationship and put the business’s future at risk.

It’s critical for agribusiness owners to assess the supply chain of their product from beginning to end. All food production programs need thorough documentation, verification and testing of products or ingredients. Ingredients must have exact specifications before being incorporated into any product.

The processes should be analyzed for gaps and employee training should be conducted on a regular basis to avoid hidden damages.

Most underwriters’ and engineers’ eyes light up when buildings have quality fire suppression, security and monitoring systems.

Employees need to understand that minor impurities or incorrect packaging can lead to significant damage to property upstream. Agribusiness professionals need to know how a buyer brands itself and how their product will be used in order to devise the best QA/QC programs. Large food entities have top-notch QA/QC programs and will most likely find the impurity before it hits the shelves.

2) Fire

Even a small fire can be crushing in the food production industry. While structures, machines and products can be reproduced, the amount of time necessary to pass inspections and accelerate production can create a large loss.

Traditional property underwriting and thought processes must deviate for this scenario. Most underwriters’ and engineers’ eyes light up when buildings have quality fire suppression, security and monitoring systems. However in the food industry, a fire with significant smoke damage may require replacement of electrical, plumbing and processing equipment.

While the shell of the building may remain, the fire will lead to a significant period of restoration, rendering finished goods unsaleable and ingredients useless.

Although insurance can pay for tangible items and provide income for expense during the period of restoration, another company can step in and fill the primary buyer’s contracts. Any fire could lead to new competition or loss of customers.

3) Contamination

Contamination comes in many forms in the food production industry: foreign matter in ingredients, non-organic material used in organic products, and genetically modified ingredients in products that are branded GMO-free. Damage to other company products from these events can lead to a substantial loss for a food production business.

Contamination can occur during different phases of distribution, which is why it is imperative for food and agribusiness professionals to have in-depth knowledge of the processes employed by companies they contract with.

If a shipment of contaminated seasonings from an international vendor is incorporated into your buyer’s product, the entire purchase can be rendered useless once it is packaged.

Most contamination exposures will be mitigated with good QA/QC procedures. Good contractual arrangements outline responsibilities to prevent cross litigation and finger pointing with vendors or clients.

Pay attention to transportation processes both in and out of the facility; many contamination losses begin in transportation and snowball. Rail cars and trailers that are not adequately sanitized from prior loads can easily contaminate other products. There are no minor contaminations in food-grade products.

More from Risk & Insurance

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2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.

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But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.

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Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at dreynolds@lrp.com.