Supply Chain Risks

Food and beverage companies face increasing complexity at every level of the supply chain. While the key drivers for this added complexity vary, many companies are working hard to meet global demand for innovation, including new flavors, new products, and exciting ingredients. There are also new threats to food, including the emergence of new microbes and instances of ‘usual suspects’ bacteria such as E. coli making appearances in previously unsuspected products and ingredients. In part, these complexities led the Food and Drug Administration (FDA) to recognize the supply chain as a significant risk. The Food Safety Modernization Act (FSMA) resulted from that deep dive.

Regulators, therefore, require companies to take different approaches to control their risks, and customers are likewise tightening their efforts to ensure the purchase of safe, high-quality products. Testing has become more robust as well, and the expectation is that each party—from the farm to the retail end of the supply chain-–will do their part in preventing risks.

To further complicate matters, companies must still control their costs. Organizations must take an economical approach to managing risks, dedicating available resources to the most critical risk factors.

We’ll begin with some key considerations to help you identify any gaps in your current supply chain management activities.

What Are the 4 Types of Risk in the Supply Chain? 

To formulate a management approach, it’s crucial to first identify the risks facing supply chains within the industry and which risks apply directly to your organization. In general, there are four types of risk in the supply chain:

• Environmental: Even the most vigilant scrutiny of the weather can fail to prepare manufacturers for natural disasters. Sudden floods, wildfires, and other devastating events can create a ripple effect.
• Ethical: Ethical supply chain risks can include child labor violations, failure to pay a fair or minimum wage, improper or fraudulent labeling, or withholding personal protective equipment.
• Economic: While the manufacturer may be operating in a region with a booming economy, it could be sourcing ingredients or parts from suppliers dealing with a recessionary environment. Suppliers can also mismanage funds, go bankrupt, or find themselves embroiled in a work stoppage or strike.
• Political: Newly-elected officials may place tariffs or restrictions to assert control or attempt to create parity. Civil unrest, instability, and war can also cause importing and exporting to grind to a halt. Unrest and war can have far-reaching consequences. Russia’s recent invasion of Ukraine is exacerbating famine conditions in drought-stricken countries such as Somalia and impacting the most at-risk in other politically unstable countries like Syria, Lebanon, and Yemen. 

What Are the Biggest Risks Being Faced by Supply Chain Leaders?

Political: The COVID-19 pandemic has proven to be an exceptionally challenging supply chain issue with environmental, economic, and even ethical and political components. However, the pandemic has not been the only problem for suppliers and manufacturers. Other political events, such as the US presidential election, Brexit, and military escalations between China and Taiwan and Russia and Ukraine, have all generated snarls, halts, and anxiety. 

Sustainability: However, one issue gaining visibility alongside the other woes currently creating supply chain risks is sustainability. The general population and global governments are becoming increasingly aware of the environmental impacts of logistics, shipping, and supplier management, from sourcing to manufacturing. As governments call for and introduce stricter regulations, suppliers have to adapt to new extraction, production, and transport methods. 

Shortages: In the last couple of years, as suppliers wrangled with unprecedented supply chain risks due to COVID-19, it was common for production and transport issues to lead to shortages of products on the shelf. However, as some bottlenecks have suddenly widened, companies have gone from shortage to glut, with an overabundance of available, unsold products suddenly gathering dust.

Inflation: Many countries and regions, including the US and much of Europe, are struggling with rising inflation as 2022 progresses. Financial institutions such as the Federal Reserve have already hiked rates several times. But many experts are cautiously optimistic that inflation may be showing signs of slowing. Less hopeful market watchers are beginning to question whether stagflation—the dismal combination of a sluggish market and high interest rates—could be on the horizon. 

How Are You Managing Supply Chain Risks Today?

Many often perceive the supply chain as a linear relationship between suppliers and customers. In reality, however, it is more like an increasingly vast and tangled web. Although there may be visibility into your tier 1 suppliers, organizations often must admit that visibility begins to cloud at tier 2. As you trace back and visibility decreases, you must identify the most significant risks. Some risks may have a small impact, for instance, while the effect of others could be massive. Certain ingredients may only affect a few products, while others may affect many.

Yet, identifying and assessing risks is only one piece of the puzzle. The next equally important step is determining who is responsible for controlling them. Each company approaches supply chain risk management differently, but there are many industry-wide similarities.

For instance, many companies rely on audits to verify that their suppliers have appropriate, preventive-based food safety practices in place. While some larger companies may have the means to perform second-party audits, most rely on third-party audits.

In some instances, you may rely on certificates of analysis (COAs) or your own testing programs. While these measures are dependable, in many cases, organizations may need to do some fine-tuning to ensure they are taking the most compliant and effective approach possible. Lastly, some companies also use monitoring their suppliers’ behavior. When vendors become less responsive, send materials that are just barely within specifications, or are missing deadlines, it could be time to reevaluate their status as an approved vendor.

Critical Considerations for Assessing Supply Chain Risks

As you assess how you currently manage supply chain risks, here are a few key questions to bear in mind:

• Do you have an adequate understanding of supply chain risks?
• Do you know who is really controlling the risks in your supply chain?
• Are you able to track all of the information you receive, including COAs and third-party audits?
• Who is in charge of the supply chain? Frequently, this question generates a complex answer. Many people may be involved, including individuals from procurement, product development, research and development, finance, legal, operational manufacturing, and the food safety team.

Answering these questions means identifying your risks and differentiating among which risks have the most significant potential impact. Oftentimes, food and beverage companies wonder whether they should devote more resources to managing high-risk areas than low-risk areas, and the answer is yes. Nearly everything food companies do today involves developing a risk-based approach.

Taking an FSMA Approach to Supply Chain Control

Because the FDA recognized that supply chain control is critical in managing food safety risks, it developed two fundamental rules under FSMA to address this key area, outlined below.

Preventive Controls Rule (Human and Animal Food)

Food and beverage manufacturers subject to the Preventive Controls Rule must assess supply chain risks and then verify that the risks are being controlled. If it is determined that the supplier is responsible for managing the risk, the purchasing company must be able to confirm that the supplier is doing so effectively.

Foreign Supplier Verification Program (FSVP)

FSMA’s FSVP is very similar to the Preventive Controls Rule, except for the fact that it shifts the burden of ensuring safe food to importers. It is, therefore, the FDA’s expectation that importers will have assessed risks in the supply chain and subsequently verify that risks are being controlled.

While these rules are conceptually relatively straightforward, many companies still face confusion around their implementation. For instance, one common question is: If a manufacturer that would ordinarily fall subject to the Preventive Controls Rule also imports food, does it need to take a separate approach to comply with both rules? The answer is no—it can cover all supply chain risk control as part of the Preventive Control Rule requirements.

The FSMA Approach to Supply Chain Control

The regulatory approach to managing supply chain risks is the same for both the Preventive Controls Rule and FSVP. The key steps that manufacturers should follow are:

• Perform a Hazard Analysis: Look at hazards presented by the materials your company sources in all three areas: ingredients, products, and packaging.
• Evaluate the Risks: Identify the types of risks posed, including whether they are microbiological, chemical, or physical. The next step is to identify who is responsible for controlling the risk. This could be the supplier, your company, or your customer. If your customer is responsible for managing the risk, FSMA requires a letter of assurance from the customer stating this.
• Supplier Verification: If it has been determined that the supplier controls the risk, you will need to verify that the vendor is indeed doing so effectively.
• Use of Approved Suppliers: The FDA may request to see your list of approved suppliers and how you select and approve suppliers.
• Corrective Actions: Any time a supplier fails, ensure that the corrective actions are carried out appropriately and thoroughly documented.
• Build a Program and Keep Records: Detailed recordkeeping is a common theme across many aspects of FSMA, so confirm that records are updated regularly and are well organized.

A Basic Approach to the Preventive Controls Rule

A practical implementation of an FSMA approach to the Preventive Controls Rule is as follows:

• Create a List: Compile a list of all ingredients you are using, as well as products and primary packaging.
• Perform a Hazard Analysis: Determine if any risks are Class 1 level. Retain this information for your records, as the FDA may request it.
• Determine who will control the identified risks: Will it be your company? If so, you must build controls into your food safety plan. If the supplier is controlling the risk, you must have measures in place to verify that they are doing so.

Regulatory Compliance Tips

The approach to supplier verification is very similar to that of the Preventive Controls Rule. You can start by compiling a list of all suppliers, including locations if there are multiple manufacturing sites for one supplier. You will need an onsite audit for all Class 1 risks being controlled by the supplier. If you are sourcing from multiple sites, you will need an audit for each. Many companies rely on third-party audits to satisfy this requirement; however, it is essential to ensure that you have proper documentation in place should you choose to go this route. Because Global Food Safety Institute (GFSI) standards are well-aligned with FSMA, GFSI certification appears to satisfy FDA requirements. If you cannot perform an onsite audit for Class 1 risks, you will need to document why and control the risk through other means, such as a testing program.

You can use alternate control methods for other risks, such as a COA or review of suppliers’ food supply plans. Be mindful of how you use COAs, however. While they are common across the industry, it is important to understand precisely what each COA means. If an ingredient poses a high risk, ensure the COA is robust and reliable. For instance, is the testing method an approved one? Does it test adequate amounts of the product? Are the suppliers using an accredited laboratory for testing? While you do not have to look at COAs quite this closely for every ingredient, be sure to do so for those you deem most important. Before we move on to the next section, here is a brief recap of the information outlined here: 

• Create a List: Compile a list of all ingredients you are using, as well as products and primary packaging. 
• Perform a Hazard Analysis: Determine if any risks are Class 1 level. Retain this information for your records, as the FDA may request it.
  
  

Determine who will control the risks you have identified. Will it be your company? If so, you must build controls into your food safety plan. If the supplier is controlling the risk, you must have measures in place to verify that they are doing so.

• Maintain a list of approved suppliers
• Take appropriate corrective actions
• Keep full records

If your company falls under the Preventive Controls Rule or FSVP and follows these tactics, you should be well prepared for an FDA inspection.

What Is Supply Chain Risk Mitigation?

Unpredictability is what turns many events into supply chain risks. However, there are several ways that companies can mitigate the effects a risk will have on the health of the supply chain. These methods include:

• Diversifying: Manufacturers can create flexibility by diversifying their supplier base. If a supplier in one region is suddenly dealing with record-breaking floods, the manufacturer can turn to suppliers in other areas to prevent interruptions.
• Scenario planning: Drafting a plan of action for risks that could happen gives a company a framework to operate from if a disruption does happen. 
• Adapting the management strategy: In recent years, many companies have adopted a Just in Time (JIT) strategy of carrying enough inventory to stock shelves with a small reserve. After the pandemic, many might be looking at a Just in Case (JIC) strategy. But it doesn’t make sense to implement JIC across the board. Resilience could come in the form of crafting a JIT plan with JIC for strategic products or regions.

Assessing Supply Chain Risks

By this point, the necessary actions for satisfying the Preventive Controls Rule and FSVP are clear, but the question remains: How do you determine risk in the supply chain? Clearly, not all suppliers present equal risks. How, then, should you differentiate among these risks? 

Again, you should be dedicating your resources to the most significant risk areas, but to do that, you must first determine which are most important. Multiple

factors can impact risks, which can be categorized into three main areas:

• Ingredient Risk: This refers to the inherent risks posed by the ingredient itself, including a recurring history of problems, country of origin, and so forth.
• Supplier Risk: You should factor supplier behavior into your risk assessment, including the degree to which they control risks.
• Your Use of the Ingredients: Naturally, ingredients used in all products pose a higher risk than a select few. Likewise, those used in high-profile products—those customers associate most with your brand—should also be considered a greater risk.

Assessing Ingredient Risks

One effective way to assess ingredient risks is to develop a series of 10-15 questions that you could ask about each ingredient. These questions could refer to a history of problems, and whether the ingredient is from high-risk areas and has been found to contain microbiological or chemical contaminants in the past. You can then rank each response using high, medium, or low-risk values and repeat the process for each ingredient. There are also tools available such as vendor management software which can assign numerical values to ingredient risks, allowing you to rank ingredients from highest risk to lowest risk. This helps to ensure that risk management is based on data, not instinct or experience alone.

Assessing Supplier Risks

Using the same approach, you can then begin to rank supplier risks. Questions can include information about qualifications and certificates, onsite audit results, any prior history of problems with the supplier, and regulatory actions. Again, ranking supplier risks will enable you to take a data-driven approach to supply chain risk management.

Assessing Risks Based on Your Use of the Ingredient

Finally, formulate a list of questions about your use of an ingredient. For instance, you might ask yourself about the number or volume of products it affects, whether it is used in a “flagship” product strongly linked to your brand identity, and the potential economic impact that could occur in the event of a recall.

By looking at all of the information above, you can compile a risk-based strategy. Instead of simply following FSMA requirements, this ranked risk approach allows you to take your prevention efforts a step further and optimize your resources. While you certainly can’t dedicate the same amount of risk prevention for every supplier and ingredient, you can identify which poses the greatest threats and take appropriate actions based on your findings. In other words, you can ensure that you are genuinely spending your risk management dollars based on an accurate and thorough risk assessment.

Working With Suppliers

To some extent, the effectiveness of your supply chain management lies in your ability to collaborate seamlessly with suppliers. You must also cultivate and nurture teamwork within your own facility.

New Products or Suppliers

When new products are in development, make sure that all teams involved are collaborating to ensure that potential risks are identified proactively—not reactively. This may mean that in addition to Research and Development, Procurement, and Supply Chain personnel, you’ll also need a Food Safety manager involved in the early phases of product development.

The company must understand both the product risk and the supplier risk. If it is deemed that the product poses a high risk, it may require you to change directions, or it may simply warrant new processes for controlling risks.

Current Suppliers

One area in which many companies fall short is tracking the performance of existing suppliers. The emphasis is typically on innovation—which is why new suppliers are so thoroughly vetted—but to ensure safety at every level of the supply chain, companies must also monitor current suppliers. If you don’t already have one in place, develop a process to track and trend performance data. This could include timeliness of deliveries, how well the facility is meeting specifications, COAs, corrective actions, and so forth. Keep thorough records and analyze them frequently to look for warning signs that a supplier’s performance needs to be addressed.

Why Is Supply Chain Risk Management Important?

A marked increase in supply chain risks coupled with ever-tightening global competition has forced companies to develop or strengthen their supply chain risk management strategies. The frequency and severity of supply chain disruptions cost more and result in longer recovery times. While there are several tactics companies can use to mitigate risk, the risks themselves show no signs of fading away in the near future.

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