Business owner Ben LeGrand is anticipating the sale of a company that he built up from scratch over three decades. Ben should be reaping the benefits of his hard work, but instead of getting a good price for his business, he sees his business devalued by more than a third because of product contamination that results in injuries and fatalities. This Risk Scenario highlights some of the risk management shortcomings that made the loss that much worse.
1. Crisis communications: Ben’s crisis communications team is overwhelmed when social media attacks do great damage to the company’s reputation in the weeks following an adverse event. Ben needed a plan in place that was state of the art and equipped to move at the speed at which social media moves. It was not and so they had little or no ability to mitigate or influence the crisis. Not only did Ben’s company suffer substantial reputational damage, but also so did many of the companies Ben supplied with his baked goods.
2. Product recall and product contamination coverage: Although Ben was proud of his creativity and his business savvy in building a business valued at close to $1 billion, he was proved to be naïve in his understanding and use of some key insurance products and the crisis management expertise and risk consulting services they provide. Ben suffered substantial insurable liabilities and losses when products that were either contaminated or could have been contaminated had to be recalled. As a food manufacturer, he should have given these products much more serious consideration than he did.
3. Supply chain management: Ben suffers losses over something that at its root is a supply chain management problem. Ben and his operations staffer did not have adequate visibility into the operations of a supplier or a supply chain management plan that kept them out of trouble. A further failure of the company’s supply chain management was that when a spot market supplier created a problem, the company lacked the supply chain flexibility and ability to fully trace the offending raw materials through to finished products to adequately react to the problem.
4. Recall and traceability plans: Ben’s operations manager did not have a set of plans in place that adequately managed the risk of a poor recall decision. The operations manager gambled that the company could only recall part of a suspected contaminated product line and not all of it. He was wrong and substantial losses occurred as a result.
5. Enterprise risk management: Ben committed a classic risk management mistake. He allowed top-line concerns to dominate his thinking. This break in the logic of proper enterprise risk management effectively took his “eye off the ball” and resulted in substantial bottom-line losses.
Related Articles and Resources
Food Safety Modernization Act: Focusing on Prevention(Risk & Insurance®)
There is perhaps no legislation more historic when it comes to food safety than the Food Safety Modernization Act. The law gives food-system risk managers the chance to assess how well their companies mitigate and respond to food contamination issues with the goal of reducing bacterial contamination in foods.
Food Recall Worries (Risk & Insurance®)
The Food Safety Modernization Act has stirred considerable debate over pricing for product recall insurance in that market. On the one hand, there are those experts who see an inevitable rise in food recall insurance prices given the much more stringent requirements of the new federal law. On the other hand, there are experts who see a leveling off of food insurance prices after an initial spike.
Product Recall (Sponsor’s Information)
To protect both financial and reputation exposures, XL Group offers a solution that combines coverage with crisis management service.
How to Survive a Product Recall (Inc.)
For Ben’s Best, issuing a “peanut free cookie” that actually had traces of peanut in it was a death sentence. But it didn’t have to be. This story highlights how companies can limit the damage to brand and reputation after a recall.
Recalls that Kill (CNN Money)
As we saw with Ben’s Best, issuing dangerous products or products without proper labeling can destroy companies. Here are five businesses that didn’t survive their recalls — and two that used bankruptcy to their advantage.
Five Food Recalls that Changed Our Lives (PeanutAllergy.com)
As we saw for Ben’s Best, allowing dangerous foods to hit the shelves can be devastating. Over 380 million eggs were recalled because of possible salmonella contamination in 2010. More than 370 health problems were reported coming from peanut butter traced to ConAgra’s Sylvester, Ga. plant in 2009. Here is a list of the five largest food recalls in recent history.