ISO 22000: Traceability in Food Supply Chains/ Costs and Benefits of Traceability - VII

ISO 22000 & Food Traceability 
Part VII

Benefits of Traceability

Much of the current motivation in the food industry for implementing tracking and tracing systems is in response to current or anticipated regulation. If the only objective is to meet regulatory requirements traceability costs can appear to be a significant burden. However, traceability can also provide significant benefits that extend far beyond simply meeting regulatory requirements unlike other investments in process improvement. The key to achieving those benefits is first to identify them and then to develop a plan to achieve them. This means taking a different approach to traceability; from the planning stage right through to execution. Accurately assessing benefits is challenging because they tend to be harder to identify and individual benefits vary among different markets, products and processes. However, it is evident that, taking the high level systematic approach can help managers on potential new profit or cost saving opportunities.

After examining areas of potential value for traceability, it is observed that benefits fell into four key categories areas:

1. Regulatory Compliance;
2. Market and Customer Related;
3. Recall Risk and Scope Reduction;
4. Efficiency and Quality Improvement;

The process of assessing benefits begins with an area of mandatory regulation, where most managers are most familiar with. It then drills up searching for other market incentives, impacts on recalls and finally opportunities for improvements in efficiency and quality. The key to truly understanding the whole business case is to identify and enumerate the benefits at every level and compare the complete package of benefits to the cost of implementing the system. The different categories of benefits are discussed in more detail in the following sections.

Compliance of Regulatory Requirements

Many organizations agreed that, the significant motivator for adopting traceability is meeting regulations. Regulations or anticipated regulations are being spurred by factors ranging from Bovine Spongiform Encephalopathy (BSE) and Avian Influenza to the new bio-security regulations for food importation into the United States and new E.U. requirements for traceability. These regulatory requirements have predictably sensitized most food organizations to the need for more responsive and robust food traceability systems and processes. The predominant sentiment seems to be eventually traceability may be mandatory and it will simply cost the business and customers more money. When regulations are imposed, traceability becomes a market entry requirement; without it a firm cannot ship product into the regulated market. Managers can compare the value of being in regulated markets with alternative markets and measure the difference in revenue and contribution to gross margin or profits. If there are few unregulated market alternatives then traceability may be essential to the survival of the business. However, even in such cases, it is important to continue the business case analysis through the next levels of value assessment, since they identify benefits which will cover the costs of implementing traceability.

Addressing Customer & Market Needs

Even in markets without traceability regulations, traceability can still be a customer requirement. Customer requirements and the motivations behind those requirements can vary significantly. Retail organizations like Wal-Mart are imposing Radio Frequency Identification (RFID) systems on their suppliers in the search for process efficiencies and ultimately reduced cost. Other customers and markets require traceability as an assurance of product attributes, particularly for attributes which are not visible, often referred to as credence attributes. Credence attributes fall into two broad categories: content and process.

Non-visible content attributes are tracked because the products appear to be the same as others on the market, but their composition is different and the difference is important for customers.

Process attributes are tracked because products are produced using different processes and the process matters to selected customers. Organic food products are an excellent example where using traceability helps track process attributes. The premium value for organic products lies in the process by which they are produced. Traceability is needed to assure buyer and consumers that the products are actually produced under organic processes. Animal welfare and fair trade coffee are other examples of process attributes.

Genetically modified (GM) crops are examples of products differentiated on both content and process basis. Non-GM products can attract a premium if exported into selected markets. Traceability assures consumers that the products do not contain any GM crops. In the future, functional food products and GM crops that provide health benefits will be traced so that their full value may be realized. The benefit assessment for content or process attributes will include looking at current or future product sales volumes and margins and comparing them to the values for other market alternatives not requiring traceability.

Considering the benefits of traceability; i.e., one produce company which was able to claim a significantly higher price for its product because it could accurately and consistently identify the quadrant of land from which its product was harvested. The particular quadrant of land (due to environmental factors) and seed genetics produced a highly desirable group of attributes which lessened the need for blending at the processor level. The company used its ability to identify the product to attract export customers. This enabled the company to not only open itself to new markets, thus expanding its revenue potential, but to claim a higher price (margin) for its product. The interesting aspect in this one case was that traceability was initially designed so that the product would not run the risk of being rejected by regulatory requirements in the receiving country. The company turned a regulatory compliance issue into a market benefit, significantly raising the value it had assigned to traceability. It creatively used the ability to trace its product back to a specific plot of land as a competitive advantage to become identified as a high quality supplier.

Recall & Risk Management

Governments impose traceability on companies as a risk management tool to protect public health or animal health. However, traceability also acts as an effective means of reducing the risk exposure of firms. The most obvious benefit comes from the ability to accurately identify problem lots, their location and source, important factors during a recall situation. An effective traceability system can reduce the potential scope of a food recall, the volume of product which must be withdrawn in order to be sure to capture compromised product. In an examination of the food industry full traceability can cut the scope of the recall substantially, and can observe instances where the scope of recall could be lowered as much as ninety percent. Increasing recall speed and reducing product risks should decrease risk to consumers. This can ultimately decrease liability claims by consumers, a fact that can eventually be reflected in lower liability costs and lower insurance premiums.

A whole chain traceability system can reduce the time required to withdraw recalled product. In the case of a potentially hazardous product, this will ultimately reduce a firm’s exposure to liability claims by recalling product before it is sold to the public and possibly consumed. Traceability can affect recall frequency in two ways. First, accurately identifying only recall product and reducing the scope of individual recalls will reduce the number of locations and organizations experiencing the recall. For an example; where a recall included six retail locations under current levels of traceability when, in fact, the affected product actually only went to a single location. Under enhanced traceability the other retail locations would not have experienced that particular recall. Second, by maintaining accurate information on products it is possible to move older products more effectively through the chain and thereby reducing the risk of bacterial contamination. The benefit of improved risk management can be assessed by first considering the improvement in recall costs through reductions in frequency, scope and severity, and then considering the impacts on liability claim costs and potential reductions in insurance premiums.

Process Improvements – Efficiency and Quality

An enhanced traceability system is another tool that managers use to increase the efficiency and effectiveness of business processes, and thus improve the quality and cost of their products. Today, organizations appeared to have difficulty contemplating improvements in efficiency and quality by adding traceability, mainly mentally separate traceability from other supply chain related activities and do not view it as an integral component of their management systems. Few consider that being able to track and locate products accurately can reduce out of date product losses, identify problem processes or suppliers and improve logistics and warehouse operations. This is curious when one reflects on the value traceability brings to such diverse industries as pharmaceuticals, automotive, aerospace and electronics. The first step in identifying efficiency gains is to break business processes into a small number (ten or fewer) of key ones that can be analyzed in more detail. Once the key processes are identified you can ask the following questions.

1.      Do I have full control of the product lot and its identity through this process and am I able to maintain identity throughout the process?

2.      Could the tracking information be used to:

Adjust processes on a real-time basis to improve yield or quality?

Identify product approaching its due date so that it can be used or sold quickly?

Optimize inventory management to reduce overall inventory requirements?

Compare supplier performance, packaging or shipping alternatives and identify improvement opportunities?

Increase quality or efficiency in some other manner?

3.      How much would potential improvements contribute to the bottom line?

For example, one processor was able to identify potential yield improvements using the information from a traceability system to make process adjustments on a real-time basis. In order to accomplish this, a significant investment in new process equipment and changes to internal processes were required. In this case, the investment had an estimated payback of less than one year because of the increase in product yield and the ability to trace the variation in yield on an individual unit basis. Being able to trace to this level of specificity would also allow the processor to trace yield back to different suppliers which, in turn, would allow them to preferentially buy from producers with higher yielding product. The process yield improvements were significant enough to warrant the investment.

Qualitative Benefit Assessment

To complete the assessment of the real value of traceability, it is necessary to consider

benefits which are not easily measured in monetary terms. Working through the benefit hierarchy is possible to estimate real values for many, but not all, factors. Others may be important to the firm yet it may be extremely difficult for managers to put accurate estimates on the real value of those benefits to the firm. For example, traceability may affect the reputation of the firm, providing a market advantage, and the perceived risk reduction may be extremely important to the firm. Such benefits are often termed intangibles, but improved reputation and reduced risks are very tangible benefits for the organizations affected. They are tangible, just not easily measured. You can refer to such benefits as qualitative benefits. One way to assess the importance of such benefits is to ask managers to answer the following questions and apply a five point (Likkert) weighting scale.

How important is this benefit to the organization?

How much will implementing traceability affect this benefit?

Traceability Costs

There are two issues related to costs - what they are and who bears them. There are several key categories of costs. Costs may be incurred during implementation or on an ongoing basis. Costs incurred at one level may be passed on to different levels or may benefit other levels. For example, label costs may be borne at the producer and processor level but the investment will benefit all other levels using them.

An example cost of a system may be:

Hardware – computer and tracking

Hardware and other capital expenses

Software

Consultancy services – Integration and support  

Education and training

Other professional costs

Ongoing maintenance support

Label supplies

Policy development, compliance and auditing

Other costs

Traceability costs can vary widely depending on the nature of the firm and its products, its role in the supply chain in which it operates, its main activities and current track and trace technologies and capabilities.