Risk in Context

Food For Thought 2: Navigating through the Pandemic Response Cycle for the Food & Beverage Industry

Posted by Sarah Koo May 13, 2020

The COVID-19 pandemic is an unparalleled global crisis with adverse economic impacts to international trade and businesses. 

The food supply chain landscape is inter-connected and highly integrated. Any disruption along the food supply chain will have a domino effect for many in the region. This can be further aggravated by delays and restrictions in global transportation, panic buying, hoarding of essentials, and trade restrictions, which increase supply chain vulnerabilities.

Being considered an essential service in many, if not all, jurisdictions in Asia, food manufacturing and processing businesses are generally permitted to continue operating. However production may be impeded by local control measures, affecting labor resources and hence making it challenging for food production to operate as usual.

Food manufacturers may face shortages for some food supplies or certain types of food commodities, increased prices of materials, increased freight charges, and the need to source for alternatives. Given the current limited flights and constraints in capacity of third-party logistics providers, there will be concerns on time-dependent and temperature-sensitive food cargo, and hence the risk of food quality and food safety issues.  Food packaging materials may see intensified demand. Food suppliers will need to scramble to look for additional or alternate supply sources for food packaging, which may potentially give rise to compromises in food safety and lead to possible food contamination issues.

It is important that manufacturers continue to adhere to food safety processes, risk management procedures, local standards, and other certification requirements, and also ensure traceability in the food supply chain, minimizing the risk of a food contamination and recall incident.

For some sectors in the food Industry, there may be an unexpected upward trend in sales and demand for groceries and other food items during this period.  Some businesses have seen significant jumps in sales that they have needed to increase manpower staffing in order to cope with the heightened customer traffic and transaction volumes.

To meet increased consumer demand, manufacturers and retailers are increasing their inventory either using their own warehousing or third party warehousing facilities. Additional efforts may be required to ensure these new third party warehousing facilities meet the requirement of food storage and temperature controlled environments as well as the required food safety and quality management system certifications.

There has also been a surge in online demand and orders for groceries and food.  Increased usage of digital platforms has become necessary for businesses to maximize revenue during this difficult time.

All these changes may present a shift in your risk profile with increased cyber exposures arising from data privacy breaches, hacking attempts, malware attacks, and other cyber-related risks.

The following can be considered to mitigate losses and risk exposures arising from disruption in the food supply chain, and ensure continuity for the organization through risk transfer measures.

Business Continuity Management

Business Continuity Management plans for the food industry are generally focused on strengthening the following elements:

  • Operational resilience.
  • Manpower resilience.
  • Supply Chain resilience.
  • Enhancing food security with alternative sources.

Countries like Singapore, which import the majority of its fresh food, are actively focused on mitigating supply chain risks by diversifying sources across regions.  Hence, the following can be prioritized to enhance resiliency in your Business Continuity Management:

1.              Updating existing Business Continuity Plan

  • Organizations will need to identify alternative suppliers in the event of a disruption.
  • Be adaptable to maintain productivity levels by leveraging on technology.
  • Address changes in distribution channels, for example, secure online ordering and introducing technology.

2.              Forecasting models  

  • Economic forecasting models help organizations factor in the impact of the pandemic and the evolving responses needed on their businesses and recovery plans.
  • This enables organizations to make better informed decisions, including:
  • Evaluating different risk mitigation strategies, for example, modelling their supply chain risk and their susceptibility to specific disruptive events.
  • Managing tail uncertainty under different scenarios, for example, modelling the liquidity of the business under extended recovery periods.
  • Prioritizing strategic projects and balancing revenue interruption versus cost control decisions, while allocating limited resources.  

3.         Understand the new cyber threats through risk identification, risk quantification, and risk mitigation. This will address the increased cyber and cyber-crime exposures arising from data privacy breaches, hacking attempts, malware attacks, and other cyber-related risks.

Contaminated Product and Recall Expenses Policy

In a world where social media use has become ubiquitous, recall incidents for the food industry bear consequences beyond financial loss. They can result in reputational risks, loss of consumer confidence, and even loss of confidence among key stakeholders and investors. Brand and reputational risks remain top concerns for organizations in the food industry.

Significant costs and expenses can be incurred in the recall, replacement, and even the safe disposal or destruction of contaminated products.  Accidental or unintentional contamination with the potential to cause bodily injury can occur during the process of manufacture, production, packaging, and distribution. A Product Contamination and Recall Expenses policy addresses the following risks and expenses associated with a food recall (including governmental recall) arising from an accidental contamination. It will be useful to know examples and financial implications of such recall expenses that organizations will potentially experience from a food recall incident.

  • Removal of affected products from distribution channels.
  • Media and advertising costs.
  • Warehousing and transportation costs. 
  • Additional labor costs.
  • Investigation costs.
  • Third party recall costs.
  • Replacement costs.
  • Repacking and redistribution costs.
  • Crisis and public relations management consultation fees.
  • Possible legal expenses.
  • Loss of business revenue.

Hence, continued adherence to food safety management systems, active risk management, and coverage protection from a Contaminated Products and Recall Expenses policy, will mitigate the adverse effects of a product contamination incident and losses arising from recall costs suffered by the organization.

Cyber Risks Policy

Based on responses by over 150 leading retail and wholesale food industry organizations to the 2019 Marsh Microsoft Global Cyber Risk Perception Survey, it was reported that 79% of these organizations ranked cyber risk concerns among the top 5 corporate risks, alongside with supply chain, brand, and reputational risks.

About 35% of the organizations surveyed have no method of identifying and quantifying their cyber risk exposures.

Data breaches, loss of confidential information including customers’ details, systems outage due to cyber attacks, or technology malfunction at a food manufacturing/processing operation resulting in loss of business revenue and supply chain disruptions, are examples of emerging cyber risks.

A Cyber Risks policy protects organizations by providing the following areas of coverage:

  • Cyber Breach Response Service, addressing costs incurred to mitigate a cyber breach and crisis management consultancy services.
  • Network and Security Liability addressing claims arising from unauthorized disclosure, theft, or mishandling of confidential information.
  • Information Asset, referring to data and software recovery costs to restore the organization’s information and computer systems and corrupted or damaged assets.  
  • Business Interruption, reimbursement for losses in business income suffered. 
  • Cyber Extortion, referring to specialist decryption expenses in event of ransomware attacks and costs of cyber extortion negotiation.

With Business Continuity Management and risk transfer mechanism, organizations in the food industry can remain resilient and withstand interruptions and other risks exposures arising from supply chain disruptions, and minimize adverse impacts from other emerging risks in the industry.

Sarah Koo

Food & Beverage Industry Leader, Asia