With the recent press attention given to KFC’s supply issues, and product withdraws from Russell Hume and Fairfax Meadow, Sian Edmunds, partner, head of food and drink at law firm Burges Salmon LLP, discusses what operators can do to limit the negative impact of issues with suppliers.
Recent food safety issues at processing businesses such as 2 Sisters and Russell Hume, along with the current delivery problems faced by KFC in getting supplies into stores, have highlighted the huge impact there can be on food operators when things go wrong in the supply chain.
Many of these issues will be out of the control of affected outlets, but what can businesses do to limit the financial and reputational impact if problems arise? Assuming that the fault doesn’t lie with the food operator itself, there are a number of precautionary steps that can be taken to minimise risk and damage.
Supply contracts are a good place to start. Ensure you have clear provisions in place which hold suppliers responsible for failures to deliver and enable you to recover financial losses direct from that supplier. Suppliers would of course be wise to do likewise with businesses they work with within the supply chain.
Check also that any specified cap on the amount of compensation payable by a supplier doesn’t prevent you from recovering any likely loss of profits - many supply contracts will limit compensation to the cost of replacing the goods themselves, or specify a maximum sum payable which may be considerably less than the actual losses suffered by the outlet.
The announcement this week that Russell Hume has gone into liquidation demonstrates that when major incidents arise with a supplier it can lead to a catastrophic failure of the business itself. In those circumstances, a contractual obligation to pay a customer for lost profits is worth nothing if there is no money in the pot to make that payment.
Consequently, you may wish to consider imposing a contractual obligation on your suppliers to obtain insurance to cover any incidents. There are a number of policies available which may cover some or all financial losses arising from food safety or supply issues. But make sure you think about what kind of losses would actually arise and specify the level or type of cover required. Again, many policies will only cover the cost of goods themselves and not lost profits. Alternatively, consider whether to take out your own insurance to cover any losses arising from failures in the supply chain.
The potential impact on a food outlet’s reputation is more difficult to deal with. It is possible to include contractual provisions which require a supplier to recompense a business for loss of reputation but careful drafting is needed to ensure that this type of loss is both quantifiable and that it could not be successfully challenged for being a ‘penalty’ clause.
Reputation is in any event a hard thing to put a figure on. The businesses that seem to do best when problems arise are those which are up front at an early stage about explaining to customers what has arisen. In the era of social media and 24/7 news feeds trying to sweep a problem under the carpet is not a wise approach.
Businesses that tackle safety and supply chain issues well are generally those which have a clear incident response plan in place in advance of anything actually happening. It is well worth any food business spending some time now in ensuring that a plan is in place for tackling incidents and communications around them and, crucially, that everyone (including customer facing personnel, communications and marketing teams, buyers and Board members) know where it is, what it says and how to access it in the event that an incident arises.
