Credit Redi, Helps Spot Small Business Credit Risk
The recession and credit crunch have shifted financial risk from banks to small and midsized businesses (SME) that often must extend credit to customers to make a sale. When companies extend credit, in effect making unsecured loans, they’re acting like banks but without the credit management tools and experience of a banker.
Credit Redi is designed for small businesses to quickly spot customer credit risk. Small businesses typically don’t have access to information that provides transparency about customer credit worthiness. Credit Redi is a credit risk management tool for small and mid-sized businesses. It only takes one or two bad receivables to damage an SME’s financial health. Market conditions quickly change and its critical to have some type of business insight into the businesses SME’s work with.
Credit Redi is also an excellent tool to determine the financial health of critical suppliers. A key supplier going out of business could have disastrous consequences for SMEs. Credit Redi monitors the financial health of existing suppliers and help managers make wiser choices in supply chain and business partner decisions.
Get Credit Redi here: 
Risk: SME, credit risk, supply chain, partnerships, customers, receivables
Sum2 Announces Business Alliance with CreditAides
Sum2, LLC is pleased to announce that they will begin to offer the corporate rating products of CreditAides. CreditAides is an independent corporate rating and research firm that provides financial health assessment reports and credit risk analysis ratings on companies using the Z-Score methodology. The CreditAides reporting system is a predictive tool that helps managers gain insights into the financial health of a company. The insights help managers identify a company’s ability to remain competitive and financially sound while measuring the impact of business initiatives to achieve profitability and growth.
James McCallum, the President of Sum2 stated, “The CreditAides quantitative assessment tool is a wonderful compliment to the qualitative risk assessment applications offered in the Profit|Optimizer. Now our clients have a recognized standard to measure the financial impact and returns on capital allocation decisions they implemented as a result of a Profit|Optimizer review. The challenging business cycle requires that managers allocate capital to a few select initiatives. It is critical that managers fund initiatives that mitigate the greatest risk and provide the potential of optimal returns. The combination of CreditAides reports with the Profit|Optimizer will provide our clients with the ability to discern the optimal initiatives to fund and measure the effectiveness of their capital allocation decisions.”
The Profit|Optimizer guides business managers through an thorough enterprise risk assessment. Uncovering the risks and opportunities associated with products and markets, business functions, numerous macro risks and critical success factors are key components of effective enterprise risk management (ERM). ERM requires the assessment and aggregation of hundreds of risk factors. The Profit|Optimizer helps managers identify the key initiatives that will help to maintain profitability and sustainable growth. The use of CreditAides provides an important measurement tool to affirm and validate that managers have made correct bets on capital allocation decisions.
Z-Score Financial Analysis Tool
The Z-Score formula for predicting bankruptcy was developed by Edward I. Altman a Professor of Finance at New York University. The Z-Score is used to assess the financial health of companies and the probability of bankruptcy. The Z-score uses multiple corporate income and balance sheet values to score the financial health of a company. The use of Z-scores is a strategic tool managers use to measure and validate the effectiveness of their business strategy.
Risk Assessment and Opportunity Discovery
The recession has created macroeconomic conditions that are causing widespread business failures. Small and mid-size business enterprises (SME) require effective risk management tools to effectively manage business threats to survive extreme business downturns. Assessing, measuring, aggregating, prioritizing, pricing and initiating actions are the tactical means risk managers use to support the business objectives of the enterprise. Sound risk management practices are central to a healthy corporate governance culture and are central to maintaining profitability and long term sustainable growth for the business enterprise.
The Profit|Optimizer
Profit|Optimizer helps managers assess risk factors and uncover opportunities that are always present in the business environment. The product is based on Basel II working group recommendations that outline optimal risk profiles of SMEs. The Profit|Optimizer incorporates four focus areas.
1.) product and market dynamics (products, clients, competition, supply chain, market segments)
2.) business functions (management, sales and marketing, operations, facilities, IT, HR, accounting)
3.) critical success factors (generic and specific)
4.) macro risk factors (macroeconomic, STEEPLE, SWOT, segment benchmarks, business plan optimization)
SME’s lack of agility and reluctance to change has made it difficult for these businesses to survive severe market conditions. There are tremendous market forces at work in the current business environment that are creating dangers and opportunities for SMEs if they can effectively assess and adapt. Business managers must be astute and exacting how they allocate the precious capital resources required to achieve business objectives. The Profit|Optimizer helps managers make better capital allocation decisions. CreditAides provides fiscal metrics to validate or adjust business strategy and initiatives. Sum2’s risk assessment products coupled with the measurement tools provided by CreditAides creates a leading edge solution for SME risk management. The ease of use and superior value proposition of the combined solution is unsurpassed in the market.
About CreditAides
CreditAides (www.creditaides.com) online business analysis and credit assessment portal provides business managers with important insights into the financial health of their company. Automated financial analysis improves efficiency of the business enterprise. CreditAides reports are used to assess the financial health of clients, supply chain and used to demonstrate financial health and credit worthiness to credit and equity providers.
True underlying financial health of companies has never been harder to identify and never been of greater importance. Across both equity and credit markets, understanding relative financial strengths of companies is paramount for effective business decisions. Good decisions cannot be made without good quality information generated by incisive tools.
About Sum2, LLC
Sum2 (www.sum2.com) was founded in 2002 to promote the commercial application of corporate sound practices. Sum2 manufactures, aggregates, packages and distributes innovative sound practice digital content products to select channels and market segments. Sum2’s sound practice products address risk management, corporate governance, shareholder communications and regulatory compliance. Sum2’s objective is to assist businesses and industries to implement sound practices to create value for company stakeholders and demonstrate corporate governance excellence to assure profitability and long term sustainable growth.
You Tube Video: Ella Fitzgerald, A-Tisket A-Tasket
Risk: bankruptcy, default, market, credit
A Growing Contagion: One in Seven Companies Are a Credit Risk
The H1N1 Swine flu threat may be the big topic on CNN but a growing contagion of financial distress is widely infecting small and mid-sized enterprises (SME) with potentially fatal consequences.
CFO magazine reports that 14% of companies are struggling to pay their bills or are at risk for bankruptcy. These findings are the result of a study CFO conducted on 1500 Midcap companies. The 2009 Credit Risk Benchmarking Report indicated that 550 companies of the 1500 made the credit watch list and over 200 of the names were in or are entering a distressed financial condition.
The report measures each company on three factors: cash as a percent of revenue, days payable outstanding (DPO), and DPO relative to the DPO of that company’s industry. The last of these measures is intended to expose which companies are under performing regardless of the economic condition of their industry as a whole. A company scoring low in all three areas is rated a potential credit risk.
The strain of a two-year recession and limited credit access is taking its toll on small and mid-sized businesses. This development is not surprising. The recession has hurt sales growth across all market segments. Banks, still reeling from the credit crisis are still concerned about troubled assets on their balance sheets. Bankers can’t afford more write downs on non-performing loans. Banks remain highly risk adverse to credit default exposures and have drastically reduced credit risk to SMEs by shutting down new lending activity.
Reduced revenue, protracted softness in the business cycle and closed credit channels are creating perfect storm conditions for SME’s. Bank’s reluctance to lend and the high cost of capital from other alternative credit channels coupled with weak cash flows from declining sales are creating liquidity problems for many SMEs. As a defensive maneuver, SMEs are extending payment cycles to vendors to preserve cash. This same cash management practice is also being employed by their clients resulting in an agonizing daisy chain of liquidity pain. SME’s that have concentrated exposures to large accounts are at the mercy of the financial soundness of few or in some instances a single source of revenue.
The growing contagion of financial distress is also a major threat to supply chains. Buyers might prize their ability to drive hard bargains with their suppliers but the concessions won may be the straw that breaks the camels back driving a supplier into insolvency.
It is critical that managers understand all risks associated with clients and suppliers. It is critical that managers assess risks associated with client relationships and key suppliers. In this market, enhanced due diligence is clearly called for. The financial soundness of suppliers and clients must be determined and scored so as to minimize default exposures to your business.
CreditAides is a company that delivers SaaS based financial health assessments on SMEs. CreditAides reports that their clients are becoming more vigilant and thorough in their due diligence of customers and suppliers. They have noted a particular emphasis on the growing practice of reviewing the financial health of suppliers. Supply chain risk is a heightened risk factor for SME’s due to their over dependence on single source. Conducting a financial health assessment on key suppliers and other enhanced due diligence practices mitigates a risk factor that could have potentially devastating consequences. SME manager’s need to button down their due diligence practices to prevent the sickness from infecting their business.
CreditAides SaaS can be accessed here: www.CreditAides.com
You Tube Music Video: Bing Crosby and Rosemary Clooney, Button Up Your Over Coat
Risk: contagion, credit risk, counter-party, supply chain, client, recession, banking
Sum2 Announces New Business Webinar Series: Recovery Tools for the New Economy
Great Falls Festival Paterson, New Jersey September 7, 2009: Sum2 is proud to be participating again in this year’s historic Great Falls Festival and is pleased to announce a new webinar series entitled “Recovery Tools for the New Economy.” The webinar series is designed to highlight the dramatic changes occurring in the economy and provide business managers with a set of tools to assess business risks and uncover opportunities the trying business cycle is creating.
The Great Falls Festival presents a perfect opportunity for Sum2 to announce its new webinar series. The Festival brings together leading industry executives, business associations, academic institutions, service providers, government agencies and capital market participants. Sum2 believes economic recovery will require concerted action by all these participants. Sum2 invites all of their participation to more effectively address the problems and opportunities confronting business and industry to effect sustainable economic recovery.
Recovery Tools for the New Economy
The Recovery Tools for the New economy Webinar Series will consist of three modules. Those modules include:
- Macro Risk and Opportunity Assessment: Macroeconomic, STEEPLE, SWOT, Financial Ratios, ROI Analysis
- Product and Market Segment Assessment: Product, Customer, Competition, Supply Chain, Market Dynamics
- Business Function Performance Scoring, Management, Sales and Marketing, Operations, Accounting, IT, Human Resources, Facilities
Each webinar will provide participants with an SMB 360 workbook and a series of interactive worksheet templates to conduct assessment exercises. Each webinar session will run approximately 1 hour in length. Each webinar module subscription fee will be $75.00. Subscribers can purchase a subscription to all three modules for $200.00. Subscribers that license all three modules can also purchase a Profit|Optimizer license for $200.00. Subscriptions to the webinar can be purchased on the Sum2 website www.sum2.com.
Sum2: Sound Practice Thought Leader
For the past three years Sum2 has used the occasion of the Great Falls Festival to announce a new product or market initiative. Last year Sum2 unveiled The Hamilton Plan.
Sum2’s announcement of the Hamilton Plan is in response to the compounding economic and political crisis that is confronting the United States. The credit and energy crisis, inflation pressures, trade deficits, geo-political instabilities, global warming and ecological degradation are the result of long term systemic problems that government and industry has failed to address effectively.
Sum2 put forth a 10 Point Program that squarely addresses these pressing issues. The previous year Sum2 announced the SMB|360° product series which has grown to include the Profit|Optimizer, IRS Audit Risk Program and the Macroeconomic Risk Assessment program.
The Profit|Optimizer is a qualitative risk assessment and opportunity discover tool. It assists SME’s to identify and score business vulnerabilities and opportunities. The Profit|Optimizer conducts over 200 assessments encompassing products and markets, business functions and critical success factors. The Profit|Optimizer aggregates risk assessment scores and presents action items on a series of dashboards that enable managers to decide what initiatives mitigate the greatest risk and produce the greatest return. The Profit|Optimizer demonstrates to shareholders, bankers and other stakeholders that company management are effective risk managers and are committed to corporate governance excellence.
Sum2 offers a series of products and services to help SME’s effectively manage risk, improve stakeholder communication, implement effective corporate governance that create sustainable business practices to assure long term profitability and growth.
Sum2 also offers the award winning PACO™ (Patriot Act Compliance Officer). PACO™ helps financial services companies comply with the anti-money laundering provision of the Patriot Act.
About Sum2, LLC
Sum2 was founded in 2002 to promote the commercial application of sound practice programs. Sum2’s sound practice program addresses risk management, corporate governance, shareholder communications and regulatory compliance. Sum2’s objective is to assist businesses and industries to implement corporate sound practices that add exponential value for stakeholders, employees, customers and to be exemplary citizens within the communities in which they operate and serve. Sum2 manufactures, aggregates, packages and distributes innovative digital data content products to selected channels and markets.
For more information on this program or to order products offered by Sum2 please contact customer.service@ sum2.com or call us at 973.287.7535.
Politicians Get Wind of Contaminated Drywall
As reported on this blog back in February, the problem of contaminated drywall residential home developers, suppliers and construction companies imported from China for new home construction is growing and the issue is beginning to raise a stink in Washington. Senators from a number of states are fuming about the extent of the problem. The use of contaminated drywall in new home construction spans many states. Florida in particular is reported to be severely effected by this product liability event. It is estimated that contaminated drywall was installed in over 35,000 homes. Risk mitigation experts believe that it would cost approximately $100,000 per home to remove, dispose and replace the drywall. Developers, banks, construction companies and consumers still reeling from the recession and credit crisis would be hard pressed to meet that huge expense.
The problem of contaminated drywall has many dimensions. It is a product liability issue, ecological hazard and has dramatic contagion capabilities that can effect financial solvency, community quality of life and international trade relations with China. At its root, the issue of contaminated drywall is a dramatic example of the severity of the consequences of a poorly managed supply chain. See our post For the Want of a Nail: Lennar Homes.
The Biz Journal Article can be read here: Senators Outraged Over Chinese Drywall.
More information on Chinese drywall contamination from NACHI
Managing Infuenza Pandemic Risk
The Swine Flu outbreak carries with it the potential to severely damage the financial health of small and mid-size enterprises (SMEs). Left unmanaged pandemics can impair profits, generate losses, undermine the contribution of key employees, disrupt supply chains, halt operations, undermine an enterprises financial health that can ultimately lead to bankruptcy.
Though many consider pandemics as a force majeure risk event that cannot be controlled, businesses can take steps to mitigate and manage the drastic challenges a pandemic can pose to a business. This is particularly important for businesses that find themselves in a weakened position due to the recession. Businesses that have become highly stressed due to the current business cycle are at acute risk of becoming insolvent due to the shock of this potentially catastrophic risk event. Business managers, bankers, shareholders and businesses with extended supply chains need to take steps to manage and mitigate the sever effects of pandemic risk.
The first step is to create or update a business continuity plan. Business continuity plans need to address a range of issues that includes planning for disasters and planning for the unique risk factors of an influenza pandemic need to be integrated into business processes.
All businesses are unique. Addressing a pandemic risk event in your business plan will require you to conduct a risk-management assessment on all aspects of your operations, business processes and market impact to ensure continued operation and financial health.
Some things management must consider in its review are:
- Assess how you work with employees, customers, contractors to minimize contagion threats
- Determine mission critical business functions your business requires to maintain operations
- Stress test your business operations to determine how to function with up a 40% absentee rate
- Review inventories in case foreign or domestic suppliers and transport services are interrupted
- Review your supply chains, determine at risk suppliers and identify backups
- Reorganize work spaces to minimize the spread of the disease
- Equip employees to support telecommuting
- Develop communication strategies to inform employees, customers and the media
- Use this opportunity to expand your e-commerce capability
- Promote awareness of the problems associated with pandemic flu
- Alert employees about what steps you’re taking and what they can do to limit the pandemic’s impact
- Review sick-leave and pay policies to ensure they don’t discourage workers from staying home when they’re ill
- Make backup plans if you need to pull people out of countries where the epidemic strikes
- Develop a travel policy that restricts travel to areas where the virus is active
- Stock up on masks and sanitizers, and consider staggering work hours to limit the size of gatherings
Sum2 publishes the Profit|Optimizer product series. The Profit|Optimizer is the leading SME risk management platform that helps business managers and business stakeholders quickly assess enterprise risk factors and take considered action to mitigate and manage those risk factors. Sum2 will be releasing a pandemic risk assessment module by the close of this week. The product will retail for $95.00 and will assist SME’s to assess, mitigate and manage the threats posed to their business by pandemics and other social disasters.
More information can be found on our website www.sum2.com.
Sum2 help our clients assess risk and realize opportunities.
PCA Goes To The Lonesome Valley
PCA RIP
The practice of selling food additives laced with salmonella bacteria makes it difficult to win back the trust of customers that had been so grievously violated.
PCA’s actions to knowingly ship contaminated products that have resulted in nine deaths and have sickened 637 people in 44 states. PCA’s salmonella laced peanut paste has contaminated 2,226 processed food products. A full list of recalled products can be found on the FDA website. These potentially criminal acts by PCA’s management has demolished the PCA corporate brand making it impossible to continue as a going concern.
The Chapter 7 bankruptcy filing will liquidate the company. This strategy will protect the PCA shareholders in the privately held firm from the significant legal liability that this event has created. It does not however protect PCA’s company management and accomplices that knowingly shipped contaminated products from potential criminal prosecution. Criminal persecution of those involved should be pursued and if anyone is found guilty punishment must be severe.PCA released its contaminated product into a large and extensive supply chain. Many leading brand food processing manufacturers that use PCA’s peanut paste as an ingredient in their packaged goods products have suffered severe reputational damage to their product and company brands. Though PCA’s corporate liability may be mitigated with the bankruptcy filing, aggrieved consumers will continue to have have legal recource by filing suits against the major consumer product companies that are still in business. This could make for a record breaking class action product liability suit.
Unfortunately this tragic occurrence could have been prevented. PCA’s actions demonstrate a disturbing ambivalence toward effective sound corporate governance practices. Companies that willingly sacrifice risk management and ethical business practices for the sake of short term profits consistently undermine corporate sustainability. All may not result in a dramatic corporate implosion like PCA. But ultimately the song of corporate liquidations remains the same. Unemployment for workers, aggrieved consumers, community desertion, tortured consciences and and in some instances criminal prosecution.
RIP PCA.
You Tube Video: Fairfield Four, Lonesome Valley
Risk: corporate goverance, ethics, risk management, legal
For the Want of a Nail: Lennar Homes
for the want of a nail
Community developer Lennar Homes lawsuit against drywall manufacturers reminds me of the old Mother Goose nursery rhyme, “for the want of a nail.” The rhyme begins with a nail that was not available to affix a shoe to the hoof of a horse. The loss of the nail loses the shoe, which loses the horse, which loses the rider, which loses the battle, which loses the war, which loses the king which loses the kingdom. For the want of a nail is an instructive tale of how seemingly insignificant or minute events can create consequences that escalate into a catastrophic incident that impacts and endangers many.
The Lennar lawsuit is yet another egregious example of supply chain contamination that has recently come to light. The discovery of toxic substances within drywall manufactured in China and used in the construction of Florida homes has prompted the lawsuit against manufacturers and a number of installation subcontractors that purchased the contaminated drywall on behalf of Lennar.
Lennar’s lawsuit alleges that subcontractors it employed to install dry wall, substituted high quality domestic brands with the less expensive contaminated drywall. The subcontractors imported the contaminated drywall from China to save on costs of materials in an attempt to boost profits for their contracted work. The drywall was discovered to contain toxic substances after a number of homeowners began to complain of foul odors, product deterioration and in some cases sickness due to exposure to the contaminated product.
It is believed that the Chinese drywall was found to contain a quantity of dry ash which was used as a filler substance in the manufacturing process. Dry ash is a waste by product of coal fired power plants that are so prevalent in China. The dry ash is known to contain concentrations of heavy metals that are considered dangerous to humans.
This event is certainly unwelcome news for the beleaguered construction and real estate industries. Particularly so in deeply distressed markets like southern Florida. It has heightened the risk profile of all parties involved and could spell catastrophic consequences for some of the involved manufacturers, homeowners, and contractors. This event can also impact the profitability of banks that may be forced to write off non-performing mortgages and construction loans sold to affected homeowners and contractors. Insurance companies may be required to pay off clams for product liability and homeowner policies. Municipalities are also at risk due to this event. Tax ratables and property values are threatened due to property abandonment and the suspicion that toxins have been introduced into the community.
This risk event will require the drywall manufacturers to face severe legal liability. It will impact profitability due to the financial stress of remediation expenses. Most significantly these types of events do severe damage to the company brand and reputation. A great deal of company and product branding is about trust. This types of events compromise the trust of brand consumers. Once that trust is violated it is very difficult to win it back.
Lennar violated its customers trust by allowing its supply chain to be contaminated. This violation of trust will result in financial loss and may create a long term health risk for Lennars customers and their families.
The municipalities that welcomed Lennar with the anticipation that development will serve the citizens of their communities have now been scarred by an ecological hazard. This will continue to haunt the reputation of these towns for many years because it threatens the value of both contaminated and non contaminated homes.
The drywall installation contractors face a high probability of bankruptcy and potential criminal prosecution. This event will fire a deepening distrust of Chinese manufactured products. It will certainly add stress to the delicate political balance of the highly codependent China USA trade relationship. Instigating calls for more protectionism and “Buy America” mantra by American based manufacturers. The prospect of added strain with China is particularly delicate due to China’s important roll in financing government spending through its large purchases of US government bonds. All because some subcontractors wanted to realize a little more profit margin. For the want of a nail indeed.
The unfortunate realization is that this risk could have been prevented. Master contractors need to put in place service and supply level agreements that prohibit the use of substituted materials. Master contractors need to manage supply chains by insisting that all materials used by subcontractors meet quality specifications and are sourced from trusted and thoroughly vetted providers. Adherence to international product quality and testing standards must be ascertained before those are accepted into the supply chain. This is just one aspect of ascertaining weather a supplier meets acceptance criteria into a company supply chain.
The Profit|Optimizer helps manufacturers, developers, contractors and lenders conduct a risk assessment of their supply chain. It is something that many businesses often take for granted yet holds the potential to become one of the most dangerous risks to the financial health and stability of the business enterprise.
Sum2 sells nails. The Profit|Optimizer helps business nail down risks that can deconstruct your business. It is a great set of tools to build profits and construct a healthy sustainable business.
Next time you read Mother Goose “for the want of a nail” to a child remind them to pay particular attention to its sage advise. It may be the first lesson in effective risk management that they will receive.
You Tube Music Video: Peter Paul and Mary, If I Had A Hammer
Risk: supply chain, product liability, reputation risk, ecological
Kashi’s Kismet
salmonella
Last night as I was researching the Peanut Corporation of America’s (PCA) peanut paste recall, my wife received an urgent telephone call from our local supermarket. The caller informed us that the Kashi products we purchased were subject to recall. I was a bit astonished by the call for several reasons. The first being notified of the unhappy news that a premium brand product that I so enjoy has the potential to kill me or make me very ill due to Salmonella bacteria. It goes without saying that it was a most bracing experience. I was also a bit bemused about the ability of my local supermarket to track me down to inform me that my favorite breakfast cereal might endanger me. At the very least letting me know that this is no breakfast for champions.
Though this is a positive example of how consumer product data mining and customer tracking business intelligence is employed; the realization that your breakfast eating habits are tucked away in some giant relational database remains a bit unnerving. But that is a different subject for another day.
After checking with the Kashi website the cereal products I purchased were not listed on the recall list. Kashi website lists granola bars and cookies as its only products that are subject to recall. As a committed consumer of the brand I remember when I purchased the cereal a free granola bar was included in the package for product promotional purposes. When I returned home I eagerly consumed the free granola bars. I am happy to report that I have not fallen ill. I’ll have to go back to the supermarket and ask if the non contaminated cereal I still have in my cupboard remains subject to the recall. An interesting product bundling dilemma.
The mechanics and execution of the product recall seems to be effective. The sophisticated use of data mining technologies and the ability of the manufacturer to contact a retail consumer through a digital trail that includes customer loyalty cards, credit card, and product bar codes is pretty impressive.
What is of concern about Kashi and other processed food manufacturers that are dependent on an expanded and complex supply chain is their failure to uncover the risk associated with the supplier. In this case PCA. It is alleged that PCA had a leaky roof that played a role in contaminating the peanut paste. A simple walk through of the facility may have uncovered this risk factor. Certainly if a company fails to perform the most basic facilities maintenance functions (like a leaky roof) odds are that the company has other issues and businesses functions that it is not addressing. This is the cockroach theory. Where you see one there are usually many others. A simple walk through may have revealed that all was not kosher at PCA.
Supply chain risk is becoming more prominent as manufacturers and service providers aggregate components and ingredients from numerous providers to deliver a finished product or service to end user consumers. The implementation of a sound practice program that addresses risk associated with supply chains is a key ingredient for a sustainable business enterprise.
The Profit|Optimizer devotes a section to supply chain risk. All process manufacturers must require suppliers to conduct a thorough risk assessment of processes and functions as outlined in the Profit|Optimizer. The Profit|Optimizer also includes a section on facilities risk. The risk assessment tools offered by the Profit|Optimizer would have uncovered the dangerous risk factors at PCA and may have prevented the fatal and costly release of contaminated products.
The kismet of commercial enterprises like Kashi will continue to be bright so long as the mantra of sound risk management is practiced with more vigilance. In doing so the health and well being of its loyal customers will flower as will the value of its product brands and the sustainability of the business.
You Tube Video: Vince Guaraldi, The Peanuts Theme
Risk: reputation, brand, product liability
Peanut Corporation of America
A salmonella breakout that has been traced to peanut products marketed by the Peanut Corporation of America (PCA) is an unfortunate and severe example of a company with poor risk management, weak corporate governance controls and questionable ethical business practices. In most instances poor risk management and corporate governance violations primarily victimizes the company that fails to institute them. In the case of the PCA, unsound business practices has unleashed a deadly viral bacteria into a vast consumer market. Since its outbreak in October the salmonella infection is believed to have claimed the lives of 8 people and has sickened over 500. PCA violations will also cast a long shadow on the vibrant US peanut growers and processing industry.
A brief examination of some of the public disclosures that have come to light concerning the PCA speaks of a telling breakdown in sound risk management practices. These disclosures also hints at potential instances of fraud to cover up lax controls and compliance violations cited by FDA and State of Georgia food safety examiners.
The PCA had been cited for violations and lax operational controls during past inspections by regulatory agencies. Inspectors found evidence of roach infestation and mold in the production and storage facilities. Inspections also revealed that product quality had been compromised due to a degraded manufacturing process and improper maintenance of the operating facility. After bringing this to the attention of company management PCA executives sought out food testing companies that would provide results to indicate that product quality met federal safety standards and were safe to ship.
Utilizing industry standard risk analysis tools like the Profit|Optimizer would have revealed several breaches in sound risk management practices at PCA. Lax operational controls, poor facilities and the evasion of corporate governance practices will likely put PCA out of business due to the damage its actions have done to company product brands and reputation.
Problems and risks associated with process manufacturers like PCA add layers of complexity to determine product risk due to its role as a supplier in an intricate and expanded supply chain for processed consumer food products. The melamine contamination of Chinese milk products and the mortgage backed securities market crisis provide examples of how product liability and consumer risk is leveraged due supply chain complexity. The pervasiveness of products that use the peanut paste manufactured by PCA is very similar in many respects. Cookies, ice cream, crackers and other products are subject to recall. Some of the companies affected by PCA’s contaminated products include premium consumer product and brand marketing companies like Kellogg, General Mills, Jenny Craig, Nuti-System and Trader Joes.
Severe product liability events like this unfortunately also cast aspersions on an entire industry. Associations like the American Peanut Council are most concerned that the poor manufacturing practices and product quality standards exhibited by PCA will reflect on how consumers view the industry as a whole. It is a valid concern for the industry association and it must demonstrate to the regulators and consumers that its membership is committed to sound manufacturing practices, product quality and corporate governance excellence. This is not a PR problem. Nor is it a problem born from an industries anathema to regulatory control or a problem unleashed by some renegade industry member. Industries and their representative associations must also help address sound risk management and corporate governance excellence as a cultural issue that is endemic to its membership. Then industry excellence becomes synonymous with product quality and consumer satisfaction.
In all the FDA uncovered 10 violations and has published its report and carries a full listing of recalled products and other resources on the FDA website.
You Tube Video: Dizzy Gillespie’s Big Band, Salt Peanuts
Risk: product, operations, regulatory, reputation
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