Economic Reality Trumps
Official Policy Every Time
Jim Prevor’s Perishable Pundit, May 20, 2009
Our piece, Pundit’s Mailbag — Mike Stuart Of FFVA Speaks Out On Ballantine And Buyer/Seller Relations, included these words from Mike Stuart:
At the end of the day, how are these firms going to make significant investments in food safety, traceability, sustainability and other important industry initiatives if the profitability of the business is squeezed to the breaking point? How are they going to survive at all?
Interestingly enough, we received a number of phone calls and notes from retailers in complete agreement. They basically said that the corporate priorities, particularly of publicly held companies, simply made it very difficult to act in the way they felt would both serve the industry and their own companies in the long run.
This issue of organizations pronouncing one policy but acting in a way that serves a different policy is not new and it is not confined to produce.
Some years ago, in a situation we’ve written about previously, Domino’s Pizza had a similar situation. It had an official policy saying that delivery drivers were never to speed but a public offer that pizzas would be free if delivered after 30 minutes. This offer set up a whole bunch of economic and personal incentives that put an awful lot of pressure on individual drivers to make the deadline — speeding if necessary. It took a death, and a lawsuit, to have Domino’s drop its half-hour delivery guarantee.
Equally if you read the news stories about the crash of the Colgan Air/Continental Connection flight that crashed in February outside Buffalo, you see the same point.
Although the airline had official policies making safety its top priority, its desire to hire first officers and pay them $16,000 a year or even $25,000 a year made it impossible to require that employees live in the hub cities where they were based. This makes a mockery of all the FAA minimum rest rules, which do not contemplate MASSIVE COMMUTES. Here are some notes from a USA Today reporter:
USA TODAY’s Alan Levin is reporting on the second day of National Transportation Safety Board hearings over the crash of a Colgan Air-operated regional plane near Buffalo in February that killed 50 people.
He reports, among other things, that the 24-year-old co-pilot, Rebecca Shaw, earned $16,000 a year and may have been suffering from fatigue for having to “commute” to her job from her home in Seattle.
From Levin’s file:
Shaw had flown from Seattle to Newark on two overnight connecting flights on cargo carrier FedEx before reporting to work the day of the accident, he reports. She stayed at a crew rest area in Memphis from midnight to 4 a.m., according to the safety board.
“It sounds pretty horrible to me,” said NTSB member Debbie Hersman.
“I think it violates the professionalism of a crew member,” said Colgan Vice President Harry Mitchel under questioning by Hersman.
Mitchel said it is the responsibility of pilots to report to work well rested, but Hersman questioned whether airline policies contribute to the problem of fatigue.
The NTSB estimated that Shaw, who had been hired a year before the crash, earned an annual salary of about $16,000. Some board members suggested it would have been difficult for her to afford to live in the Newark area, where she was based.
Out of 137 pilots based at Colgan’s Newark operation, 93 of them live outside the local area, according to the NTSB.
The pilot, Capt. Marvin Renslow, 47, who lived in Florida, did not have a place to stay in the Newark area, according to the safety board. He slept the night before the accident in a Colgan crew rest room, despite a company policy prohibiting sleeping overnight in the room. At 3 a.m., he logged into a company computer system, the NTSB found.
The low pay, lengthy commutes and lack of areas where pilots could rest added up to a risk to passengers, said NTSB member Kitty Higgins.
“I think it’s a recipe for an accident and that’s what we have here,” Higgins said.
The airline is at least feigning outrage, claiming that the pilot would have been terminated had the airline been aware he had incompletely listed the number of times he had failed certain tests on his job application. Now The New York Times reports that the airline didn’t exactly bend over backwards to make sure it had all the information possible about its new hires:
Colgan had not taken the step that some safety board experts pointed out, asking pilots to sign privacy waivers so the Federal Aviation Administration could divulge their records to the company.
It is, of course, impossible to make a direct link between any of these problems — long commutes, lack of “crash pads” in hub cities, poor training, lack of aptitude — with this particular crash. It is, however, clear that there is a race to the bottom going on and that the overwhelming priority — keeping the pipeline of first officers and pilots full with people willing to work cheap — discouraged executives from proposing common sense requirements.
Think of the executive at Colgan who would have stood up in a meeting and suggested that Colgan require proof such as signed leases, utility bills, etc., that pilots and first officers had local places to sleep at the hub city where they were based. Every executive at the table would know that the consequence of such a requirement would be that they would have to pay more to attract a work force. That is specifically why they didn’t propose it. And all the high falutin language about safety first simply bent before that economic reality.
Way back in the spinach crisis, one of our most e-mailed pieces was titled, Tale of Two Buyers. We think it is worth reprinting today:
Tale Of Two Buyers
Jim Prevor’s Perishable Pundit, November 17, 2006
One of the most difficult things to do is to align corporate culture and compensation programs with the goals of management. When we speak to VPs of Perishables or VPs of Produce at major retailers, all are very focused right now on food safety..
But we are also hearing from shippers about a “disconnect” between the goals that executives are setting for their organizations and the way the actual buyers are reacting.
Here is a fairly common scenario:
A team from a shipper flies into a retail headquarters to do an account review and discuss business concerns. The initial meeting includes high executives who emphasize that the chains wants exemplary food safety practices.
In the past, this chain’s supply might have been met via a hybrid mix of sources. The vendor grew some produce, represented some growers exclusively, bought some product in the field or on the trees that the vendor had packed to the retailer’s specifications, some of the product was bought from other shippers and, when things were tight the vendor might have bought some produce off the terminal markets to keep the retailer well supplied.
The vendor never had an actual contract, but over the years had come to be the primary supplier on his lines.
Well, this mechanism had served the chain well through the years. The stores were rarely if ever short of product and it was always priced competitively for the market.
But this model couldn’t sustain the kind of food safety scrutiny that the VP now is talking about in the meeting.
As we dealt with this before, via a letter we received from a reputable grower/shipper, to provide a certainty of food safety standards, you really need an asset-based solution. The vendor has to either grow it all itself or secure, in advance, certain growing deals that can be done under its control and according to the standards it specifies.
The vendor, being flexible, suggests to the VP that if the chain would contract for its requirements, the contract could specify any food safety standards the chain desires and the vendor would be happy to execute to those standards.
It is not a 100% perfect solution. After all, if a hurricane comes and wipes out a growing region where the contracted product was planted, the chain will still have to make a decision as to whether it is willing to accept product from another growing region that may not have been grown to the retailer’s specifications.
Still, barring natural disasters, if a chain needs ten trailers of product a week, the chain contracts for them and they can be certified to meet any standard the retailer wants.
Heads are nodded in agreement, hand shakes are given all around, the VPs leave the room to let the buyers work out the plan and then it happens… The buyer says something like this:
“This is a great plan, we are all on board with this. Just one thing: How are we going to be able to take advantage of markets when the price dips below the contracted price? You know, sometimes the market can get a lot lower than the contract price and our competitors would under price us and we can’t let that happen.”
Of course, a good vendor will try to come up with creative solutions in terms of how the contract can be structured that might make the buyer feel better. But, basically, the “magic is gone” — the vendor really wants to say “Look, you are getting a fixed price for exactly what you want. Some weeks it may be a bargain and you make extra; other weeks it may be expensive and you have to lose some back. Probably, overall, you will have higher costs than the free market, because you are asking for specially food safety certified product. So the product you will be getting is not comparable to product bought from the cheapest vendor every week.”
Although it is frustrating to hear these stories — and we are hearing them a lot from many vendors — it strikes us that to “blame” the buyers is futile. They are responding to the culture and compensation practices of the organization.
If the VPs are sincere about wanting the buyers to place food safety first, the VPs have the responsibility for changing the culture and the economic incentive systems.
Because, let us talk straight and imagine two buyers:
1. The buyer in the little story above buys into the contracting idea and, as a result, gets the food safety standards the chain wants but, even though the grower worked closely, the contracted price turned out to be higher this season than the market price so, all season long, the chain had to either price higher than its competitors, which reduced sales or had to accept substandard margins or a loss.
2. The buyer in the little story above resists contracting because he wants market-priced produce and as a result his product, though meeting all legal requirements, is produced with no extra food safety protocols. The chain is not always aware of exactly where it is grown and packed, but they deal with a good supplier and they did a field inspection once a year, although the actual crop used may not come from that field. The vendor signs lots of representations and warranties as to the way the product is grown and packed. Fortunately there were no outbreaks and buying at market price, the chain was consistently priced competitively to consumers and made decent margins.
Ok, now here is the test: Which buyer gets a bonus this year? Buyer #1 — who put food safety first, or Buyer #2 — who put profitability first?
If your answer is the same as the Pundit’s, you realize why solving this problem depends on a lot more than the intentions of retail VPs. Until the culture and compensation systems change, this is a problem that will stay with us.
Broaden this story to encompass not just food safety, but traceability, sustainability and other industry priorities, and one sees why Mike Stuart is concerned… and so is the Pundit.