Risk Management in an Organic Food Industry

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Table of Contents

Simulation Decisions
Influence on Job Processes
Solution Options

Simulation Decisions

All organizations are subjected to external and internal risks due to globalization and liberalization of trade barriers.So most organizations now have a special risk assessment and risk management team to eliminate or reduce the effects of risks. The crisis task force consists of the chief executive officer and the departmental heads.They meet periodically to discuss the impacts of risks and how to mitigate them, so that the impacts on the company is minimum.

The Company: The Company in Question is a leading producer and supplier of organic farm produce. What started off as a small farming operation in 1975 has now grown into a professionally managed organization with staff strength of more than 200 people. The company grows its crops using only organic methods and does not use pesticides or non-organic fertilizers. The farm and the headquarters are located in California and distributes its products to three neighboring states. Because of rising levels of health awareness, more and more people are turning towards organic foods and hence the future of the company looks very bright.

The company sells its products mainly to small retail and medium sized groceries in these areas. It does not cater to supermarkets because of the low prices offered by them. Produce is delivered through a network consisting of 10 delivery trucks. The food is packed in such a way that food that will ripen at the earliest are delivered to nearby shops while those that will take longer are delivered to shops in more distant places.

Risk Assessment: The area of operation is agriculture and all risks associated with this type of activity can be included as potential risks for this company also.

Production: Optimum agricultural production is dependent on many factors such as weather, availability of irrigation facilities and organic fertilizers. The company uses lady bugs instead of pesticides to ward off pests. Risks due to weather include unseasoned rains, excess or no rains, floods, cyclones, forest fires etc. A study of past weather records in the area will be helpful in assessing average weather patterns. The Company has enough water sources to irrigate the land for a period of six months in case there is no rainfall. Organic fertilizers like compost and animal waste is available throughout the year.
Storage: The Company has storage facilities like warehouses and cold storage facilities. A failure in the distribution system can cause problems in storage because the available cold storage facilities can accommodate the produce of not more than two days. Because of its inherent nature, certain produce cannot be stored for a period of not more than one week without being spoilt.
Distribution: Even though the network of the company is efficient and the number of trucks is adequate to handle the business, a breakdown may cause serious losses to the company. This is because the entire product life is limited to a maximum of two days without refrigeration after which it will be spoilt. None of the company trucks have refrigeration facilities. The storage facilities of our clients are also a factor in keeping the company produce as fresh as possible.
Market: The prices of agriculture produce are subject to availability. A glut in general production will bring down the prices also which will bring down the earnings and profits of the company. Being an organic producer, our prices are high when compared to non-organic products and demand will depend on the general health of the economy. Payment for our goods has not yet been a problem area for the company.

Simulated Crisis

A wrong dispatch of produce resulted in an operational crisis that require immediate attention to ensure brand promise, is not affected by operational hazards The period of crisis happened near to the Easter season. when usually large orders had to be executed. This resulted in additional strain on all departments especially the delivery department. Occasionally the company policy allows the purchase department to buy produce from neighboring farms to meet the increased demand. This time this practice was resorted to and about 20% of the orders were sourced from outside. The resulting rush caused the new supervisor to give wrong delivery orders to four of ten delivery trucks. Supplies that were supposed to be delivered to nearby places were sent to other markets further away. This resulted in our nearby buyers getting wrong products or products that were not ready for sale. Buyers who were far away received goods that were spoilt. To make matters worse, some of the outside produce was not grown organically and contained traces of pesticide. One particular customer who says he is allergic to such things has threatened to sue the company for negligence.

Quantifying risks: : The risk management team had quantified the risks as follows.

Wrong delivery: The tolerance level determined by the company is 3% for wrong deliveries in nearby areas and 1% in faraway markets. The probability for such risks happening is 1 wrong delivery per 100 trips. In reality the wrong delivery percentage stood at 40% since four trucks made wrong deliveries.
Quality of outsourced products: Tolerance level given for quality and genuineness of organic foods outsourced is fixed at 1%. The probability of inorganic food being purchased has been estimated at 1%. On analysis it was found that the actual instance of delivery of inorganic food laced with pesticides happened only once in the past five years.

Influence on Job Processes

It will be interesting to note the reaction of the Marketing manager to this issue. The wrong delivery spoiled the image of the company as it was given publicity by the media. The competitors took advantage of the situation offered to deliver goods to our buyers at reduced prices. This resulted in 25 % of our buyers switching over to buying from our competitors. As we were sometimes unable to keep up with orders, we resort to buying organic food from local farmers. It appeared that some of the produce had traces of pesticides in them causing discomfort to a consumer who was allergic to pesticides. This news was covered widely in the local media resulting in a loss of image for the company.. The marketing staff had to bear the whole brunt of the problem since they are the link between the company and its customers. They had to face the angry customers.As a member of the crisis management task force he had to draw contingency plan to make up for the loss in market share. They took extra efforts to meet the customers and explained to them how this has happened. and the remedial measures taken to avoid occurrence of similar incidence&

Solution Options

The company had the following three options to tackle the crisis.

Call all produce back.- In this case the company has to arrange additional rooms in the holding centre.In this case there will be significant loss as the entire days consumption has to be disposed of
Call some trucks back and re route the rest.In this case a complex analysis required which truck to call back and which produce it will carry
The franchisee was required to exercise their options as being at the local centre; they knew the pulse of the customer.

The company chose the third options as it resulted in minimum loss to the company as the complete inventory was sold to franchisee. By resorting to these options although there is no immediate financial loss to the company; it had long range impact on the market share of the company as the public become skeptical about the quality of the organic produce.

Recovery measures

Additional delivery system checks were introduced.
Special training imparted to the delivery staff to cope with the peak -rush. period.
Exhaustive quality control measures were introduced for outsourced product.
Marketing staff met the families of the affected persons and explained the remedial action taken by the company.
A press conference was arranged in which the CEO expressed apologies to the Media
An out of court settlement was arranged to avoid litigation.

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Risk Management in an Organic Food Industry

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