August, 2013

Fruits of Thought

Sysco's San Francisco Food Safety Failure Reflects On Industry's Broader Problem With KPIs

When Sysco of San Francisco was caught using 14 unrefrigerated outdoor public storage units as jerry-rigged warehouses for all kinds of products – including raw meat, milk and produce – it gave the industry a black eye. Everyone well knows this is unacceptable. In fact, anyone who knows Sysco, its food safety people, its produce people, its corporate culture… knows that it was a rogue operation going on in the City by the Bay. There is no possibility that the top executives at Sysco ordered it, knew about it or countenanced it in any way.

Yet that doesn’t mean Sysco was not culpable. In the obvious sense, merely having corporate policies is not enough. Top enterprises, and Sysco clearly counts among these, do not merely promulgate policies but have audit and verification procedures in place specifically to catch non-compliance by their own staffers. If nothing else, the existence of this rogue operation indicates that those auditing procedures were inadequate.

Yet there is more to it than that. And more in a way that implicates the whole industry. Some years ago, there was a meeting in which food safety was discussed and there was a panel of important retailers who, one after another, waxed on about their deep commitment to food safety. Karen Caplan, president/CEO of Frieda’s Inc., raised her hand and, like the little boy who said the Emperor had no clothes, asked the crucial question: In light of the high priority that retailers now had on food safety, how had they changed their KPIs – Key Performance Indicators – to reflect these priorities?

KPIs are typically used as a basis for compensation and promotion, so if a KPI is a sales increase of least 20 percent, or attaining margin of 35 percent, or getting an ROI of 18 percent, those executives who meet or exceed these goals can expect bonuses and promotions. If they do not meet these KPIs, they can expect no bonus, no promotion and, perhaps, to be placed on probation or have their employment terminated.

At that meeting, none of the panel members reported changing their KPIs to accommodate the high priority they claimed to be placing on food safety. We don’t know of many who have made changes since.

We will probably never know precisely how this policy of renting sub-standard facilities started or why this policy was maintained over the years. Simultaneous with the revelations, it was announced that Bruce Leong, who had been president of Sysco San Francisco, left the company. But whether he was a sacrificial lamb or was actually found to have been implicated in the matter was not announced.

Still, someone implemented this policy, and dozens of Sysco executives had to be aware of it. None of them picked up the phone and called the Quality Assurance Director in Houston. This columnist has had the privilege of addressing Sysco’s annual produce event in which it brings in executives from all over the country to educate, and we feel completely confident in saying no one ever picked up the phone and told Rich Dachman, vice president of produce at Sysco, or any of many other Sysco executives who could have and would have reacted.

The management question is why did no one call?

The best answer to this question is that despite the sincere commitment of Sysco to food safety, it has not — as virtually all the industry has not — been able to incorporate safety into its KPIs in a meaningful way. To put it another way, imagine that a new CEO of Sysco San Francisco, let us call him George, had come in. Imagine he noted this practice and decided to not rock any boats. As a result, sales and profits in the division increased 20 percent this year.

Now imagine a new CEO coming in, let us call her Lydia. She started work, noted the problem and decided it had to stop immediately. She ordered the dumping of any product stored in those facilities, recalled any product that might have been stored in those facilities in the past, reported Sysco to the relevant regulatory authorities and publicly apologized for Sysco’s transgression. She fired all Sysco personnel who had known about this problem and hadn’t acted to stop it.

Of course, under Lydia, Sysco had to give up some customers until new facilities could be leased, new employees hired and trained, etc., and as a result of the reputational and operational damage, sales fell 30 percent this year and operations slipped into a loss. A few national accounts left Sysco, thus depressing business nationally.

Now ask this question: Whose salary and bonus is likely to be higher for the year? George, because he made money for the company, or Lydia, because she defended the corporate priority on food safety?

Now ask this: In your own company, if a similar choice had to be made, what would the financial incentives produce?

We all hope, of course, for virtuous people who will do the right thing and sacrifice short term profits for long term safety. But to some extent companies get out of their employees what they pay for, and it is perhaps the biggest food safety issue in the industry that few companies have found a way to incent for food safety, even if it reduces sales and profits in the short run.

The associations and the industry institutions treat food safety as principally a research and technical matter — that is why all the food safety people have PhDs in technical subjects. But situations such as this tell us that food safety is just as much a managerial issue — and one the industry is still not certain how to manage well.                                  pb