June 26, 2009
Calculating the Cost-Benefit of the Traceability Initiative
In his recent column, "Cost-benefit analysis: Is it too much information?" (May 25), The Packer's National Editor Tom Karst asked: "What's the cost-benefit of the Produce Traceability Initiative (PTI)?"
This apparently simple question had not been tackled directly. As a result, many produce companies are sitting on the fence, unable to justify an investment with an unclear payback.
One answer is that "it's a cost of doing business because the government or retailers will require it," and by implication doesn't need to be analyzed.
This may be so, but for many grower-shippers that's unsatisfactory. Produce industry executives need a business case for PTI. After all, if a compelling business case is made, then compliance will be in a company's interest.
The promise of PTI is whole-chain traceability, resulting in faster, narrower recalls and a reduction in the "collateral damage" caused to innocent growers and shippers from others' recalls.
We at Yottamark can build a model to analyze the value of this promise. We want to model both a recall that implicates a shipper, and the one in which the shipper is not implicated, but is still affected.
First, we must make our best guess at the probability of each recall happening sometime in the future. Then we calculate the negative economic impact of the resulting drop in sales, followed by a period of recovery.
We can then make an assumption about the reduction in the depth and duration of these recalls if PTI is implemented. (Note: We do not assume that PTI reduces likelihood).