July 2009: What's the Value of PTI?
In his recent editorial Traceability: You do the math, The Packer 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 "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 adding PTI. After all, if a compelling business case is made then compliance will be in a company's self 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 can build a model to analyze the value of this promise. We want to model both a recall that implicates the shipper, and the one in which the shipper is not implicated, but is still affected. First we must make a best-guess at the probability of each recall happening sometime in the future. Then we calculate the negative economic impact of the recall's 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). That gives us the value created by PTI. Subtract from this the ongoing cost of PTI (labels, software, hardware, labor, etc.) and restate it in today's dollars' to take into account the time-value of money, and we have the net present value of PTI.
Now, of course, many of these inputs are unknowable, such as the likelihood and timing of a recall. However, one can make reasonable assumptions based on experience. The key number to look at is how effective does PTI need to be on softening a recall and accelerating its recovery, for it to be at least a breakeven investment given a set of reasonable starting assumptions. If this breakeven number seems reasonable, then we can conclude that, above this number, PTI creates value.
Okay, so what happens when we run the numbers? Well, there is no single, simple answer. But, with some reasonable set of starting conditions for produce like tomatoes, cantaloupe and leafy greens where there have been recalls in the past enhanced traceability needs only to reduce the impact of a possible recall happening in the next 10 years by a believable amount and it's going to pay back. In other words, we don't need to assume miraculous results for traceability to be a smart investment.
Our analysis is conservative in several important aspects. It assumes that retailers show no preference for traceable produce, nor pay any premium for traceable produce. It also does not reflect the sales lift that could result from increased consumer confidence in a brand. It also doesn't attempt to value improved visibility into the supply chain, or ability to quickly get and respond to customer feedback.
Calculating the value of traceability is imprecise but it's not impossible. When shippers have the tools to determine the value of better traceability for themselves we think that when they put in their own numbers many will agree the benefits outweigh the costs.
The HarvestMark team put this model into a tool that allows a shipper to "twist the dials" and see the results for their own business. The tool is available here.