8. QUALITY AND SAFETY ECONOMICS

8.1 Introduction
8.2 Fish Safety and Quality
8.3 Quality Economics Analysis
8.4 Production Cost and Quality Cost

8.4.1 Design and investment to produce quality (fixed cost)

8.5 The PAF (Prevention-Appraisal-Failure) Model of Quality Costs

8.5.1 Prevention costs
8.5.2 Appraisal costs
8.5.3 Failure costs
8.5.4 Relation between the PAF costs
8.5.5 Quality cost indexes
8.5.6 Limitations to the PAF model

8.6 The Cost of Applying HACCP
8.7 Social and Political Costs of the Lack of Food Safety and Quality

8.7.1 Epidemiological data
8.7.2 Estimated costs
8.7.3 Places where food was contaminated/mishandled

8.8 Environmental and Political Factors that may Contribute to the Costs of the Lack of Safety and Quality

8.8.1 Political factors
8.8.2 Environmental and ecology factors

8.1 Introduction

A necessary objective of the fishery industry is to deliver a wholesome and edible product and the necessary auxiliary services fulfilling a number of requirements and features known generally as quality (in the understanding that safety is the first stage and sine qua non condition for quality). Therefore, it follows that a joint analysis between economics and quality of the food or fishery product delivered will also be needed at company level.

The economics of safety and quality of fish and fishery products despite its practical importance, has received comparatively little attention till now. As pointed out by Bonnell (1994) regarding Atlantic Canada's seafood industry, there are relatively very few industries in this sector that apply the concepts and techniques involved in quality economics. The difficulty in determining and analysing quality costs in practice, particularly in the food industry, is recognized in the literature (Hosking, 1984) (Crosby, 1980) (Morgan Anderson, 1984). However, it is already a very important management tool, for instance in the Scandinavian fishery industry (Drewes, 1991; Valdimarsson, 1992).

Quality economics analysis will become increasingly more important to the fishery industry worldwide. The first reason is that quality is becoming a marketing tool (particularly in demanding markets), the second is the need to implement Hazard Analysis Critical Control Point (HACCP), as requested now by regulations in many developed and developing countries, for instance Canada, those of the EU, Brazil, Thailand, and Uruguay.

In addition, since unsafe products are at the basis of foodborne disease outbreaks, Governments are also gaining interest in the matter, due to the impact of the lack of food safety on public health budgets. This situation is compounded in practice with the steady increase of the cost of medical services, consumer awareness, pressure to reduce public expenditure and citizen's opposition to tax increases.

8.2 Fish Safety and Quality

Food and fish safety is defined in practice with reference to public health regulations, the purpose of which is to define the basic conditions for the wholesomeness and edibility of a given type of food. As very often consumers are not personally able to determine if a given product is apt or not for consumption (e.g., levels of histamine, Hg, absence of pathogens) Governments apply sanitary policy to pass and enforce regulations.

Specific regulations vary from country to country (FAO, 1989) as well as the procedures for enforcement. To meet the safety regulations and the minimum quality level of a given State are a pre-requisite to enter its market.

Quality is not easy to define. Different people give different definitions or underline different quality characteristics or features, even speaking of the same type of product. As philosophers have by now agreed the word "quality" does not appear to be definable.

Nevertheless, practical definitions can be found in the literature, for instance according to the standard ISO 8402 quality is "the totality of features and characteristics of a product of service that bear on its ability to satisfy stated or implied needs". This is certainly open to interpretation, since almost anything could qualify as an "implied need". It is in practice a working definition of quality (in this case a definition with didactic purposes).

From recent papers where the subject of fish and food quality is discussed (Lee, 1994; Sloan, 1994), there seems to be at least three groups of characteristics and features that contribute to quality:

1. Characteristics and features of the product that can be directly measured or assessed. For instance weight, shape, temperature, fish species, colour, taste, texture, size, homogeneity, composition, oil content, etc. Most of these characteristics and features are normally specified in the seller-buyer (wholesale) contract.

2. Characteristics and features of the product that can have a desired or undesired effect on human health. For instance, nutritional value (desiderated), pathogens counts, Hg, histamine, pesticides, paralytic shellfish poisoning, etc. Most of these characteristics and features are usually defined by law although they may be incorporated to contractual agreements. Recently, characteristics related to environment and ecology (that could create problems to human beings in the medium and large term) are added to this group (e.g., recyclability and biodegradability of packaging).

3. Characteristics and features of the services involved with the product; including consistency in the quality of different shipments and within a shipment, integrity (in trade), communication and keeping time. Most of these are usually part of expected customary and ethical trade practices, although some may form part of local regulations or be included in contractual agreements.

Each market, each buyer, will have a working definition of quality that encompasses characteristics and features of (a), (b) and (c). The producer must know the working definition of the aimed market in order to succeed in business.

Despite the complexity there is in practice a simple parameter against which quality is measured; and that is money. The price of the product (or competitive price) (Lee, 1994; Sloan, 1994) is at the same time a quality feature and a parameter that reflects the influence of all the others, including the influence of production cost. However, price, isolated from the other characteristics and features, should be viewed with caution.

Depending on the product and the market, the complete working definition may be more or less complex. It is advisable to specify numerical values for the characteristics and features whenever possible, limit values should be clearly specified, and in the case of using words, they should be unambiguous and concise.

The industry that manages to produce at the required level of quality, at minimum cost, will have a comparative advantage over competitors. This is basically the strategy of companies that utilize quality as a marketing tool.

8.3 Quality Economics Analysis

Quality economics is a very wide subject. A common misconception is that it is solely related to certain type of costs and aimed at reducing them. Although in practice most of the available literature is related to "quality costs", quality economics analysis is applied because an increase of profit (see Chapter 7) is pursued, and not just as a result of cost reduction.

As stated by Sterling (1985), after the implementation of a quality assurance programme at Nabisco Brands Inc. (USA):

"We had to spend money to implement our programs. New technical positions and staff increases cost about US$ 1.5 million per year. But our payback was more than US$ 2 million, US$ 1 million related to quality, and more than US$ 1 million related to cost improvement. We could never have obtained cost improvement until we had the system to ensure quality."

A similar trend, quality improvement - cost reduction - profit increase, has been observed in the Danish fishery industry (Drewes, 1991).

The reason for this relationship is rooted in the fact that the true application of quality assurance (or HACCP) requires an in-depth technical knowledge of the processes and operations involved. Once this technical knowledge is gained, it allows to identify and control more easily non conformance costs. At the same time improved quality allows the firm to secure better prices, increase the market share, etc.

Example 8.1 The Case of Fresh Fish Fillets carrying the US Grade A Shield (Gorga et al., 1979) (Gorga et al., 1982)

In 1974 the Gloucester Laboratory of the National Marine Fisheries Service (NOAA) of USA initiated, in association with some fishery industries and supermarkets, the basic experiment to introduce the US Grade A quality shield. The Gloucester Laboratory "found it necessary to design and to implement a strategy to convince the US seafood industry that it pays to assure the quality of its products to the consumer."

Within six years the sales volume had reached eleven million 1b, with a value of about US$ 30 million, and included fifteen northeastern States. Today, the US Grade A quality shield is utilized throughout the US territory. A key point of this development was the quality related economic analysis, performed at the end of the project in 1976.

"At the end of the project, an economic analysis was made, and when the findings were extrapolated to an activity involving a production rate of 10 000 1b of fish fillets/day, an efficient production rate, the analysis showed that the unit cost to assure quality was US$ 0. 10/1b. The analysis also showed that even this added cost was nullified because quality assurance helped eliminate losses due to spoilage and to markdowns. Thus the analysis showed that it required no added cost to assure quality."

The initial study also revealed that consumers were willing to pay up to US$ 0.50/1b more for guaranteed quality fillets than for fillets whose quality was not guaranteed by the US Grade A shield, and by the implicit pledge of the retailer to withdraw from sale those products which were about to fall below the established quality grade.

This project was conducted "without the inclusion of fishermen, whose involvement although not essential - was vigorously attempted without success, the quality control and inspection activities that are required to assure quality started at the point of landing rather than at the sea." This is a very interesting example; points deserving further analysis and comments include the following:

• The relationship between cost increase due to increased quality and profit.

• The need of involvement of all concerned through to the final consumer.

• The possibility of an official research laboratory to be involved in a technical/economic experiment to improve fish quality at retail points.

• The need for a careful evaluation of production costs during the experiment, and skilful extrapolation of the results.

8.4 Production Cost and Quality Cost

Actual production cost, as discussed in Chapter 4, is the cost of producing a given product at a declared level of safety and quality.

Production cost is composed of variable or direct and fixed costs. Although most of the literature dealing with "quality costs" refers to optimization of variable costs (see section 8.5) this is misleading. Optimization of variable costs could be of no avail if fixed cost is high or low. With a high fixed cost, optimization of variable costs may be not enough to make a cost competitive product, even if quality is right. In the case of low fixed cost, the plant, equipment, etc. may not be in a position to yield a product of the desired quality.

There is no single type of cost, or group of them, as defined in Chapter 4, that could be identified as "quality costs". All contribute in one way or another to total production costs and to the quality associated with the product. However, as will be discussed in section 8.5, it is possible to identify some quality related variable costs that can be controlled by management in order to minimize production cost (for a given fixed cost structure).

8.4.1 Design and investment to produce quality (fixed cost)

Fixed costs, in particular depreciation, are determined at the design and investing stage. The quality level and the necessary costs to produce it, are analysed and decided at the design stage. Figure 8.1 shows conceptually the comparison between the value assigned by buyers or consumers at a given level of quality and the quality cost to produce it.

Depending on the type of product, a quality that maximizes the profit will be chosen (schematically in Figure 8. 1, a quality level between 3 and 4). This quality level will resolve the quality objectives that should concord with the quality requirements of the customers (contractual or implicit agreements). Quality objectives and quality costs should be rechecked later, after production starts.

In Figure 8.1, five arbitrary levels of quality values are indicated (e.g., the quality levels of fresh fish), together with the corresponding five levels of quality costs. As quality increases the corresponding quality costs will also increase. At a certain point the quality cost may become prohibitive and will equal and even overtake the quality value (e.g., wild marine fish from clean unpolluted waters to be served shortly after capture, marketed on a commercial scale).

Failure to achieve quality objectives (established by design or implicit) can stem from three causes: (i) unrealistic initial objectives, (ii) inadequate hazard analysis, or (iii) failure to implement the requirements properly (IFST, 1991) (Pearce, 1987). In particular the first two are clearly linked to initial investments (e.g., pre-project study and analysis expenses, selection of main equipment and design of production lines, storage rooms and distribution).

Figure 8.1 Quality Costs at the Design Stage

Figure 8.1 shows that it is not a good business for a company to produce at "the maximum" possible quality, and that low quality is a bad business. A good design puts "optimum" quality a value above the minimum quality level, fixed by food safety considerations (public health) and public acceptance.

The costs of solving a problem increase exponentially the further the work has progressed into the development and production life cycle before the fault has been discovered. From that point of view a proper design is a preventative measure.

The overall objective will be the design with minimum costs at specified quality. Whereas the main aspects of fish processing and characteristics of fishery products are generally well known, the way to produce fishery products of a given quality, particularly high quality products at a minimum cost, is becoming a guarded secret. This is primarily due to the investments made in the plant design, and in the selection and implementation of the QA methodology.

For example, this phenomenon can be observed in the smoked salmon industry of Northern Europe. Design and quality assurance methodologies are becoming part of industrial know-how in the fishery industry. The introduction of electronic scales and machines that can be connected directly to microcomputers are concentrating, collecting, elaborating and providing on-time information to comparatively fewer people within the plants, making it easier to control actual costs and at the same time maintaining secrecy on overall procedures, results and parameters (Valdimarsson, 1992).

8.5 The PAF (Prevention-Appraisal-Failure) Model of Quality Costs

Feigenbaurn (1974) proposed a model to analyse quality cost that is almost universally accepted (Plunkett and Dale, 1987; Porter and Reyner, 1992). This model assumes that production costs relevant to quality changes can be divided in three categories: prevention costs, appraisal costs and failure costs, and can be defined as follows (British Standard Institution, 1981):

Prevention costs. The costs of any action taken to investigate, prevent or reduce defects and failures.

Appraisal costs. The costs of assessing and recording the quality achieved.

Failure costs. The costs arising from failure to achieve the quality specified. These can be divided into internal and external costs, whether they are produced within the plant or after the transfer of ownership to the customer.

The model assumes that PAF costs can be identified, measured and particularly controlled, this means that they can be varied as a result of management decision. Therefore only variable costs, within production costs are usually considered. Fixed costs (e.g., depreciation) are not considered. These categories of quality cost are limited to. the analysis of costs of conformance and costs of non-conformance.

This techno-economic analysis can be done for example, following the guidelines for the determination and use of quality related costs of standards such as the BS 6143:1981 (British Standard Institution, 1981), the Australian standard AS 2561-SAA, 1982; or the procedures recommended by the American Society for Quality Control (Hagan, 1986; Moore, 1977). The interested reader should be aware that such standards are general and not specific to the fishery industry.

Quality costs are not easy to determine from ordinary reports and accounts, and should be identified first and recorded separately on a subsidiary ledger or memorandum account.

Quality costs are usually analysed following the Pareto principle: few factors account for the largest portion of the costs. These are often referred to as the "vital few", while remainders are the "trivial many". The Pareto principle can be a useful tool in analysing quality costs. It allows for a large proportion of the costs to be accounted for with relatively little effort or expense (Sandholm, 1987).

8.5.1 Prevention Costs

These are the costs of activities aimed at preventing defects occurring during the development, production, storage and transport of a product. They relate to quality before a single unit of product is made. They usually represent up-front costs that should minimize overall costs by performing the task properly and hopefully at the first attempt.

Prevention costs received little attention in the past when classic quality control (QC) and inspection were applied, but with the introduction of HACCP and quality assurance (QA) concepts, they became an essential component of the quality cost scheme. Components included within prevention costs are usually the following:

• Costs involved in planning and documenting the Company's quality system (including establishment of product specifications). Quality planning is done by QC or QA personnel and involves setting up programmes for process control. Quality planning activities may be also carried out within a Company by other departments (e.g., Purchasing, Research and Development, Production Planning and Scheduling and Sales).

• Costs of directing, administrating, executing and auditing QA activities (including salaries). In the case of the Example 8.2, all costs are directly linked to this item.

• Costs of planning and implementing training and motivational programmes in quality operations and attitudes.

• Costs of industrial safety programmes and measures. This is very important in the fishery industry, particularly onboard fishing vessels and during fish handling and processing.

• Preventative maintenance on processing equipment. This includes the cost associated with necessary repairs and adjustments.

Example 8.2 Prevention Costs. Cleaning Costs in the Australian Seafood Processing Industry (Dunsmore et al., 1983)

Cleaning is one of the key activities in the prevention of failure costs of fish processing plants. Cleaning it is not an aesthetic operation or just a general hygienic procedure but a preventative measure. As such, it is necessary to analyse procedures and costs in order to study its cost-effectiveness.

During 1980 a survey was conducted on costs and cleaning practices in twelve Australian fish handling and processing facilities. Findings are detailed in Table 8.1. This case study is also particularly useful in discussing the need of applying the economic engineering approach in the analysis of quality costs.

In this instance, the need for proper equipment and processing lines design to facilitate cleaning is clear (saving cleaning time means saving labour, and reducing hygiene risks), and the investment in training of operators (to carry out and follow the proper cycle of cleaning operations).

Table 8. 1 shows wide variation in costs associated with cleaning, even within the same type of industry. Plants 1 to 5 were general processors, plant 6 was for specialized prawn processing, plants 7 to 9 were smaller enterprises.

Table 8.1 Costs of Cleaning at 12 Locations in the Australian Seafood Industry  

Notes:
(1) All values in $AUS (1980)
(2) Value within brackets indicates percentage of total cost
(3) Fish box cleaning facility at a fish market

This review does not indicate plant capacity or actual levels of production that would be useful for comparison purposes, but offers the following useful information for analysis and discussion:

• Overall labour comprised the bulk of costs (average 84.2%), with detergents and sanitizers only a minor part (average 10.6%), and cleaning equipment even less (average 5.2%).

• Lower expenditure was found aboard fishing boats. They were cleaned with water and scrubbing brush without using detergents and sanitizers. According to the investigators, "the situation on the surveyed fishing boats was particularly disturbing", because "the same standards of hygiene should apply on boats as in other efficient food-handling operation" (Dunsmore et al., 1983).

• Even in the case of the crate-washing plant that had an automated line to clean the fish boxes, the main cost item was labour. Table 8.1 includes the annual depreciated costs of the cleaning equipment.

• Highest expenditure was found in plant 6, specialized in prawn processing for local consumption and export. It was the only one to be cleaned twice each shift (e.g., at lunchtime and after the cessation of processing).

• Cleaning systems utilized are also analysed. The general conclusion was: "Unfortunately, none of the systems used in the surveyed plants incorporated all 'Of the components required for effective detergency or sanitizing" (Dunsmore et al., 1983). For instance, plant 6 followed the correct procedures with regard to some sections and equipment, but not throughout the plant.

8.5.2 Appraisal costs

These are the costs of inspecting and testing to ensure that the products, parts and raw materials conform to quality requirements. These are generally the easiest type of quality costs to measure and include:

• Costs related to the in-plant (internal) inspection an control of raw materials, purchased ingredients and packaging.

• Costs related to in-plant (internal) process inspection, such as checking of semi-processed items and final products, temperature inspection and recording, including costs of compilation of quality records (cost of the forms and clerical expenses).

• All the in-plant laboratory costs (including sampling and testing). This item also includes the cost of disposable laboratory equipment and material (chemicals, microbiological media, glassware, etc) calibrating equipment and any outside testing services that may be used.

• The salaries of quality control and inspection people (professionals, technicians and workers).

• Costs related to final inspection, in-plant or external. Official final inspection certificates are mandatory in some countries, and the firm should pay for them to the Government or specialized Government Agency (e.g., to CERPER in Peru). In some cases in accordance with a contractual agreement, a final certification from a third independent laboratory may be required.

As temperature is the single most important parameter in HACCP implementation, the costs related to measurement, recording and control of temperature, including calibration of equipment, should be included as appraisal costs. The level of costs of this item can be a good indicator of HACCP implementation.

According to the new regulations in Canada, USA and the EU, now being implemented, fishery products manufactured outside the proposed HACCP-based systems will have to pass through independent full sampling and analysis. If applied, these regulations will increase the appraisal costs of the companies that do not conform with the new regulations.

Example 8.3 Costs of Microbiological and Chemical Analysis

The cost of objective and subjective analysis to determine safety and quality of fishery products is a key component of appraisal costs. This type of cost can be due to internal or external (voluntary or mandatory) quality control and inspection. In principle, cost of analysis is easy to determine. It comprises the cost of chemical reagents and media, disposable glassware, analyst's time (sampling, sample preparation, travel time, analysis time, time of analysis interpretation and reporting and dead time), energy (some analyses require notable use of electricity), cost of samples and administrative overheads.

If fixed costs are to be included in the picture, the proportion of depreciation of the laboratory, facilities and equipment should be added. As discussed in section 8.4, at company level, fixed costs are treated separately of variable costs. The inclusion of a laboratory in a plant will depend on an economic comparison of the cost of performing the analysis in-plant or contract a external laboratory to do them.

Small plants may find more convenient to contract a laboratory service rather than to have their own; however, this will depend on the volume of production, type of product and legal and contractual requirements.

(i) Cost of external analysis

It may be difficult to determine the cost of in-plant analysis, because in practice very often the analyst is used in many other functions, e.g., procurement of permits, discussion with official fish inspectors, product development, in-line quality supervision, quality auditing, supervision of cleaning personnel, pest control, responsible for industrial safety, fire warden, etc. However, it is relatively easier to establish the cost of external analysis.

In Table 8.2 the cost of different types of analysis, performed by a third party, is listed. In the case of Canada and Mexico the cost that appears in Table 8.2 represents the total cost of the analysis; in the case of USA the cost will depend on the time used by the NMFS officer to draw the sample and travel, plus mileage cost and administrative overheads.

From Table 8.2 it is apparent that costs of analysis vary widely, in developing countries they may be less expensive, because of low wages. However, the advantage of low wages may be offset by the increased cost of reagents, media, glassware and equipment that should be imported, and sometimes labour productivity.

Table 8.2 Cost (in US$) of some Microbiological and Chemical Analysis on Fish Samples

Notes:

1. Fish Inspection Regulations, Canada, version of 1992, values in US$ (calculated at a rate of 1.2 $CAN per 1 US$). Reinspection fees are higher than those that appear in this table (e.g., reinspection analysis for histamine costs US$ 183.33).

2. National Marine Fisheries Service (NMFS), USA, 1992, values in US$. Cost for analyses only, hourly charges for lot, miscellaneous, consultative and inspection services plus a 20% surcharge for administrative purposes should be added.

3. Centro de Investigación en Alimentación y Desarrollo, A.C. (CIAD), Mexico, 1994, values in US$ (calculated at a rate of 3.3 MN$ per US$ 1).

4. The basic analysis is Total coliform that cost US$ 11.98, to determine Faecal coliform US$ 11.98 should be paid in addition.

5. The basic analysis is Total coliform + Faecal coliform (see previous note), to determine E. coli US$ 11.98 should be paid in addition.

6. BAM method (steps 1, 2 and 3).

7. Paralytic shellfish poison (PSP), cost per sample (minimum of 3 samples).

8. On meat.

(ii) Cost of lot sampling and inspection services

The hourly fees for inspection services rendered by the NMFS (USA) are listed in Table 8.3. If the values for USA of Table 8.2 are consolidated with values of Table 8.3 (Type 11, for sampling), administrative surcharge (20%) plus eventual travel, costs of analysis in USA and Canada became more or less of the same order.

Tables 8.2 and 8.3 indicate the additional cost created by fish shipments being placed in detention upon arrival in the USA (in this case analysis costs could be part of a failure cost, see section 8.5.3.2). In the case of USA private laboratories could be called upon by the competent authority to perform inspection analysis on request. In this case, costs are charged at the current cost of the private laboratory.

Table 8.3 Hourly Cost Fees for Inspection Services (voluntary scheme) charged by the US NMFS (1992) (1)

Notes:

1. Excluded the states of Alaska and Minnesota. A 20% of the total will be charged for administrative purposes.

2. Minimum fee US$ 34. 10. It includes sampling and travel time (mileage costs are assessed separately).

3. Minimum fee US$ 30.45.

(iii) Influence of the number of samples

The type of analysis and the number of samples for each shipment are determinant in defining the total appraisal cost, particularly in fish inspection and quality systems based on analysis of final products.

The number of samples to be analysed depends on the size of the lot, and on the degree of reliability pursued. In the case of fish inspection, regulations could specify the number of samples to be drawn from a lot. For instance in the case of the Canadian Fish Inspection Regulations the sample size, for organoleptic evaluation, should be determined in accordance with Sampling Plan 1 (for first inspection) and Sampling Plan 11 (for reinspection) as specified in "Sampling Plans for Prepackaged Foods" (FAO/WTHO, 1969). A case for a lot composed of product units with a weight equal or less than 1 kg each, is presented in Table 8.4.

As costs presented in Tables 8.2, 8.3 and 8.4, in particular those referring to Canadian and American Public Services, are fees aimed to recover "as nearly as possible" the costs of providing the inspection service, they can be used as a base to calculate the cost of analysis in developed countries. Private laboratories will usually charge higher fees than official laboratories, and report or certificates produced may have not the same legal value of those of official laboratories. However, it is very common that seller and buyer may agree on a private laboratory to check lots, since obviously official laboratories cannot cope with all the existing trade.

Table 8.4 Cost of Sensory Evaluation (in US$), in Function of Lot and Sample Size, and Acceptance Number, for Inspection and Reinspection of Fish Lots, according to Canadian Regulations (1) (2) (3)

Notes:

1. Fish Inspection Regulations, Canada, version of 1992.

2. Values of N, n, AQL, (6.5) and c, according to Sampling plans 1 and 11 (reinspection) for product units with a net weight equal or less than 1 kg (2.2 1b). Determined in accordance with (1) and (FAO/WHO, 1969).
   AQL: Acceptable Quality Level. Maximum percentage of defective units permitted in a lot, which will be accepted approximately 95 % of the time. A sampling plan with AQL of 6.5 will accept a lot or production which has 6.5 % defective approximately 95 % of the time.
   c: Acceptance number. Indicates the maximum number of defectives permitted in the sample in order to consider the lot as meeting the requirements of the FAO/WHO CAC/RM 42.

3. Values in US$ calculated at the rate of 1.2 CAN$ per US$ 1 (1992).

4. Values in brackets correspond to reinspection, according with Sampling plan II (n and c), and respective reinspection fees.

In practice, an exporter may be put in the situation to pay for the quality appraisal of a lot more than once. It may expend to check at plant level, then pay for the local fish inspection and finally been affected by the inspection cost at the importing country. Although national regulations in general establish that inspection analysis "shall be payable by the person that imports the fish" (Canadian Fish Inspection, Cost Recovery Programme), it is clear that such cost will influence the amount to be paid for the lot to the exporter.

If all the cost analyses are compounded, the appraisal costs can become very high. In that situation it is not unusual that "commercial sampling" has been agreed by seller and buyer, this means in practice less demanding sampling, each time, that such detailed in Table 8.4. Depending on the type and value of the product, if it is a final or intermediate product, size of the lot and type of analysis requested fewer samples can be drawn.

For instance according to Canadian regulations, for bacteriological examination of fresh and frozen fishery products the sample size should be 5 individual prepackaged units or five 1-1b sample units from large bulk containers (Emberley, 1991). This in turn fixes the mandatory cost of the analysis; e.g., the analysis of Salmonella spp. (see Table 8.2) will cost US$ 770.8, regardless of the size of the lot.

In general, small lots will have a comparatively high appraisal cost and a relatively low statistical reliability, even if FAO/WHO sampling plans are followed. Exports from developing countries usually face this type of problem. The analysis of Table 8.4 while giving an indication of the possible costs of sensory evaluation, immediately raises a number of issues: the comparatively large number of defective lots that may be accepted, the risk involved in accepting "bad" lots, and the existence in practice of "zero" tolerance limits (e.g., Salmonella spp.).

The number of samples to be analysed can be increased in order to reduce the risk of acceptance of faulty lots. However, reliability does not increase proportionally to the number of samples as will be discussed below.

(iv) Cost of increasing reliability through the increase of the number of samples analysed

Following with the sensory analysis presented in Table 8.4 it could be hypothesized that there is a product with lots containing 4 800 or fewer units of 1 kg each, with 20% of defective units. Applying Sampling Plan 1 according to Table 8.4, 6 samples will be drawn for sensory analysis, and the cost of the analysis will be US$ 58.3 .

From the analysis of the corresponding Operation Characteristic Curve (OCC), (see FAO/WHO, 1969) it will result that the lot will be accepted in approximately 65% of the cases, or conversely approximately 35 % of the lots in such conditions will be rejected under this sampling plan. At this point the purchaser or importer who discovered that the lot contained a large portion of defective units may be inclined to request that more samples be analysed in future shipments.

What degree of reliability is required (in percentage of rejected lots with such characteristics)?, how many samples?, and how will the cost increase?. Using Sampling plan 1 (AQL, 6.5) and, the corresponding OCC, it is possible to construct Figure 8.2. Although the curve drawn in Figure 8.2 indicates only tendency (available cost values are for a fixed number of samples) it is clear that under such a sampling plan, the increase in reliability (or in assessed quality) will imply a exponential increase of the appraisal cost (see Figure 8.3).

It is pointed out that increased sampling will not eliminate the risk of acceptance of "bad" lots. In the example of Figure 8.2 it was assumed that 20% of the units within the lot were defective, but,-this is a hypothetical situation (in practice it cannot be know how many defectives there are in a lot). What happens for instance if instead of 20% defectives there are only 10% defectives?

Assuming that in the example of Figure 8.2, it had been decided to have a sampling of 48 units (1 % or more of the total lot!) to assure a 87 % of rejections of lots containing 20% of defectives, it happens that lots with 10% defective units will be accepted in approximately 78% of the cases, or rejected only about 22% of the time.

From a cost point of view this can be a nightmare situation for a small and medium company. Following the example of Figure 8.2, the increased reliability from 35 % rejections (n = 6) that will cost US$ 0.012/kg of sensory evaluation, to 87% of rejections (n = 48), will increase the cost of sensory evaluation alone from US$ 0.012/kg to US$ 0.036/kg (figures can be higher than indicated if the lot has less than 4 800 units).

This increase in the cost of analysis does not include the cost of the samples (that should be included) and eventually the cost of other required analysis (e.g., microbiological). For example, assuming a total cost of US$ 1 per unit (US$ 48 in addition), plus a faecal coliform. analysis (US$ 390.48), the total cost of analysis will reach US$ 0.127/kg. This is 12.7% of the total cost; and if defective units are below 10% of the lot, they will be accepted 78% of the time.

Figure 8.2 Variation of the Cost of Sensory Analysis vs the Increase in Reliability (approx. percentage of rejection of a lot containing 20% of defective units)

(v) The economic need to assure quality through other means

The example discussed in point (iv) is illuminating regarding the economic impossibility to assure (not control) quality through the analysis of samples of the final product. Although the incidence of cost of analysis can be reduced by increasing the number of units of a lot, it may create other problems, such as lack of consistency of the quality within the lot (because it is actually made up of a number of small lots, e.g., formed by the processing of different lots of raw material).

Although it is rarely admitted, the number of analyses prescribed by the regulations of some countries are impossible to meet just for cost reasons. They are only enforced when an outbreak occurs (e.g., cholera, SPP, salmonellosis), in the case of lots of dubious origins, or when the producing company (sometimes the country of origin) has poor records of safety and quality. Those regulations may be used as non-tariff barriers, but in view of the nature of the international fish market those moves are necessarily short-lived (the suppliers will look for alternative markets).

Nevertheless, there is the need to produce safe products of consistent quality. The liability continues to subsist regardless of whether or not the specific analysis was performed. At the same time the customers require products of consistent quality if they are to purchase them again. The only possibility of responding to such requirements is to develop safer production methods aimed at avoiding safety and quality problems, designed, operated and controlled in order to obtain and deliver the right product, the first time. Regulations on Good Manufacturing Practices (GMP) and FAO/WHO Recommended Codes of Practice were and are still in use.

More recently HACCP and HACCP-based methods have received wide recognition because they present a more systematic and precise approach, are relatively easier to harmonize at regional and international level, and focus on essential safety aspects. In addition to other possible approaches, HACCP has been applied since 1976 in the canning industry with excellent results.

However, to be useful any method should be more cost-effective than the one it is intended to replace. GMP and Codes of Practices allowed, when properly applied, to lean on fewer demanding sampling systems, but neither eliminate the need of analysis nor the problems due to defective productions. Application of HACCP and HACCP-based methods, according to the existing experience of the canning industry, can reduce even further the need of analysis, and at the same time the problems caused by defective products. Further discussion on the cost of applying HACCP to the fishery industry is presented in section 8.6.

(vi) There are a number of practical projects that the reader can attempt, departing from this example, viz.:

• The actual cost of analysis in the company/country, or for a given product

• The incidence of appraisal costs on the total selling price (ex works) of a product

• The total cost and economic viability of full applying a given national regulation

• The economic feasibility of a "zero" defect product

8.5.3 Failure costs

This is the highest type of quality cost in virtually any operation. It includes product and process failures that become evident and those which do not (hidden costs).

8.5.3.1 Internal failure costs

Internal failure costs include the following:

(i) Scrap

Products, parts and materials that cannot be used because they do not meet the quality requirements. It refers to final products, intermediate products, ingredients, packaging, etc., that should be discarded voluntarily or compulsorily (in the case that official fish inspection be inside the plant), before being sold. This is a direct loss and should include all the material, processing costs and labour costs incurred in production. In particular, it includes the quality aspects that relate to yield, wastage (raw materials, intermediate products, final products, energy, labour, facilities), sub-standard products (not reprocessed) and mark-downs (also called downgrading) due to poor quality.

(ii) Reprocessing

With regard to reprocessing, a fish processing material could have salvage value and can often be reprocessed into a new product. It should be borne in mind that this is really a cost, not a recovery. Generally all that is recoverable from reprocessing is the value of the fish, because in most cases the original processing costs, labour costs, and packaging material costs are lost. A typical case in the fishery industry is repackaging due to wrong labelling.

Other costs associated with reprocessing could be: reinspection, screening (sorting out defective individuals from a batch found to have too many defective fish), and defect analysis, to identify the causes of the internal failure cost. In practice, a reprocessing activity in the fishery industry may be masked.

In the example presented in Figure 2.6 , the influence of the quality of raw sardines on the productivity of the nobbing operation was discussed. The same example could be analysed from the viewpoint of quality costs, since the screening (sorting out of the defective sardines showing belly burst) introduces increased labour cost and a cost associated with a less-than-satisfactory use of the nobbing machines.

(iii) Other costs

There are a number of other internal failure costs that may pass unnoticed in normal plant operation but that should be accounted for. For example, cost of additional laboratory analysis to ascertain the quality of dubious lots, extended cold storage of lots that could not be dispatched due to low quality, costs produced during the analysis of faulty lots (including salary), energy losses due to improper use of ice, electricity, steam and water, faulty operation of the cold storage room, low fish yield of untrained staff, low fish yield due to improper adjustment of fish processing machines (e.g., filleting machines).

An example of this type of internal failure cost is the so-called overall shrink (or cold storage/chill room storage losses). Shrink is the loss of inventory due to spoilage, deterioration, water loss and uncontrollable acts. In the US fishery industry an average for fresh fish overall shrink is 10%, and 1 % for frozen fish (Source: Food Marketing Institute FMI - Retail Produce Operations 1986).

Example 8.4 Energy Consumption in Tanzanian Ice Plants

Production of ice is itself a commercial activity. To economize on overall performance, production costs should be kept to a minimum. Energy costs in particular should be closely controlled. The energy required to produce 1 t of ice varies depending generally on the type of ice maker and prevailing climatic conditions. In the tropics, it ranges from 55 to 85 kWh/t, with the lowest value for block-ice and the highest for flake-ice. If plants are not properly managed, energy consumption can become much higher.

Four ice plants in Tanzania were tested for energy consumption. All installations were relatively new, and similar regarding capacity, type of compressor, type of refrigerant, refrigeration-flow control and condenser capacity. The figures found were as follows: 86 (ice block), 117, 136 and 178 kWh/t; this is between 31 and 93 kWh/t more than the reference value. Faults were found in all these plants, including improper regulation of expansion valves, heat leakage and the malfunction of pumps and propellers (Anon., 1990).

Comment and discuss the following points:

1. How long ago did you check the energy consumption in your ice plant?

2. Taking the industrial electricity costs of your country, calculate the money losses per ton of ice produced.

3. The influence of the extra energy costs surely reverted on the ice costs (ice that should be utilized to chill fish).

4. The lack of trained personnel to carry out proper maintenance.

8.5.3.2 External failure costs

These are the costs of defects found after shipment to the buyer or consumer. This type of failure is probably the most costly of all. Due to the commercial implications, it is very difficult to find values of this type of cost, and fishery industries in general are reluctant to admit that they had or may have this type of cost. External failure costs can be generated from minor incidents (e.g., relating to a single package of product) to a catastrophic event involving a product recall, which can be devastating to a company and may result in failure of the firm. They include product failures of which the firm will become aware, and those that remain unknown and will be reflected by a fall in sales.

In the case of external failure, the costs usually exceed all the costs involved till the point where the failure is found, and include the liability for the wrong product and the loss of confidence of the customer, that will in turn reflect in the marketing position of the firm. This affects both internal and external markets.

Fish and fishery products are a very particular and sensitive type of food, and publicized external failures influence fish markets in general, regardless of the type of product, firm involved, country of origin, and nature of the problem. This largely justifies the increasing role of the fish producer associations in the field of safety and quality.

Most of the literature available relating to the external failure costs of food in general, and fishery products in particular, has been produced in USA and Canada. This is the core material to be utilized to develop this point. It does not mean that such costs do not exist in other countries, even if not so well known.

External failure costs may involve or create commercial, political, legal and sometimes diplomatic implications which are very difficult to overcome in practice. However, a deeper knowledge of this type of cost is necessary to improve marketing at home and abroad, and to develop and implement at industry and public level effective cost/benefit safety and quality systems.

(i) External failure costs related to international food and fish trade

A first approach to the magnitude and reasons of the most direct component of external failure costs can be attempted by analysing the Monthly Import Detention List published by the Food and Drug Administration (FDA) of USA. Table 8.5 indicates the reasons, number of lots and estimated values of FDA detentions of all types of foods imported into the USA in the period January-March 1980.

Table 8.5 helps in ascertaining the relative weight of the different type of reasons for detention and the economic impact in each case. It should be kept in mind that Table 8.5 refers only to mandatory safety reasons and does not include eventual complaints by the importer about FDA-approved shipments due to sub-standard quality. Even though a large proportion of the detentions relate to exporters from developing countries, exporters from developed countries also appear on the list.

Table 8.5 Reasons for Detention, Number of Lots and Estimated Values of FDA Detentions of All Types of Foods Imported into the USA, January-March 1980 (1)

Notes:

1. Adapted from Ref. (Anon., 1985). Primary source FDA

2. Insects, rodents, excreta and not elsewhere classified (NEC) sources.

From October 1981 through September 1982, 1924 shipments of shrimp from a few developing countries (mainly South and Southeast Asian countries), weighing a total of some 19 000 t were detained by the FDA because of contamination with Salmonella spp. or because of decomposition. The value of the shrimp losses was estimated, conservatively, at around US$ 42 million (Anon., 1985). It is possible to analyse detentions of fishery products alone, from the FDA monthly detention lists. Details of the reasons and volume of detentions of fishery products imports into the USA from 1 to 31 October 1991 are presented in Table 8.6.

Table 8.6 gives more details on detentions related to fish and fishery products. The corresponding total value of detentions, taking average values of 1990 (US Department of Commerce, 199 1), for October 1991 is US$ 11. 5 million: that is, about 2.5-3 % of the total worth of fish exports to USA goes into detention. However, it is not possible to arrive at a common factor for detention/rejection since there is an automatic detention list; i.e., fishery products coming from a given country or producer are automatically inspected. On the other hand, it is possible for a country included in the automatic detention list to define an average external failure cost as the percentage of the total value detained or rejected. Inclusion in the automatic detention list is not permanent, and with good records a firm or export from a country can be taken off the list.

Detention does not imply automatic rejection, since some of the reasons listed in Table 8.6, particularly No. 4 and 6, may be amended. However, nearly 80% of the total weight detained (Table 8.6), is due to reasons that can hardly be changed. The cost involved in removing a shipment from the detention list also represents an external failure cost.

Table 8.6 Reasons for Detention, Number of Cases and Total Weight of FDA Detentions of Fish and Fishery Products Imported into the USA, 1-31 October 1991 (FDA, 1991)

Notes:

1. Some of the lots may have been detained for more than one reason.

2. Insect, rodents, excreta and NEC sources.

3. Include false, misleading, incomplete and labelling not in English.

4. In all cases, mercury (Hg).

5. Unregistered (LACF) manufacturer, and unfilled (LACF) procedure.

6. Abnormal/damaged cans/containers.

A quick comparison of Tables 8.5 and 8.6 shows that there is a tendency to increase the number of detentions rather than the contrary. The average monthly number of lots of all the food products detained in January-March 1980 was 290, while in October 1991 more than 300 lots, of fishery products alone, were sent to detention. This in turn is linked to the pressure of US consumers to obtain safer fishery products.

Most of the detentions shown in Tables 8.5 and 8.6, even if transformed into rejections, implied for the company involved a failure cost basically limited to the production cost, transport, insurance and analysis involved (although other costs not easily to account for may be involved, e.g., automatic detention of the next shipment, loss of commercial image, customer lost). However, if the defective lot passes the successive inspection steps and produces a foodborne outbreak at consumer level, the cost can be much higher depending on the seriousness of the outbreak and number of people involved. The total costs of some of the best known botulism outbreaks associated with fishery products are shown in Table 8.7.

Table 8.7 Total Costs of Botulism Associated with US Canned Fish Products (Todd, 1985)

Note: (1) The economic impact of this incident on the UK fishery industry was estimated at US$ 4 million (Anon., 1985).

Total costs presented in Tables 8.5 and 8.7 may appear very high. However, a search on the seizure levels in developed countries would show commensurable figures. In Italy, the Italian Police ("Carabinieri") participates in about 1 500 seizure cases per year of fish and fishery products. During 1991 the 14 most important cases amounted to the equivalent of about US$ 12 million (Anon., 1992).

Example 8.5 Botulism in Canned Salmon, USA 1982 (Todd, 1985), (Thompson, 1982)

On 5 February 1982, FDA's Rockville headquarters learned that a Belgian couple had been hospitalized with a suspected case of type E botulism, usually associated with fish and seafood. The source (as was confirmed later) was a can of pink salmon packed in Alaska, found in a trash box in the couple's home.

By 7 February the husband died and warnings against eating the brand that caused the incident were broadcast throughout Belgium and also in English to the US Armed Forces in Europe. In the meantime, the code of the can was identified. It corresponded to the first production shift of 24 July 1980 of an Alaskan cannery. FDA had inspected that cannery on 29 July 1980 and had checked production reports at the time dating back to 24 July, no problems having been noted on that date.

On 10 February, an FDA canning expert sent to Belgium reported that the incriminated can had a small punched-in triangular hole, and that bits of salmon still in the can showed many spores when examined under microscope.

By 15 February the company was in the process of recalling the half-pound cans of US-packed salmon. UK health officials advised the public not to consume US canned salmon and to return them to the place of purchase. This followed the discovery of a returned can of salmon with the same punched hole, but packed by another Alaska cannery. The reforming machine utilized by the different packers was the apparent source of the problem.

By 17 February, an FDA engineer was able to duplicate the malfunction that caused the hole at the end of the rim. Some cans were tom by the reformer causing a tiny hole. Those cans were not properly sealed because of the holes. Even though they were then properly cooked and sterilized, bacteria (in this case Clostildium botulinum) could enter the hole during the cooling process.

On 18 February FDA issued a press release advising US consumers to return to the place of purchase any 7 3/4 oz cans of salmon, with a suspected hole in the lid. The FDA found 22 defective cans in half a million they examined (0.0044% of defectives).

The survey confirmed that the defect may be common to all the Alaskan canneries that utilize the defective reforming machine, and that it affected the salmon produced in 1980 and 1981.

On 5 March a programme was agreed upon by the salmon industry and the FDA was to assure the safety of all the half-pound cans of salmon produced in 1980 and 1981. Some 50 million cans were still in storage in Seattle.

By 19 March more than 20 million cans were under recall. Several packers decided to implement the recall of their defective products.

By mid-April 1982, more than 50 million cans of Alaska salmon distributed throughout ' the world were under recall - almost 20% of the 1980 and 1981 output of the Alaska salmon industry. The total failure costs of this incident was US$ 151 181 900 (see Table 8.5). Discuss the following:

• The importance of the incident; national and international impact

• The development of the events, the steps taken, the process of identification of the

• reasons of the problem

• The process of recall. Does it exist and is it applied in your country?

• By the time of this incident the HACCP basic approach was applied in the fish canning industry in USA as can be seen from the procedure utilized by FDA to inspect the plant. Could you explain what happened?

(ii) External failure costs related to domestic markets

Evaluation of costs at national level for Canada and the USA based on all available costs for 61 incidents showed that company losses and legal action are much higher than medical/hospitalization expenses, lost income or investigational costs (Todd, 1989c). The average cost for industrial food processing incidents is found to be 70 times higher than the average costs incidents linked to food-service establishments, markets, homes, farms and communities (Todd, 1989b). All data and estimates available seem to indicate that external failure costs at national level are higher than those at international level, even though such failure costs do not necessarily affect directly the industry(ies) involved (see section 8.7).

Costs of external failure related to domestic markets in developing countries are in most cases impossible to estimate, first because even obtaining the relevant data is a very costly process, and the responsible Government branches may not exist, and when they do they very often have no means of performing their job. In many of the poorest countries there is not enough expertise to produce epidemiological data on a consistent basis. This situation is at the root of one of the main misunderstandings in the fish trade between developing and developed countries.

For many exporters in developing countries it is very difficult to understand why the situation can be so different in the importing country. If there are no problems with the fish at home why are there problems abroad?

As in developing countries records may be not enough to ascertain the true entity of the external failure costs in domestic markets , the only wise decision is to apply the HACCP procedure (or some HACCP-based effective system). This in turn will revert in an improvement of the situation both on domestic and international markets.

(iii) Legal liability and external failure costs

Two aspects linked to external failure costs deserve additional comment. The first relates to Government regulatory actions when specific regulations have been infringed and charges may be laid. The second relates to the law suits that have been or may be initiated by individuals or companies who believe that a warranty or contract has been broken.

Legal liability can be related, in this context, to both safety (public regulations and eventually contractual agreements) and pure quality aspects (contractual agreements). This type of legal liability is generated by a risk that should be kept at a minimum by the process control system responsible for quality production.

This liability is a very important factor in the production of quality in developed countries, but unfortunately is awarded less importance in developing countries. Depending on country regulations and type of problem, products can be seized, injunctions can be presented, companies and executives fined, licences withdrawn and, in extreme situations, those responsible can be prosecuted and officials imprisoned (Burditt, 1984). Seizure is not usual it the firm responsible voluntarily recalls the unsatisfactory product.

Example 8.6 Criminal Case Involving the Presence of Salmunella in Froglegs (Anon., 1976)

A case of severe penalties involved the presence of Salmonella in froglegs sold by a Texas Company in 1976. The Company was fined US$ 15 000 and the owner placed on year's probation after paying a personal fine of US$ 10 000.

Discuss the case. Could regulations in your country allow such a situation to develop?

Legal action can be sought by anyone, particularly in developed countries, claiming to have a just cause, whether or not a regulation or code has been violated, or even whether or not the person concerned was ill or injured. In many developing countries such type of rights are seldom utilized or non-existent. This may be "advantageous" for the firm in the domestic market, but it can cause easily problems in foreign markets.

This type of cost may not necessarily be an external failure cost. However, proper legal advice and support are needed at the product development stage in order to prevent, as far as possible, such costs and problems. The firms directly in contact with the final consumer (brands, restaurants, supermarkets) are more at risk than firms trading primary and intermediate products. However, the firms sued may in turn recover losses from suppliers if they can prove that they were not the primary offenders. Companies in developing countries operating in the most profitable field of value-added fishery products should be aware of this additional risk. The Company may decide for a settlement in or out of court. This will depend on the individual circumstances. Large food companies have a special department to deal with such cases. While wanting to avoid as much as possible the negative effects of exposure by the press, they have to defend themselves from injustice. In all cases, sound technical knowledge is necessary, together with proper legal advice.

Example 8.7 Case of Out-of-court Settlement. Label Showing Incorrect Information

In 1977, a large German packing firm of frozen fishery products for the internal and European market was denounced to the authorities by different final consumers because the number of shrimps implied by the external picture on the package of a frozen seafood salad was greater than the actual number of shrimps inside the package. The German fish inspection service made a check at the supermarkets where the products had been purchased, and found that the accusation was basically correct, even though not all the packages presented such characteristics. The incident was not prevalent throughout the production, but only in some lots due to the malfunctioning of a dosing machine. Those lots were recalled. The Company wrote a letter to all the claimants explaining what had happened, apologizing and offering in compensation a box of the incriminated product. No one sued the Company, accusations were withdrawn, and the authorities closed and filed the case.

Discuss the example.

8.5.4 Relation between the PAF costs

The PAF model allows to study the relationship between the three main types of quality costs. In principle, the increase of expenditure in prevention and appraisal costs should decrease the failure costs (external and internal), and there will be a point at which total quality costs will be at their lowest. This general behaviour is qualitatively presented in Figure 8.3. The relationship presented in Figure 8.3 can be also expressed by an equation that represents the variation of total quality costs per unit of product:

(8.1)

where:

ct(q)      = total quality costs per unit of product

cp(q) = summation of all prevention costs per unit of product

ca(q) = summation of all appraisal costs per unit of product

cf(q) = summation of all failure costs per unit of product

The basic assumptions of equation (8. 1) are:

(i) It should be possible to determine costs as a function of quality level (measure of quality).

(ii) Costs of prevention, and particularly costs of appraisal, grow exponentially with the increase of quality and inversely, failure costs decrease exponentially when quality increases.

The exponential nature of the curve of prevention and appraisal costs in Figure 8.3 is mainly linked to the increase of the appraisal costs (increased number of sampling and analysis), as discussed in example 8.3 (see Figure 8.2). Sometimes the fixed costs (supposed constant for all the qualities) are included in Figure 8.2 to give an indication of the relative weight of quality costs on the total costs of manufacture.

Figure 8.3 Qualitative Variation of Quality Costs according to the PAF Model

The existence of an optimum, and awareness of it, does not mean that a given industry will necessarily work at that optimum. Two large European fishery industries that apply quality economic analysis, have declared to the authors that actual expenditures are above their optimum. Considerations such as net sales, safety, prestige (brand image) and goodwill, may make it advisable or desirable to increase prevention and appraisal costs above the optimum point, as is determined by Figure 8.3.

The application of HACCP and QA can change the actual shape of Figure 8.3. For instance in the design of new plants some of the prevention costs could be eliminated through appropriate design and construction of machinery, premises, equipment and processing lines. This eventually can be also achieved by improvement of procedures within an existing installation, e.g., by eliminating the need of pasteurization in a line of pre-cooked shrimp, as result of the introduction of HACCP and resulting improved shrimp handling. The investment in prevention (fixed costs) can thus reduce the prevention costs (variable costs). This means that a new plant, properly designed and constructed, or a plant where procedures have been improved, could produce a safer and better product at lower cost.

This tendency, identified in other manufacturing industries (Johnston, 1988), is certainly a trend of the modern food and fishery industries. In principle, a given company or processing line (for a specific product) will present three different total quality costs: the actual quality cost (measured directly), the optimum quality cost according to design (see Figure 8. 1), and the optimum operative quality cost, according to Figure 8.3. In general, it can be expected that such quality costs will be related in the following way:

Actual > Operative optimum > Design optimum

whereas the quality achieved will follow just the opposite order. Although it is rather improbable that most of the fishery industry could have this level of information, the concept is useful in that it provides the rationale for improvement, even if optimum values are unknown. At the same time it is underlined that most of the empirical data published relate to actual quality cost.

The relationship between actual quality costs (prevention, appraisal and failure) is also important, because it gives a primary indication of where to direct the efforts to reduce quality costs and increase quality. Table 8.8 gives percentages of actual values of prevention appraisal - failure costs.

Table 8.8 Prevention - Appraisal - Failure costs, as Percentage of Total Quality Costs in Different Industries

It is clear from Table 8.8 that the optimum is not necessarily at the intersection of the curve of failure costs with the curve of prevention and appraisal costs (see Figure 8.3). Otherwise failure costs would always be 50% of the total quality costs.

8.5.5 Quality cost indexes

Very often quality costs are analysed with reference to a consistent basis against which relevant comparisons can be made. Although quality cost indexes are not strictly part of' the PAF model, some of the indexes utilize costs defined and determined in accordance with it. The basis should represent the business from different viewpoints and be sensitive to management decisions and business changes. The following indexes have been suggested (British Standard Institution, 1981):

1. Labour base (Internal failure costs / Direct labour) x 100

2. Cost base (Total failure costs / Manufacturing costs) x 100

3. Sales base (Total quality costs / Net sales) x 100

4. Unit base (Test and inspection costs / Unit of production) x 100

5. Value added base (Total quality costs / Value added) x 100

The sales-based index (iii) seems to be one of the most utilized in practice, although it is recommended to utilize three of them at plant level (British Standard Institution, 1981). Some values of index (iii), expressed as percentages, are shown in Table 8.9.

Table 8.9 Indicative Values of the Quality Costs Index (sales based) in Percentages

According to the literature (Harrington, 1987; Crosby, 1980), a index value (iii) of 6 % can be taken as indicative regardless of the product, whereas a value of 2-2.5 % indicates that the industry manages quality and quality cost very satisfactorily. The "ideal" value of index (iii) should be zero, which is impossible in practice. Very high values (e.g., 10-20%), and very low values (1% or less) of index (iii) may be found (Hosking, 1984) (Crosby, 1980).

However, extreme values should be analysed with caution as in general very high or very low actual values of index (iii) may indicate a poor quality management and/or costing system.

Although values of index (iii) are widely popular in the fishery industry, very often as a yardstick rather than an actual value, they cannot be determined without a sound economic analysis. Other indexes can be defined: e.g., for the retail food industry where there are unusually high distribution costs, it has been suggested to define an index based on the cost of sales (Crosby, 1980). Values in Table 8.9 are only indicative because comparison with other firms is not always a valid guide to the level of acceptable costs (Sandholm, 1987).

In the fishery industry, often influenced by seasonal variations, the indexes should be chosen appropriately, e.g., on a 12-month basis. Quality cost analysis on a monthly basis could be meaningless and a proper statistical analysis is advised.

8.5.6 Limitations to the PAF model

The PAF model is widely utilized, and it usual to find that large fish and food companies utilize it. A number of observations have been raised, and alternative models proposed. Criticisms on the PAF model include (Porter and Rayner, 1992):

1. All that is done in a plant is aimed to make a product of a given quality. The risk-of focusing in a limited number of costs, deviate for instance from the fact that there is a continuous improvement in quality due both to equipment (hardware) and management and procedures (software). The notion that an optimum quality cost exists may become a static concept, whereas a dynamic situation regarding costs exist in practice.

2. The model focuses in cost reduction and ignores positive contribution of improved quality to sales volume and price that improved quality can provided.

3. Very often it is difficult to ascertain when a given cost should be considered prevention, appraisal or failure cost. For instance an analysis could fall into any of the three categories depending the purpose and when, along the line, was performed. This problem is compounded in practice by the difficulty in gathering data on quality costs from current accountancy, and the pursued accuracy of the data gathered (the increase in accuracy could imply also an increase in the cost of performing the quality economic analysis).

4. May create the false concept that an additional management function is needed to reduce quality costs and improve quality. Whereas prevention should be just part of good management practices, and management should assume full responsibility for declared product safety and quality (liability). It is not rare to find that sound management improves quality, without increasing prevention costs.

5. The PAF model seems to be inappropriate to the needs of small and medium-sized firms. This may be due to its complexity, and a more simple approach to quality costs would be needed. However, there may be other reasons, for example that in small firms appraisal costs are assumed as an integral part of production overheads and failure costs are reputed as non-existent. Moreover, and perhaps more relevant, in this case the owner is usually the plant manager, and therefore prevention of mistakes and waste is considered a basic task of management ("The eye of a master does more work than both his hands").

Some of the above points have been discussed. The reader should be aware of the PAF model drawbacks discussed in order to adjust it to practical situations. Other models, e.g., "tangible and intangible costs" (Juran et al., 1975), process cost models (costs of conformance and of non-conformance of a process) and cost-benefit models (Porter and Rayner, 1992), have been suggested.

Nevertheless, in the authors' opinion such models do not address all the observations (in particular those concerning the small and medium sized firms) and are not yet widely applied. The PAF model, with due considerations, can still render a service to most of the fishery industry, at least by starting a necessary conceptual and practical discussion within the firms on the subject of quality costs.

8.6 The Cost of Applying HACCP

The worldwide trend to HACCP and HACCP-based systems application in the fish process industry has raised the question of the cost to implement HACCP in existing plants. In turn, the industry expects that this investment to be recovered and produce a profit. In the USA, the Food and Drug Administration (FDA) has published the result of two estimations on the investment necessary to apply HACCP (US FDA, Federal Register 28 January 1994). One estimation was conducted by FDA, and the other by an independent consultant firm. Results are shown in Table 8. 10.

The cost of implementing HACCP, and the possibility to recover the investment and profit, will depend in practice on a number of variables. First, it depends on how far the existing facilities and procedures are from a basic HACCP condition. The farther, the more costly. The number of hazards to be included in the system will also influence the final cost (e.g., a system including only public health hazards will cost less than a system aimed at including public health, economic fraud, spoilage and hygiene hazards). The final cost will also depend on such factors as: the type of product, current and prospective markets requirements, current appraisal costs, awareness of actual failure costs, current regulations, availability of trained people and proper advice.

Table 8.10 Estimations of Investment (in US$) Necessary to Apply HACCP to the Fishery Industry (US FDA, Federal Register 28 January 1994)

Note:

(1) Refers to fish processing plants in foreign countries that export to the USA under proposed FDA regulations on HACCP

Costs of Table 8. 10 vary widely, from US$ 1000 to US$ 39 000 or more, due to the actual distribution in the hygienic and sanitary conditions of the fishery industry, and can be taken only as indicative. Table 8. 10 gives the following useful indications:

1. The cost of implementing HACCP seems largely independent on the production volume. This may be because some of the costs involved are independent of the size of the plant, e.g., a temperature indicator and recorder will cost the same for a 10 m³ than for a 100 m³ cold storage room. It may be due also to the fact that large plants, in general, are nearer to a basic HACCP condition than small plants.

2. HACCP implementation will take more than one year.

3. It is foreseen that plants exporting to the US market will have average costs above those expected for US firms. In addition, fish importers will have a cost increase.

Costs listed in Table 8. 10 may appear below than those expected by the industry. In one publication (US FDA, Federal Register 28 January, 1994) it is recognized that a number of additional costs need further analysis. Costs associated with the retrofit of existing plants, necessary, for the proper operation of HACCP (e.g., a new freezer, a new water supply line) are not included in costs of Table 8. 10.

Other costs not included in Table 8. 10 are: training employees, creating the HACCP plan, taking corrective actions to respond to critical deviations, recall (short term), record keeping burden, ensuring that some particular equipment is achieving the desired result (e.g., cooking, pasteurization and cooling) and restricting catch in certain areas and seasons if processors (and Government) find it necessary (e.g., for ciguatera).

Industry could find actual costs to implement HACCP much higher than those listed in Table 8. 10, particularly in cases where serious flaws in premises, machinery or processing lines exist. An in depth quality economic analysis would be necessary to asses in practice the actual costs of implementing HACCP and its economic advantage. Some companies may reach the extreme conclusion that it will be cheaper and more profitable to construct a new plant and scrap the old, than to refit it.

In many cases, particularly in those where proper GMP and Codes of Practice are already followed, it will only imply additional measuring equipment (e.g., temperature indicator and recorders), increased monitoring and record-keeping and perhaps minor improvements in fish handling, processing and storage.

Implementation of ISO 9000 series standards (voluntary) should be seen as a further step after application of HACCP or HACCP-based systems (now mandatory in many countries), and it will involve a cost. Firms could seek implementation of the ISO 9000 series certification as a way to improve their market position. Until now only a limited number of fishery industries (all in developed countries) have attempted or obtained the ISO 9000 series certification.

8.7 Social and Political Costs of the Lack of Food Safety and Quality

Most of the external failure cost due to food (not only fish) unfit for human consumption is hidden and unknown. It is widespread, distributed among individuals, Government (health assistance services), insurance companies, and employers (of affected staff).

8.7.1 Epidemiological data

The main reason for the situation discussed above, even in developed countries, is the lack of sufficient and consistent epidemiological data. The chain to ascertain the linkage between a food incident and the food vehicle responsible for it, is as follows:

Food incident
S
Food incident reported
S
Etiological agent identified
S
Food vehicle identified
S
Place where the food was contaminated/mishandled

In many countries, particularly developing countries, there is no structure to gather information and investigate food incidents, or if the structure exists formally, it does not have the resources and facilities (e.g., human, financial, laboratories) to perform its duties. Even in the comparatively few countries which have a reporting system, severe under-reporting is suspected. According to Mossel (1982) only about 1 % of the total number of incidents is reported. Table 8. 11 lists some of the epidemiological data available regarding the incidence of fish and fishery products in ascertained foodbome disease outbreaks.

Values and percentages presented in Table 8. 11 depend on each case of a number of factors, for instance on the characteristics of existing system of data collection (e.g., promptness to collect and analyse the suspected food, possibility to perform the right analysis), on consumer habits (type and amount of fishery products consumed), on awareness of the physician and the victim on the etiological role of foods, on period chosen to group the data, and on more banal aspects such as if comparisons are based on outbreaks, cases or incidents. In general only in a fraction of reported incidents has it been possible to identify the etiological agent responsible for the outbreak, and in an even smaller fraction to identify without doubt the food that acted as the vehicle of the etiological agent. For instance, the number of food outbreaks reported to the US Centers for Disease Control (CDC) in the period 1978-1982 were 14 340 cases, of which in only 8 031 cases (56%) was it possible to identify the etiological agent (Todd, 1989a).

A review study (Bryan, 1988) of the US foodborne surveillance data for the years 1977 through 1984 showed that in only 1 586 cases were the food vehicles identified. For those 1 586 cases, fish and fishery products accounted for 24.8% of total cases identified, which presumably puts fish in the USA as the first food category at risk (meat 23.2%, poultry 9.8 %, salads 8.8 %). Figures in Table 8. 11 (from Bean and Griffin, 1990) make fish responsible for 20.3 % of the cases, and a study by the National Fisheries Institute (NFI), for the period 1973-1987 on 162 951 cases reported to the Centers for Disease Control, found that fish and fishery products were only responsible for 5% of the cases (2.2% finfish and 2.8% shellfish) (NFI, 1992). Therefore, data on Table 8.11 are presented only to identify whether or not a general trend may exist, or if analysed case by case in detail, to find areas of concern for public health authorities and industry. It is clear from the previous paragraph that information such as given in Table 8. 11 should be carefully evaluated. In actual markets, seafood is in competition with other foods and such data may be used to commercial purpose. However, it is clear that fish and fishery products (as other foods) have an etiological role in food incidents.

Table 8.11 Epidemiological Data on the Importance of Fish and Fishery Products as the Ascertained Vehicle of Foodborne Disease Outbreaks in the Period 1985-89 (1)(2)

Notes:

1. Data from 5th Report (1985-1989) WHO Surveillance Programme for Control of Foodborne Infections and Intoxications in Europe, Berlin, 1992 (unless other reference specified).

2. Only ascertained cases. Data do not include "not identified/unknown" outbreaks /cases /incidents.

3. Include all the reported outbreaks/incidents where the food vehicle was identified.

4. Data for 1982-83, Todd (1989 b).

5. Data for 1986-92, Razen and Katuzin-Razen (1994).

6. Data for 1984-88, Grillo Rodriguez (1989).

7. Data do not include incidents caused by C. botulinum.

8. Data on incidents caused by C. botulinum.

9. Data for 1989-93, Toyufuku (1994).

10. Data for 1987-89.

11. Data for 1986-88.

12. Data for 1973-87, Bean and Griffin (1990).

13. Data reported as "incidents". An incident is an outbreak or a single case. An outbreak is an incident involving 2 or more persons. Case, single case or sporadic case, is an incident in which only one person is involved.

14. Only includes outbreaks due to V. parahaemolyticus and food poisoning due to puffer fish.

8.7.2 Estimated costs

Consumers and Governments, particularly in developed countries, are becoming increasingly concerned about the implications of the etiological role of foods. This is due mainly to the following reasons: the steady increase of health service costs, the trend to avoid tax increases to pay for public health assistance (and the reduction in public health expenditure), and the increased awareness on food safety and quality and nutrition.

For developing countries there is little information available but actual costs may be severe. For instance, the World Health Organization (WHO) has estimated that in Pakistan 4 out of 10 deaths are due to waterborne and foodborne disease. As Todd (1989, a) stated: "Foodborne disease is increasingly being recognized as a major cause of morbidity in both industrialized and developing countries, and also mortality in the latter, but the full extent of the social and economic impact is hard to measure".

At the current state of knowledge most of the cost estimations are little more than guesses based on extrapolations of epidemiological data, as discussed in Table 8.11, and costs of ascertained incidents. However, this is a field of knowledge in quick expansion, and a number of studies proposing new models and ways to analyse the problem are appearing in the literature (see for instance Caswell, 1991 and Sockett, 1991).

Table 8.12 shows the findings of a study on the total costs of foodborne disease in the USA. This study was based on the comparative analysis of five different and independent estimates and on available data of known cases. The costs detailed in Table 8.12 integrate: costs of illness, death and the amount of business losses.

There is evidence that costs in developed countries for the same type of etiological agent are of a similar order. For instance in Canada, cases of acute bacterial foodborne illnesses were estimated at 1 million per year, and total costs around US$ 1 100 million (Todd, 1989c). However, it is not possible to link directly the estimates of Table 8.12 and the existing epidemiological data analysed in Table 8. 11. It is an error to extrapolate such results and assume that fish and fishery products are responsible for 20.3 % of the cases and estimated costs indicated in Table 8.12.

Table 8.12 Preliminary Estimates of Annual Number of Cases and Total Costs (illness, death and business lost) of Foodborne Disease in the USA (Todd, 1989a)

Notes:

1. US$ of 1988 (not clearly stated in the reference).

2. The most important are Salmonella spp. (not S. typhi) with more than 40% of the known cases, and more than 50% of the total known costs

3. Includes 1000 estimated cases of fish parasites.

4. Other estimates are in the range of 5 to 19.8 million cases per year.

Example 8.8 Estimate the Economic Impact in USA of Fish as Vehicle of Etiological Agents

A first crude approach could be to take the figures provided by the N-FI (1992), in this case 5 % of US$ 7 897 million would be US$ 394.85 million. An alternative approach could be the following:

(a) Estimate the yearly average number of cases due fish and fishery products.

The total number of cases (X_t) will be:

X_t = x_b + x_p + x_v + x_st                                                                                     (8.2)

where:

x_b = number of cases due to bacteria

x_p = number of cases due to parasites

x_v = number of cases due to virus

x_st = number of cases due to seafood toxins.

From Bryan (1988), in the ascertained cases of bacterias, fish was identified as a vehicle in 3.33% of the cases. If on average the proportion holds (see Table 8.12):

x_b = 0.033 x 5 500 510 = 181 500 cases

From Table 8.12: x_p = 1000 cases, and x_st = 58 260 cases

From Bryan (1988) viruses in average represent 24% of the cases associated with fish as the vehicle; this means:

x_v = 0.24 x X_t

Replacing in (8.2):

X_t = 181 500 + 1000 + 0.24 x X_t + 58 260

Solving for X_t , and x_v results in:

X_t = 316 789 cases and x_v = 76 029 cases

From the values obtained, and average costs for each type of etiological agent from Table 8.12, Table 8.13 is obtained.

Table 8.13 Total Estimated Costs per Year of Cases due to Fish and Fishery Products as the Vehicle of Etiological Agents in the USA (1)

Notes:

1. Based on data of Bryan (1988) and Todd (1989a).

2. In millions of US$ of 1988.

3. Taken as basis for the estimation only the total known cases of Table 8.12.

Results like those of Table 8.13 are highly speculative, serve only to identify trends and to have an order of magnitude of the problem. Comments to Table 8.13 could be as follows:

1. The impact of the results shown in Table 8.13 may be measured against the total value of fish traded in the USA, estimated in US$ 6 000 million per year. In this case the economic impact would be about 7.8% of the total value of fish traded.

2. The percentage in the total number of cases differs from those in Table 8. 11, and is even lower than the estimate of NFI. This is because Table 8.12 introduces a model of how the results may be extrapolated, and because during the calculations assumptions (based on existing data) were made. A model is essential to produce this type of estimate because, for example, there is not the same type of availability and frequency of consumption of each kind of food within a country. Moreover, there are some types of seafood consumption (e.g., raw oysters) that are very risky, produce a relatively large number of cases and are relatively easy to identify (since consumers and physicians are very aware of the risk). However, the consumption of raw oysters is very limited, and cannot be compared with other types of foods (e.g., hamburgers or eggs). The same holds for parasites and seafood toxins. It has also been recognized that outbreaks related to fish and fishery products frequently involve few people (Bryan, 1988). Nevertheless, the model and assumptions used here may be not completely correct (e.g., the number of cases due to viruses included in Table 8.13 could be above the actual cases) and a more specific model would be advisable.

3. Percentage of total cases would not be the same as percentage of costs, since each etiological agent has its own average cost. Some efforts to improve the situation could be most cost-effective than others.

This kind of analysis reveals that further studies are necessary in this field in order to ascertain the true costs of hidden external failure of fish and fishery products, even in cases when epidemiological information is available. Discuss:

1. The results presented in Table 8.13. Using the information included in the basic references (Bryan 1988; and Todd 1989a) do you think it may be possible to obtain different results?

2. Do you think it would be possible to construct a table like 8.13 for your country? If not, which kind of information is missing?

3. Why may large differences exist between countries regarding the relative importance of etiological agents and costs? Why may there be such a large difference (see Table 8. 11) between UK (England and Wales) and Denmark and Finland?

The lack of documented information in developing countries by no means implies an absence of the problem, and absence of costs. An Indian research study on the economic impact of a foodborne disease outbreak due to Staphylococcus aureus, suggested that, despite the fact that the absolute values involved were very different, the relative costs (when comparing with the per caput income) are higher in India than in USA (Sudhakar et al., 1988). Further research in this sense is also needed.

8.7.3 Places where food was contaminated/mishandled

Data such as those included in Tables 8. 11 and 8.12 should be complemented with information as to where incriminated food was contaminated or mishandled. Unfortunately, this type of information is even scarcer than that on etiological agents and type of food vehicle. Some of the available data are listed in Table 8.14.

Table 8.14 Foodborne Disease Outbreaks by Place where Food was Contaminated/mishandled, 1985-89 (1)

Notes:

1. Data from the 5th Report (1985-1989) WHO Surveillance Programme for Control of Foodborne Infections and Intoxications in Europe, Berlin, 1992

2. Includes cafeterias

3. Small food business

4. Includes factory canteens and other workplaces, military camps, oil rigs and prisons

The most interesting point of Table 8.14 is that contamination and mishandling of food in food processing establishments occurred in most of the cases in comparatively low percentages. There are no published data on the incidence of fish processing plants within the percentage due to food processing establishments.

In general most of the outbreaks were generated by contamination and mishandling in restaurants, catering and private homes. In this sense the situation may be considered damaging to the fishery industry (or other food industries), since a publicized outbreak due to fish will affect the economics of the fishery industry, even if they are not responsible (and liable) for the outbreak. However, a number of aspects should be taken into account. Even if information as that of Table 8.14 downgrades the possible responsibility of the industry, absolute figures could still be very high, particularly if the possible share of unknown cases and under-reporting are taken into account.

This point discusses possible involvement of the fish (and food) processing industry. Positive cases of food processing establishments responsible for contamination or mishandling as indicated in Table 8.14 undoubtedly lead to external failure costs, as those discussed in section 8.5.3.2. Figures in Table 8.14 could be taken as indicative of a trend (e.g., that industries are responsible only for a limited percentage of the places where food was contaminated/mishandled), but cannot be generalized and extended to other conditions. Some hygienic and safety principles remain valid regardless of the data, e.g., the existence of contaminated food increase the risk of cross-contamination (with the same or other food).

As a general conclusion of section 8.7 it could be said that hidden costs of lack of food safety are certainly very high. However, the responsibility of the fish (and food) industry, on such hidden costs may be comparatively low.

General application of HACCP will certainly reduce even further the liability (identified failure costs) and possible responsibility on hidden costs of the fishery industry due to the lack of safety of fishery products. It is also advisable that the fishery industry take a more active role regarding safety and quality, because this concerns its own marketing interest. Common moves (e.g., fish processors associations) are largely necessary. However, a substantial reduction in the total number of incidents, and hence in the total hidden costs, would be possible only with widespread application of HACCP and HACCP-based systems, to all types of food and to all the food chain, in particular restaurants, catering and private homes.

Nevertheless, it is evident that zero defect, and hence zero risk, is economically impossible (see Figure 8.2). Zero defect, as already pointed out, is also an unrealistic objective. "No human activity including eating and drinking is or can ever be exempt of all hazards. Consequently, in essence, a zero risk situation cannot exist" (Mossel, 1989).

8.8 Environmental and Political Factors that may Contribute to the Costs of the Lack of Safety and Quality

Section 8.7 discussed the possible costs associated with lack of safety and quality not included specifically in external failure costs of the product. However, as discussed in section 8.2, quality could have a very wide meaning today and encompass other aspects not directly linked with the product. Political, environmental and ecology factors may contribute to creating situations leading to costs that may eventually qualify as quality costs.

8.8.1 Political factors

Lack of safety and quality of food products, when publicized, affect the public opinion, which in turn generates a political pressure. When people are made aware of food outbreaks, or just informed about trends or average figures, a question frequently asked is:

What are the authorities doing about it?

There are two different aspects, one strictly linked to law and regulations, what are the authorities supposed to do, and which are the Government liabilities (for not doing, or even despite doing)? The second aspect is political, and relates to the relative interest paid by the public administration on matters of food safety, public health and related areas (e.g., public health share of public funds). This situation varies widely from country to country, as well as perception of public liability and political responsibility. In some countries the existence of public health officers and food and fish inspectors, empowered as sanitary police, makes Government fully, or at least co-responsible, for outbreaks. Very often this responsibility is seen by ordinary people as greater than the responsibility of the police force regarding crime, or traffic police regarding road accidents.

However, the situation is changing. Even affluent countries do not have enough resources to cover the cost of inspecting and testing all the food produced. In this context alternatives like the application of HACCP and HACCP-based systems, quality assurance methods and the concept of "due diligence" have been developed.

Although official inspection pressure (e.g., in plant inspection, mandatory sampling and analysis) could eventually be reduced (reduction of appraisal costs), as a result of HACCP-based systems, and rules made more straightforward and specific (deregulation), all liability will lie with the producer, regardless of the existence of a specific sanitary police, and even regardless of the issuance of an official certificate covering a given lot. This means in practice an increase of failure costs (costs of implementing HACCP at plant level as discussed in section 8.6). This is of particular importance for exporters in developing countries, because in many cases "letters of agreement between countries on fish exports, make them directly and fully liable both in the country of origin and in the importing country, despite official fish inspection certificates that may be issued by both countries. This is particularly serious for countries where there is no proper system to investigate food incidents (see section 8.7. 1) and where in consequence food producers (at any level) may feel not liable.

It is difficult to foresee how the full system will evolve. However, it will imply new costs (and new market opportunities). Firms in doubt will have to take specific insurance to cover possible liabilities due to a lack of safety and quality of their products (prevention cost or failure cost?). If claims to insurance companies increase due to food incidents (as may happen in developed countries) insurance costs will also increase. This also makes common action necessary on the part of the fishery industry. Although public administration can attempt to transfer to the private the full liability of food incidents (and there is hardly any alternative, with the current trend of reduction of public administration), political responsibility will remain. It is in practice unavoidable, because politics involves taking decisions in the presence of strong uncertainties, and very often to search for a balance between desirable but in practice opposed objectives.

Example 8.9 Rancid fish - Resignation by Minister

Extracted from The Daily Telegraph, 25 September 1985:

"Tins of unfit tuna have cost Mr. "X"¹, Canada's Minister of Fisheries, his job.

He resigned after the State television network disclosed that he allowed nearly 1 million tins of fish to be sent for sale in shops, although Ministry inspectors had judged it unfit for human consumption. In a visual assessment they classed it as "rancid".

Mr." X"¹ allowed it to be sold after politicians in New Brunswick put pressure on him by saying the canner¹, of St. Andrews, would be forced to close down and 400 jobs would be lost. The Minister called for a second study by the "Research and Publicity Council, which also found the tuna unfit but he did nothing to recall it until the Canadian Broadcasting Corporation made the facts public. Mr. "X" insisted the fish had not been a health problem, but the Opposition leader and former Prime Minister, Mr. "Y"¹, said hundreds of people had contacted his party and reported that the fish had made them sick.

Mr."Z", Prime Minister, said it was "pretty ... obvious" the tuna should not have been permitted to be sold in shops."

The tuna was also rejected by the Department of Defense and by Canada's Coordinator for Famine Relief for possible donation to Ethiopia (New York Times and Toronto Globe and Mail, 24 September 1985). Discuss the following:

1. Final external failure costs for the firm. The name of the firm was reported in the newspaper articles.

2. What do you think about the statement that rancid fish poses no health problems?

3. What do you think of re-sampling as a general technique to argue about already ascertained positive results?

4. What do you think the public opinion rate as more important, a social problem (close down of a factory and jobs lost) or a safety /quality problem ?

5. The Canadian reaction should be rated very positively; it indicates civil and democratic behaviour.

The previous example is illuminating regarding the risks run by a firm when it attempts to solve safety and quality problems through political decisions (in this case trying to avoid failure costs). However, the most common problem is probably the attempt to twist or circumvent existing quality and safety regulations through illicit methods (e.g., bribing to obtain a public health certificate).

Corruption is not a new phenomenon, and is present to some degree in all societies. According to a World Bank report (Gould and Amaro-Reyes, 1983) corruption occurrence in developing countries has raised substantial concern and "much corruption in developing countries takes place in the import-export sector of their economies". 

Although corruption seems to bring some economic advantage to a single firm in the short term (e.g., "help cut bureaucratic red tape and overcome rigidity by expediting transactions that would otherwise be delayed") and gives the impression of "transferring decision-making power from the public to the private" (Gould and Amaro-Reyes, 1983), it is noxious for the whole sector, and certainly noxious in the middle and long term even to the individual firm. "According to much of the data examined .... corruption has a deleterious, often devastating, effect on administrative performance and economic and political development" (Gould and Amaro-Reyes, 1983).

Usually a bribe is a cost that will reduce profit, although in some cases it may appear as the "entrance fee" that makes profit possible. However, in the attempt to recover the cost (or the "fee") and increase profit, quality is very often reduced (as can be seen from Figures 8.1 or 8.3 this will be a self-defeating strategy). The obtention of a fish inspection certificate for export (or at the entrance point), with fake values, does not mean that the failure cost will not be produced anyway, when the lot arrives at destination.

Although it is not possible to make a direct or indirect. evaluation of the costs produced by this type of situation, rejections by import countries could give an idea, particularly in cases where large percentages are involved. To the values already discussed in section 8.5.3.2, related to failure costs in international trade, it can be added for instance, that in Canada in the year (1 April 1989 to 31 March 1990) 9.8% (6 225 t) of total frozen fish and 6.2% (1 965 t) of canned fish imports were rejected, reasons for rejection being "decomposed/tainted" fish in 70.7% of the cases (Emberley, 1991).

Although it cannot be said that all the rejection cases fall into this type of condition, it seems obvious that in cases where country export certificates are awarded without proper care, it will create suspicion in the importing country. If repetitive, this type of situation leads in many countries to automatic detention of imports from the incriminated company, or even from all the shipments from a given country. To be in automatic detention, implies an additional (failure) cost.

Further, corruption undermines the credibility and legitimacy of public institutions and creates an atmosphere of distrust at all the levels of public bureaucracies and discourages appropriate training of civil servants (Gould and Amaro-Reyes, 1983). The implementation of HACCP, by reducing inspection pressure and red tape may contribute to reduce corruption. It can be reduced further, by the action of industry associations that look into medium and long term development.

8.8.2 Environmental and ecology factors

There is a worldwide growing awareness on environment and ecology. For many centuries man has treated the Earth as an infinite source of resources and an infinite sink of waste. Now it is clear that the Earth is finite in both senses. Part of this situation, in particular the consequences of overfishing, are well known to the fishery industry, and economic implications and basic management were discussed in section 5.5.

The fishery industry that depends largely on a natural resource, and that has suffered and is suffering from pollution created by others (e.g., heavy metals, pesticides contamination and oil spillage), has just begun to understand that its production should be adequate to the environment. Environmental concerns are mainly linked with the effects of actual or possible levels of air, water and earth pollution. Pollution is not a new phenomenon but in the past was limited to certain geographical areas and the overall self-regenerating capacity of Earth was largely intact. Today, pollution phenomena have transnational and even global effects, and it is known that environment has a limited capacity of self-regeneration, in some cases already exceeded.

Environmental and ecological concepts may be linked to the concept of quality (in general "quality of life", see section 8.2 (b)) in the way problems generated by a wrong use of environment and live resources, can affect mankind, in the short, medium or long term. In particular, ecology concerns, are aimed at the conservation of biodiversity and endangered species, since reduction in the number of existing species could also affect mankind.

Quality linked to environment and ecology is "intangible" in the sense that it is not directly linked to the product or associated services (e.g., it is not known if a can of tuna was produced by a company that treat its wastes or not). It is also "intangible" in other senses, for instance, certain global aspects cannot be experimentally tested (e.g., the Earth cannot be moved to a point where the biosphere is no longer in a position to self-recover from massive carbon dioxide emissions and restore it to previous conditions). Possible effects can be assesed, in some cases, only through computer simulation.

As environmental and ecological problems are already too many, it is not enough that consumers, producers, or Governments, be merely aware of them to define an operative "quality". It should be recognized that a given environmental or ecology aspect is relevant, that it can be linked to certain types of product or activity, and effective ways (formal or informal) decided on how to change the situation. This is in practice a cumbersome procedure open to discretionary decisions.

However, once decided, the characteristic chosen becomes integral part of the "quality" concept, and therefore liable to generate accountable failure costs at the firm level, in the sense discussed in section 8.5.3. However, a portion of the costs connected with use (and eventually misuse) of environment and live resources, are hidden costs since they are not usually taken into account in ordinary economic analysis. A typical case linked to the fishery industry is effluent treatment. In a study conducted in 1980 on twelve Australian fish processing plants, nine discharged the untreated effluents into the town sewerage, and three the untreated effluents into the sea, a nearby river and the harbour (Dunsmore et al., 1983). In the case of disposal to the town sewerage, the costs of treatment were transferred to the town, and in the case of use of natural sinks to the environment. Today the picture has changed and is changing also in the developing world where several countries (e.g., Thailand and Venezuela) are in the process of enforcing specific regulations on effluents from the fishery industry.

In addition to waste treatment there are other aspects that are already or may become important in. the near future in relation to the perceived final quality of the product. The following can be noted: protection of endangered species, type of fishing gear utilized to catch the fish (particularly in relationship to its selectivity), amount of water used during processing (clean production), use of no-waste fish capture and processing technologies, air and water pollution and packaging (biodegradability and use of non-critical materials).

One of the most relevant environmental problems, that would imply additional costs, is emission of carbon dioxide. Carbon dioxide is linked to the global greenhouse effect that according to most experts is and will be responsible for undesirable weather changes. Some countries are thinking of imposing a "carbon tax" proportional to emissions and other schemes are also being studied. If current discussions at the UN Conference on Trade and Development (UNCTAD) are successful, a worldwide system of carbon dioxide "emission entitlements", that could be traded at national and international markets, would be implemented (probably not before the year 2000).

"Emission entitlements" would be awarded to the countries proportionally to the number of inhabitants. Each company would have a share. However, if emissions would like to be increased e.g., by addition of new dryers) the company would have to buy additional "emission entitlements". If emissions are reduced (e.g., incorporating more efficient engines) the company will be in position to sell the "emission entitlements". This system is in part based on the fact that in the USA there is already trade in Government permits to control emissions of sulphur dioxide, a cause of acid rain.

In the field of ecology, environmental associations have already found that they can present their cases to courts in developed countries (particularly in the USA), and that in this way they could economically damage the supposed culprits, and thus force them to behave in a given way. Simultaneously consumers are convinced, by the same associations, that a mark on the package (e.g., "dolphin friendly tuna") is part of the "quality" of the product, a type of quality the supposed "culprit" product has not.

Regardless of the merits of the objective pursued, the procedure described above has become a very debatable methodology, quite different for instance, from the CFC Montreal Protocol or the agreements on "emission entitlements". It has already received criticism both from the industrial and the ecology side. Moreover, there is the risk that this type of legal action may be utilized (or promoted) as a non-tariff barrier or an unfair commercial tool, and therefore lead to international controversy, eventual commercial retortion and trade impairment, without fully achieving the pursued objectives.

Although the final system (or systems) that Governments will follow is (are) not yet decided, "clean" and less wasteful companies will have comparative advantages by having reduced production costs and a better public image (marketing). It would be a negative attitude to dismiss environmental and ecological issues as merely bothersome or problematic. Even if innovative techniques for improving catching, processing or marketing are accompanied by procedural constraints, it should be understood that this new situation will offer new opportunities for those aware of its potential.

¹ Information not relevant to the case