Currying Flavor

Over the last decade or so, McCormick’s extraordinary global expansion has had flourishing effects across the organization, resulting in sharp upticks in revenue, burgeoning market dominance and a big brand boost. So, how did the Fortune 1000 firm manage the risk that accompanied all of that sudden growth?

No one in the business of managing risk would argue that when success comes rapidly, within a compressed time frame, it could result in significant spikes in risk exposure. Expanding a global footprint brings with it new hazards. Are they foreseeable? Is that new acquisition vulnerable to flood? Additionally, when a company is uncovering new revenue streams, it’s also consolidating, that is, squeezing suboptimal facilities down and relocating critical operations to cut cost and accommodate the new order. That consolidation changes the value and significance of various locations, and opens up new vulnerabilities and exposure to business interruption.

When revenue is flowing, profits are growing and there’s all this great economic buzz going on, it’s easy to overlook the risk and uncertainty that growth brings. Fortunately, McCormick, the US$4.2 billion (in annual sales) flavor giant that is fast solidifying its place at the top of its industry, understood the consequences of its growth and took action. Thanks to productive partnerships, an embrace of metrics, c-suite buy-in and smart risk improvement investments, they were able to swing the risk pendulum back to an acceptable level. 

 

Sugar ’n spice
The global packaged spice market is roughly US$10 billion in sales, and McCormick, the Baltimore-based firm and the world’s largest spice and flavoring producer, enjoys roughly 20 percent of that business. To get there, McCormick had to be aggressive, and like many elite corporate success stories, they had to take their share of risks. “Global expansion is one of our growth strategies,” says Jim Radin, vice president of global supply chain for McCormick. “It brings us into countries that weren’t on our travel list 10 years ago.”

Stretching into places like China, Turkey, India and Poland inserted the company squarely into areas of the world that have not yet adopted North America’s risk management philosophy.  In addition to new markets for selling McCormick products, sourcing raw materials can sometimes pose challenges. “Spices are primarily grown around the equator and in countries that are much less developed,” says Bob Utz, the now retired director of supply chain solutions for McCormick. “I’m talking about basic government and security issues and an infrastructure that is really not up to a higher level.”

Not only that, the transportation and supply chain issues that McCormick contends with,  means that moving those spices from their origin to major markets requires thousands of transportation lanes from the different countries into processing facilities. The network is understandably vast—a challenge to keep security tight and products in transit.

For example, Utz explains, “Our cinnamon comes from Indonesia. Then it’s transloaded and shipped to Singapore, and then transloaded again and shipped from Singapore to Baltimore—three legs in all that require coordination and oversight.”

And that’s just for cinnamon. Many of the other spices come from various ports in India, and those spices make several other stops on the way to Baltimore. Of course, for a vast, organized, multinational like McCormick, while the modern-day spice routes do pose problems, it’s nothing they can’t handle.

“The challenges with McCormick’s global expansion are really the typical challenges most organizations face,” says George Plesce, FM Global vice president and operations manager. “First of all, as we all know, the culture of protection isn’t the same around the world. Codes and standards don’t necessarily support that each and every time, and the quality of the risk in place isn’t at the level that we and McCormick would like it to be.”

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At the same time McCormick was expanding into emerging markets, it was consolidating and streamlining facilities in its major markets at home. That consolidation, which began a decade ago, involved the company shifting a large share of its production and storage at a single site. It was indeed smart for business. But, once all was said and done, it resulted in uneasy new vulnerabilities. If something unexpected happened in that one location—which presented issues with dust and ignitable liquids—business would have suffered serious interruption.

Larry Delp is a senior project engineer with McCormick. “During this [consolidation], you could see that we were putting more of our eggs in fewer baskets,” he says. “The risks we had in the past were still present, only now the impact could be greater because we didn’t have the degree of built-in redundancy amongst different sites that we had previously. In the event of a catastrophic failure at a facility, our plan was just to go to one of our other facilities. This was a more complicated option.”

Once the consolidation and expansion was under way, FM Global had its share of concerns about protecting its client. McCormick, insurance partner with FM Global since 1967, along with longtime broker partner Marsh, began to delve into the challenges that lay ahead.

“McCormick has always been involved globally,” says John Koester, risk consultant with Marsh, who has been working with McCormick for 30 years. “It was an evolution; there were many changes they had gone through over the years. Once they fully recognized the issues they were dealing with, they embraced them and took care of them. It’s been great to see how they’ve risen to the challenge.”

“One of the reasons McCormick is so successful is that they’re willing to change and evolve,” says Plesce. “They always make decisions that make sense from a business standpoint. But in many cases those decisions change your exposure to loss. They simply had to decide how to protect the changes that had taken place and they certainly did.”

McCormick, Marsh and FM Global put together a three-phase plan to help deal with those new exposures. The first contended with North America, the second with Europe, and the third, still under way, is Asia Pacific. Plesce explains: “The three-phase plan was set up to prioritize where the revenues were driven across McCormick. What we initially did was identify the most mission-critical locations and what the exposures were to loss at each of them. One track was for all of the large capital improvements. And at the same time we followed a second track, which was, ‘How do we get human element implemented across the world where maybe it wasn’t in place?’ We also wanted to get the other locations moving and make improvements where necessary, while we waited for the capital improvements.”

The triangular relationship between the three parties provided excellent checks and balances for the work that was being done. “Marsh plays an important role here,” says Radin. “They keep FM Global accountable for the value proposition they bring and they keep us at McCormick in check as well. They play a pivotal role and bring a level of independent guidance that we seek. In fact,” he says, “that triangle has kept the partnership with FM Global together and strong for many years.”

Looking at the numbers
Over a short span of time, McCormick developed a new resolve: to build resiliency into its business model. They had learned the lessons that new growth posed—fortunately without any real setbacks—and were intent on strengthening their risk profile. 

“You could see it become a greater part of the culture,” says Radin, “and what really got it going was the use of analytics, our metrics.” McCormick began employing the MyRisk® console, including RiskMark® scores and HPR [highly protected risk] designations, as tools. “I will tell you I have never worked with a client who has been more seriously tracking and using those analytics to show improvement on an ongoing basis,” says Plesce. “They are very driven to get all of their mission-critical locations to a highly protected risk level.”

During his tenure, Bob Utz was the primary driver of risk by the numbers at McCormick. “Certainly, with the metrics that are available to us from FM Global, the RiskMark, HPR numbers and loss expectancy dollar amounts, we’ve been able to show a significant increase in the mitigation efforts of risk and reduce the potential for a major business interruption.”

Fortunately for the supply chain executives, top brass at McCormick also take an interest in those metrics. And they are willing to green-light the funding that makes those numbers look even better. “With these numbers, says Utz, we could go to our management committee and to our board of directors on a regular basis and show them the progress that we’re making.”

Bob Conrad, CFO at McCormick, has been a part of those meetings. “In the last four or five years we’ve invested more than US$15 million globally in enhancing protection at our facilities,” he says. “In the last three years we’ve taken a strategic approach to managing risk that we first applied domestically—obtaining HPR status for many of our facilities in the United States. We are now exporting that strategy globally.”

“We refer to the FM Global program as the ‘benchmark’ risk management program,” says Radin. “In fact, when we look at other areas of responsibility, McCormick takes an FM Global-type approach. We apply rigor and metrics to ensure we have the right priorities and we’re making the right investments in the right locations around the world.”

“Both partners, as well as our broker Marsh, take a lot of pride in these types of success,” adds Conrad. “Our total insured value has grown 70 percent in the last six years, while our average policy rate has only gone up three basis points, which equates to a savings of roughly US$1 million in premium reduction. Yet while tangible benefits are important, McCormick’s primary objective is to minimize the potential for a loss that could disrupt production and impact the supply of product to customers.”

Happy together
In a relatively short time, with incredible focus and diligence, McCormick and Company went from being an uncertain risk to a highly protected one. Despite its tremendous success, or perhaps because of it, it has gone to great lengths to protect that success and its ever-expanding market lead. It is also willing to change and evolve to account for the shifting landscape its growing footprint creates. “The company understands that it’s just smart to do things proactively to manage risk,” says Plesce. “And that’s why they’re an ideal organization for us. Every time their exposures evolve through the smart things they’re doing to continue to enhance their business plan, there’s an opportunity for us to bring value. They understand the importance of protecting risk. So when they put their mind to something you can see that permeate their organization in a relatively quick period of time, and that’s awfully nice to work with.”

Bob Utz believes that through the challenging work the team has managed to accomplish in a short period of time—work that has helped the risk pendulum to swing back to an acceptable place—the bond has grown much stronger. “We’ve really brought it back to a great partnership. We share a lot of information. We’re always communicating and trying to make sure we have that close relationship globally at all our facilities, so that we know we’re doing the best we can to try to mitigate all the risks we face.”

Any relationship that traverses decades—four in all so far for Marsh, McCormick and FM Global—is going to go through some turbulence. The important thing is to endure those rough patches and emerge with more strength and resolve. “We’ve been servicing the McCormick account for well over 40 years,” says Plesce. “It’s a solid partnership because we share a common goal of helping to assure that McCormick keeps product on its shelves, and keeps delivering value to its shareholders. And that’s really the foundation that our relationship is built upon. Whether it’s us, Marsh or McCormick—typically all three together—we’re all moving in the same direction.”

Radin agrees. “I think we’ve hit a great level in terms of the relationship and the interaction that we have,” he says. “I believe continuing that and bringing it to an even higher level of engagement is actually going to be easy. I think we have hit the tipping point where we recognize—and FM Global recognizes—that our company cultures are very similar, our way of doing business is very similar, and our core values are very similar. That alignment is incredibly strong.”