safeguarding the functional food and dietary ingredient supply chain hot topic #2: meaningful audit...

Safeguarding the Functional Food and Dietary Ingredient

Supply Chain

Hot Topic #2: Meaningful Audit

Systems

Suzie Trigg Haynes and Boone, LLP

12 Offices (U.S.; Mexico; China; Brazil)

>500 Lawyers

Overview

• Big Picture – Goals of Audit Systems• Developing Appropriate Hazard Analysis• Audit Criteria and Checklists• Frequency of Audits• Choosing the Right Auditors• Audits from the Auditee’s Perspective• Setting Expectations – Contract

Provisions

Big Picture – Goals of Audit Systems

• Primary Goal: Independent and systematic examination of what is happening compared to documented procedures to assess a supplier’s processes and programs to ensure that desired outcomes are consistently achieved in a manner that recognizes the unique nature of the ingredient and end product.

Desired Outcomes

• Assess and Ensure Regulatory Compliance– Minimum – supplier’s compliance with

GMPs– Ensures manufacturer can comply with

dietary supplement GMPs– Compliance with evolving FSMA

regulations

Desired Outcomes

• Assess and Ensure Component/Ingredient Safety– “Safety Culture”?– Supplier’s Food Safety Management

System (FSMS), including an effective HACCP program

– Ensure that FSMS is: • Appropriately designed for hazards• Implemented effectively• Achieving stated objectives

Desired Outcomes

• Assess and Ensure Quality and Consistency– Verify Certificates of Analysis (CofA’s) or

basis for supplier’s CofA’s, if and as needed.

– Specifications satisfied– Components/Ingredients what is

expected

Desired Outcomes

• Uphold Expectations– Maintenance of agreed upon records– Supplier’s self audits – sharing of

results?– Assess relationship and identify

potential problems in advance– Assess and modify KPI’s

Developing Appropriate Hazard Analysis

• Preliminary Considerations:– Component/Ingredient’s Intended Use –

Finished Product?– Use of Finished Product – Target

Audience


• Potential for Problems with Ingredient– Consistency/potency

• Economic incentives to provide a lesser component/ingredient or substitution?

• Potency specific to processing practices? (e.g., Stevia)

– Contamination (physical, chemical, biological)– Spoilage/shelf life– Typical supplier

• Geography matters – “Safety Culture” or not• Size of supplier


• Identify Steps for Ingredient Protection • Identify Control Measures

– Specific to ingredient– Robust, but with reasonable exclusions

identified (e.g., closed containers, less chance for physical contaminants)

• Assess Effectiveness on an Ongoing Basis– FSMS changes over time; a good audit

system also changes to address changes and new threats

The Audit Process

Audit Criteria and Checklists

• Developing Audit Criteria– Based upon desired outcomes, identified

hazards, appropriate hazard analysis and relationship with supplier(s)

– Objectivity– Uniformity

• Differences in ingredients to be contemplated• Differences among suppliers may be better

handled by increasing frequency of audits, unless audits are not thorough, in which case uniform improvement warranted


• Checklists - From Auditor or Created by Manufacturer?– Creation by manufacturer permits

specificity to ingredient– Creation by manufacturer permits the use

of auditor checklists as an additional checkpoint and supplement

– Creation by experienced, independent auditor reduces cost and may improve perceptions of validity


• Example – Basic Checklist Format:

* Identified during preliminary record review+ Reflect facts; conclusions assessed after completion of audit

FSMS Process Step or Identified CCP

Considerations and Questions to Raise On Site*

Auditor’s Findings+

Raw Material Intake E.g., Open ended questions regarding material intake process to determine whether quarantine requirements are being implemented.

Raw Material Storage E.g., Uncovered holding bins; unlabeled holding bins; temperature reading 56°F

Heat Processing E.g., Open ended questions regarding temperature and time to determine whether processing procedure meets specifications.

Batch Cooling


• Share Checklists in Advance– Checklists can be shared periodically even if

audits are to be conducted primarily on an unannounced basis

– Benefits:• Updates suppliers on the company’s standards• Permits pre-audit document review (or ‘desk’

audit) and limits auditors’ time on site• Maintains records for future reference, if need to

prove diligence and attempts to maintain ingredient quality


• Pre-Audit Document Review– “Audit the Audit”

• Examine supplier’s FSMS and likely (or unlikely) efficacy, for example:

– Are all necessary activities included?– Is HACCP flow diagram accurate? Tailored to

component and threats?– Updates and modifications– Frequency of monitory – adequate?– CCP log sheets – filled out correctly?– Do records agree with stated FSMS activities?


• Facility Visits – Plan Needs in Advance– Appropriate access needed– Ensure auditors appropriately attired –

e.g., no buttons – basic, but affects access– Walk through key production and

processing areas to evaluate HACCP process flow diagram

– Watch, listen, ask

Frequency of Audits

• Minimum Frequency– Prior to Contract – Know Thy Supplier

• Company audit possible? Trusted third party auditor in supplier region?

– After Contract• FDA requirements – debatable?• At least annually

Frequency of Audits

• Factors Leading to Increased Frequency– Documented or suspected CCP failure

• Can be revealed by a “desk” audit of supplier’s records, or testing by company when a component is received, or product problems

– Documented hazard/risk– KPI failures

• Seemingly unrelated failure (e.g., on time delivery) can signal key shift within supplier’s practices or stability

– Financial concerns

Choosing the Right Auditors

• Independence– Even if costs are shared, buyer should

select auditors so that the supplier is not employing/paying an auditor, which has lead to past well-publicized audit system failures


• Experience– Understanding of harvesting/processing

of component or ingredient– Understanding of manufacturing

practices– Understanding of intended use of

ingredient– Ability to effectively analyze supplier’s

FSMS and practices (e.g., GAP, GMP, HACCP, as applicable)


• Style - Gotcha! vs. Supportive/Corrective– A time for each – may depend on

supplier’s performance record/history– Advantages of one or the other?


• What to Look For?– Industry/ingredient knowledge

• No matter how big the auditor’s customers are, if they are not the same as the buyer, it just doesn’t matter

• Knowledge of recent enforcement climate and recent dietary supplement or functional food ingredient problems/failures – i.e., understanding of what a supplier “may be up to”


• What to Look For?– Interviewing skills (or protocol and

training program in place for auditors, if larger firm)• Open ended questions• Which personnel auditor typically interviews

– Though tied to which personnel the supplier makes available


• What to Look For?– Auditor’s work product

• Checklist supplemental to buyer’s effectively designed audit checklist

• Reports – To buyer/manufacturer– To supplier

From the Auditee’s Perspective

• Audits Not Preventive, and Ineffective– A form of testing, rather than education

or prevention– Drain on resources that can take

attention away from improving FSMS and quality assurance initiatives


• Audit Fatigue– Multiple buyers, multiple audits – 100’s?

• Diversity in style, methods and expectations of buyers and their appointed auditors

• Varying requirements mean that staff must continually adjust business and manufacturing processes, operations and records

• Each audit may mean production downtime and expense


• Moving Toward Reliable Third Party Audits / Accredited Audit Program– Streamline industry standards– Permit uniform preparation for audits– Generate reliable information

Setting Expectations – Contract Provisions Supporting a Meaningful

Audit System

• Broad vs. Tailored– Broad = Typical

• E.g., “Supplier will comply with Buyer’s quality assurance standards … applicable law…”

– Reasons for using broad provisions• Position within supply chain – supplier finds it difficult

to impose standards that it would not want to satisfy itself (middle of the chain syndrome) and finds it difficult to impose standards that are costly to enforce

• Perceived need for flexibility – red herring, tailored contracts can provide greater flexibility / room to change


Audit System

• Broad vs. Tailored– Tailored = Heavily Negotiated

• E.g., “Supplier will comply with Buyer’s Code of Conduct, as set forth on Schedule A and Buyer’s Quality Standards set forth on Schedule B.”

– Benefits of Using Specific Standards• Mutual expectations and commitments established• Costs can be effectively allocated• Eliminates costly surprises•Naturally filters out those suppliers who might

do the most harm to the buyer’s/manufacturer’s reputation


Audit System

• Record Retention; Provision of Information– Example:

• Supplier shall retain all records related to the Products and their harvest, processing and storage that are required by applicable law or regulations during the term of this Agreement and for at least [2] years thereafter (or longer if required by applicable law or regulations). Buyer or its designee shall have the option to inspect all such records, and Supplier shall provide such records to Buyer or its designee upon reasonable request. Buyer and its designee will withhold all such information from disclosure as confidential (unless otherwise required by law or order by a governmental authority). Buyer will have no obligation to share any findings related to its assessment with Supplier and shall have no obligation to verify whether any of Supplier’s records are in compliance with applicable law. Upon request from Buyer, Supplier shall provide all information that Buyer reasonably requests to facility Buyer’s compliance with applicable law, including, without limitation, any requirement contained in 21 C.F.R. 111 or any regulation promulgated by the U.S. Food and Drug Administration under the Food Safety Modernization Act (FSMA) or other applicable law after the Effective Date of this Agreement.


Audit System

• Inspection of Facilities– Example:

• Supplier shall at all times maintain and operate its processing facilities at all times in good and sanitary operating order, condition and repair and in compliance with any standards required by applicable law, with sufficient sanitary production and storage capacity to fully and faithfully perform Supplier’s obligations under this Agreement. Buyer or its designee may inspect each of Supplier’s facilities where any Product is stored or process at any time during Supplier’s regular business hours without notice to Supplier; provided that unless Supplier Fails to Satisfy the KPIs, Buyer or its designee will not conduct more than 4 such inspections each year during the term of this Agreement. Supplier shall designate an authorized representative to be available to Buyer or designee during any such inspection for the purpose of facilitating the inspection and providing information upon request. Buyer will have no obligation to share any findings related to any inspection by Buyer or its designee with Supplier and shall have no obligation to verify whether any of Supplier’s facilities or manufacturing practices are in compliance with applicable law.


Audit System

• Disclosure of Audit Results - Cooperative– Example:

• If Supplier has a third party firm conduct a quality assurance or safety audit at any facility that is utilized for the processing or storage of the Products (or raw ingredients of such Products) that are provided to Buyer under this Agreement, Supplier shall promptly send all results of such audit to Buyer; provided that neither Buyer nor any auditor shall be obligated to ensure that Supplier is in compliance with any applicable law or regulation.


Audit System

• Testing of Samples– Example:

• From time to time, Buyer or its designee may request that Supplier provide reasonable samples of the Products to Buyer or its designee for laboratory testing to confirm Supplier’s compliance with the Specifications, Code of Conduct, Quality Standards, this Agreement or applicable law. Buyer or its designee may also collect samples for laboratory testing during any inspection. Buyer will use commercially reasonable efforts to timely identify any significant hazards to Supplier, but neither Buyer nor its designee will have any obligation or liability to Supplier for any failure share any findings related to any laboratory testing with Supplier or failure to notify Supplier if any such testing reveals a breach of applicable law, or any chemical, physical, biological, microbial or other hazard or contaminant.


Audit System• Warranties and Representations

• Supplier represents, warrants and guarantees that at the time of delivery of the Products to Buyer, each Product shall:

(a) Be free from material defect and in compliance with all Product specifications issued by Buyer;

(b) Be free from any lien, pledge or other encumbrance;

(c) Not contain any chemical or pesticide residue in excess of the lower of (i) the lowest level permitted to be present under applicable law or regulation; or (ii) the level permitted by any specification or quality assurance standard provided by Buyer to Supplier;

(d) Be suitable for human consumption and in compliance with all applicable laws and regulations;

(e) Not be adulterated or misbranded within the meaning of the Federal Food, Drug, and Cosmetic Act, as in effect as of the effective date of this Agreement and as such Act and its accompanying regulations may be amended during the term of this Agreement;

(f) Not be an article which may not, under the provisions of sections 404, 405 or 512 of the U.S. Food, Drug, and Cosmetic Act, be introduced into interstate commerce;

(g) Have been transported in full compliance with all applicable laws and regulations, including those relating to the sanitary transportation of food;

(h) Have been held and transported at a temperature below ___°F or ___°C;

(i) Have a minimum [protein] level of [___%] or be [___%] [soy];

(j) [Be certified as non-GMO by the Non-GMO Project];

(k) [Be organic within the meaning provided by applicable laws and regulations]; and

(l) Have been harvested, processed/manufactured, packaged and stored in full compliance with Good Manufacturing Practices (GMPs) applicable to the Products and to the extent applicable, Good Agricultural Practices (GAPs) for the Products.

Each warranty set forth above shall survive for at least as long as the shelf life of each Product as evidenced by a clearly marked expiration label on such Product.


Audit System

• Allocation of Costs– Tie to frequency of audits – more audits,

supplier shares more of the cost– Tie to audit findings – lower audit score,

supplier shares more of the cost (may be difficult to enforce as may be perceived as subjective)


Audit System

• Key Performance Indicators (KPI’s)– Establish KPIs and reflect in the supply

agreement– Provide mechanism for periodic

reassessment and adjustment of KPI’s– Pay for performance?– Termination for repeated failure to

satisfy quality or safety KPI’s

Meaningful Audit Systems

• Tailored• Transparent• Stringent, But Improvement-Oriented

QUESTIONS?

safeguarding the functional food and dietary ingredient supply chain hot topic #2: meaningful audit...

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