Product recall costs mount for businesses

In 2007 Mattel recalled over 20 million Chinese-made children’s toys from around the world after they exceeded permissible levels of lead paint.

The toymaker was fined US$2.3 million for violating a lead paint ban in the US, but the fine pales into insignificance compared with the other costs. Along with the cost of the recall itself, Mattel settled a subsequent class action by consumers for more than US$50 million and suffered huge damage to the reputation of its once-trusted Mattel and Fisher-Price brands.

Global recalls from big corporations such as Mattel hit the headlines, but product recall consultant and trainer Steve Hather says all companies are at risk.

“Every company will have an incident. There’s no such thing as perfect systems and processes,” he says. “You’re always going to have a situation where you have a problem at some point – whether that be one of your own making or a supplier supplying you with a faulty ingredient or even a consumer that makes a complaint that ultimately is incorrect.”

The importer of a product is treated as if it were the manufacturer by the law, so some businesses can find themselves liable for a product recall for a product they did not make.

Product recalls are increasing according to the Australian Consumer and Competition Commission. There were 670 product recalls in the 2015-16 financial year, up from 596 in the previous year. Cars were subject to 182 recalls.

How well a company responds to a recall incident will determine whether it is an incident that can be managed quietly or whether it becomes a full-blown corporate crisis, says Hather.

The first step is to recognise there is a problem and to act on it. Otherwise there is the risk of more bad publicity and legal action. “In the meantime, you’ve got a potentially unsafe product in the marketplace, potentially making people sick. Instead of getting or managing the safety problem that you’d started with, a week later, you’re still arguing whether you’re going to pull it or not,” he says.

Companies need to have systems in place to quickly asses a potential incident so they can respond, including product testing.

Many companies have product recall plans but haven’t tested them. “Until I’m put in a crisis situation, I’ve got the phones ringing and a thousand people want answers to questions, including the media, that’s when you’ll know whether your plan’s going to work or not,” Hather says.

The rise of social media has also magnified the amount of reputational damage a company can suffer. A decade ago, a disgruntled consumer might have told ten other people, but with Facebook, Twitter and Instagram they can potentially tell thousands.

Many people tend to think of a product recall as a simple exercise in logistics – just reversing the supply chain to get the product back – but Hather says that is the least of their problems.

“Getting your product back is the least of your problems. It’s the investigation, the assessment, the strategy, and the communications that ultimately will make or break whether a company has a crisis or not,” he says.

This is not to minimise the cost of the recall itself, which Ross Campbell, the Principal of RCA Crisis Management, says can be huge.

Companies need to trace their products and know where they have gone, and this can be an issue if a wholesaler has sold them on to other retailers, for instance. They also have to notify consumers and refund or replace the product. And all of this activity can interrupt the day-to-day operations of the business.

“You’ve got to run a business while all this is going on. You may have to bring people in to help you with it. You may have to take people off other work to do it. And some recalls go on for months,” says Campbell. “Stopping a whole production process because something’s gone wrong and you have to investigate it can cost you hundreds of thousands to millions.”

Ben Bowen, general manager of broking at insurance broker Whitbread, says the impact of a product recall can be severe enough to close a small business.

He says specific product recall insurance is an undersubscribed product. There are two specific types of cover. One is known as product recall insurance and covers durable consumer and commercial goods such as cars, white goods, electronics, and the other is contaminated products insurance, which deals mostly with food.

The insurance covers third-party costs as well, which are often overlooked. This includes a recall administration fee which large retailers charge as well as their costs to take the products off their shelves and even loss of profit claims.

It also covers public relations costs and consultants, reworking costs if the product needs to be repaired, and loss of profits. “If you’ve got to bring your product back and rework it, that can have a massive impact for your supply chain because whilst you’re reworking that product, you can’t carry on fulfilling your orders,” Bowen says.