A review of the true cost of product recall

A product recall is likely to be one of the worst fears a business can experience – a product or products deemed by the Australian Competition and Consumer Commission, (ACCC) to be misleading or even dangerous to the point where a mandatory recall is implemented.

The ACCC has published its 2018 Enforcement and Compliance Priorities and they include a focus on Ensuring “better product safety outcomes for consumers.” This can be interpreted as putting suppliers and distributors of consumer products on notice that they will be under the spotlight in 2018.

Whilst a product recall has a defined cost element, there are other costs that can possibly amount to far more. A potentially greater cost could be incurred in reputational damage. It is the reputational damage that is almost impossible to quantify and place a value on. Reputational damage, loss of customer goodwill and the subsequent financial losses may last long after the faulty products have been withdrawn.

Typically, when businesses consider recall insurance, they do not take sufficient account of the reputational damage and instead tend to purchase policies that deal with the mechanics of the recall. That is, the logistical costs to remove the offending products from the retailers or distributors stores and warehouses, the cost of loss of profits for the retailer, the cost of any potential reworking of the faulty product or the direct replacement of the faulty goods. Some policies also allow certain costs to employ public relations organisations to answer any difficult questions and to otherwise protect the company reputation as much as possible.

The policy will usually provide a maximum reimbursable amount, say to $10 million which may sound a lot but if somebody has been hurt by the faulty product and there are thousands of products dispersed all around the country, then costs can quickly mount up. As well, the potential for a substantial fine along with hefty legal bills can further impact the already high costs of the recall.

In deciding how to price product recall policies, insurance companies consider a number of factors. The type of business, the size of a company in terms of revenue, how and where its products are manufactured and very importantly the systems and processes that the business has in place to avoid the possibility of a recall as well as the processes in place should a recall become unavoidable.

It has been estimated that some 80% of the total financial losses are incurred long after the offending product has been removed from the shelves. As well as being long term, these costs are also very difficult to define. How do you prove that poor sales of a product one year later are linked to a previous product recall?

What becomes clear is that either a voluntary or mandatory recall has the potential to at least cause major disruption and significant unforeseen costs in a business and in certain examples lead the business to close its operations.

If your business is the subject of a recall, the first steps should be:

  • Assemble the product recall team. Sometimes referred to as the crisis team.
  • Remove the offending product from the market.
  • Investigate the cause.
  • Use own resources or call in a PR management company to deal with the press and to advise management on how to manage client and consumer questions and backlash.

To mitigate the possibilities of a product recall, the following strategy should be considered.

  • Establish a product review committee with expertise from all parts of the organisation including engineering, manufacturing, sales and marketing as well as legal representation.
  • Ensure that detailed agendas and minutes are kept.
  • The product review committee should focus on any potential problems, especially new deliveries or deliveries from a change of supplier.
  • Regularly test products to relevant standards, including batch testing.
  • Analyse any trend in customer complaints regarding the same product.
  • Fully understand the requirements of the ACCC.
  • Conduct regular audits on all products and test to relevant standards and levels of compliance.
  • If necessary, be prepared to conduct a voluntary recall for products you feel may be defective or potentially unsafe.

Such action is certainly going to be less costly than a mandatory recall and it may in certain circumstances have a very positive effect on your brand perception from the consumer’s point of view.

If your business does not have the resources to implement all the above strategies, then consider the specialist recall unit at BWES Compliance and Consulting. BWES Compliance and Consulting provide a range of services and technical resources that can be mobilised at very short notice. We have experience in all facets of a recall and are up to date with the latest requirements of all regulatory requirements. Through a dedicated project manager, BWES can oversee the complete recall process. We can arrange to visit your factory/production facility, establish product compliance teams and set quality schedules. BWES also work directly with ACCC to ensure a high level of communication on every project.

At BWES Compliance and Consulting we fully appreciate the sensitivity of a recall situation and can assure our clients of 100% confidentiality. Should you wish to discuss this important topic any further do not hesitate to call.

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