There are many costs associated with a recall event, including tangible costs like pulling product from shelves, reverse logistics, and product replacement. While it is harder to quantify, the damage to a company’s brand or reputation can be much worse and longer lasting.
The stakes are high, yet experts agree that there are plenty of ways to mitigate risk.
Gene Bodenheimer, senior vice president of damage research at GENCO ATC, says, “There are many ways a company’s name and brand can be damaged during a recall. First, consumer confidence can be severely shaken by any recall that has adverse effects. Illness, injury or even death can cause consumers to switch brands.”
The negative perception is further compounded when shelves sit empty for an extended period of time. “This is tough for many companies. They need to quickly get good, fresh product back on the shelves. It’s important for the company and their customers, because the longer those shelves sit empty the greater the opportunity for brand erosion to occur,” he says. “There have been some examples in the health and personal care industry where product has been missing for six months. As you can imagine, very few customers are going to wait that long. They’re going to choose a new product to use.”
Greg Pallaske, director of regulatory compliance at US Foods, confirms that assessment. “Every large scale recall can damage a brand, a single company or an industry, as seen with the recent widespread tomato, cantaloupe and spinach recalls. A $2.7 million recall can severely damage a moderately sized company, while a $500,000 recall could put a small supplier out of business. Even if a company can weather the initial costs of the recall, the consumers may no longer trust the brand and reduced sales can negatively impact the bottom line for years to come.”
Creating a comprehensive strategy
Meghan Magruder, a senior litigation partner in the Atlanta office of King & Spalding, is seeing more inquiries from companies as they struggle to get their arms around the issue of recalls.
Lately, she has been talking quite a bit with clients about several strategies. For starters, “insurance companies understand that recalls are an area of risk, and they have acquired a lot of experience in this area. Companies should talk to their broker or risk manager about what’s available in the way of insurance for reputational risk.”
Dealing with the media is another area that requires careful planning. Magruder says it’s vital to have a PR strategy in place “because you need to move quickly when things happen. Reputational damage can occur within 24 hours of news getting out.”
There are other useful steps to follow. Magruder advises companies to review the contracts they have in place with suppliers to address losses if a supplier provides a company with contaminated product that is used in a finished good. Supply chain diversity and in-depth vetting of suppliers and vendors is key. So too is knowing the complete chain of custody.
Indeed, “this is a great tool for mitigating costs during a recall event,” she emphasizes. Companies should have accurate recordkeeping in place to follow the precise flow of goods from beginning to end, including where it’s been stored, how it’s been transported and who was responsible during every step of the way.
“Knowing the complete chain of custody ultimately reduces risk because you can pinpoint where issues may have come up,” she says.
Bodenheimer emphasizes the importance of having the proper resources in place, which can be instantly deployed in case of a recall. This includes the ability to process, hold, or quarantine product at any stage of the supply chain, including the proper disposal of affected product. “These are the types of protocols that GENCO can help companies design,” he notes.
However, Bodenheimer cautions that even the best plans can fail miserably if they’re not tested. “I can’t stress enough the importance of mock recalls,” he says.