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.
According to US Foods’ Pallaske, “There are numerous tools, firms and technical resources available to help with recalls. The best approach is not to have a stand alone or isolated program.”
His advice for companies in the food industry is to integrate their plans into existing food safety and quality systems that are certified to an internationally recognized standard like IFS (International Featured Standards). “We are the first national foodservice distributor in the U.S. to be certified through IFS for safety and quality. Our first division was certified this summer and we expect to have four more certified by the end of the year with the rest to follow over the next year or so.”
This type of comprehensive planning that is supported by programs like IFS is “the best assurance that you are mitigating the risks efficiently and effectively. An additional benefit of this approach is that it is in line with the FSMA (Food Safety Modernization Act) requirements for a recall program. The very process of building and testing a recall program as part of a larger system will help a company understand their own role and potential roadblocks to successfully recalling product from the marketplace,” adds Pallaske.
In the meantime, Jeff Pepperworth, president, supply chain & healthcare networks for Inmar, explains his company’s expertise. “As a service provider, we help companies prepare for a recall by first identifying the gaps in the current business processes and developing new processes and protocols to implement best practices in recall management.”
For example, he says that, “Many companies choose to return their recalled product through their forward distribution centers. What they find is that these operations aren’t equipped to handle the individual items that are returned. Recalls, just like returns, are usually returned as eaches, not full cases. The reverse processes are very different from forward processes. Tools are needed to track notification, product retrieval and disposition. Inmar has tools to assist with all the components of a recall event.”
Aside from the tactical steps, it’s just as important to foster a corporate culture that is committed to dealing effectively with the prevention of recalls and respond in unison if they happen.
Magruder underscores the importance of “making sure senior management is paying attention, even at the board level.” She is seeing recalls increasingly discussed at the highest levels. The result is that “companies are finding it makes their internal processes more vigorous, people pay more attention and they’re more accountable.”
Pallaske explains that, “At US Foods, we have developed an exceptionally distinguished team of food safety experts under the leadership of Jorge Hernandez, senior vice president of food safety and quality assurance. He is one of the world’s most recognized experts in the field of food quality and safety. He is a sanitarian, a past FDA standardization officer and a member of the Centers for Disease Control and Prevention-Environmental Health Committee,” among other roles.
Jon Goldberg, founder and CEO of Reputation Architects, talks about creating a “risk sensitive culture,” which he describes as “an environment where every employee instinctively looks for potential risks for the company and its reputation, and takes that into account in their daily decision making. There have been lots of examples in the food industry where all of the warning signs were present, but nobody sounded the alarm because they thought it wasn’t their area of expertise or concern. Employees need to be sensitive to risk as well as the potential cost to them, their colleagues, and to their company.”
Developing this kind of cultural doesn’t just happen overnight, admits Goldberg. “You can’t just declare ‘We will be risk sensitive.’ It’s about behavior—and it’s about the best protective net an organization can have in place.”
He also urges companies to ask themselves the hard questions. Such as: “Where are we at risk? What has happened to others in our category? Where are we vulnerable? If we had a recall situation, what could possibly go wrong?” And, that includes things that could go wrong upstream or downstream that could impact a company’s business, reputation, and ability to deal with a recall quickly and effectively, adds Goldberg.
Talk is NOT cheap
While Goldberg says that the “technical side” of handling recalls has been steadily improving over the years, there is still much work to be done regarding communications, public perception, brand protection, and “taking responsibility for what is happening and taking responsibility for protecting your customers. This is where the real risk to reputation occurs,” he says. “The message your company delivers and the tone you set as an organization either builds the trust of your customers and supply chain partners, or diminishes trust.”
Moreover, “Information and perceptions form much more quickly today. It’s instantaneous now and organizations need to be prepared to answer the ‘new telephone,’” he remarks. In other words, “Thirty years ago the housewife wrote a letter to a company, 20 years ago she picked up the phone, 15 years ago she used AOL to go to the company’s Web site and maybe submitted a question online and waited for a response. But, social media is the new telephone. Instead of having a one-to-one conversation with the company’s consumer affairs representative, the housewife is having a one-to-hundreds or a one-to-thousands conversation with her Twitter followers or Facebook friends.”
Simply put, the advent of social media means a reputational crisis today can very quickly spin out of control, warns Goldberg. “Especially in times of a crisis, a company has to be equipped to know what is being said about it in real time and has to respond in real time. Think about the perception when a customer has a product issue, contacts the company via social media, and gets a response back, ‘I’m Bob. Please DM (direct message) me.’ That customer is very likely going to go and tweet their satisfaction with that company. But if the company fails to respond or they hide behind some corporate policy, the customer is probably going to tweet that too.”
When it comes to social media, “the larger companies get it and they have teams of people who are dedicated to monitoring it and responding to customers with meaningful information in real time. As for other companies, there are various levels of sophistication. Some are willing to hire out this function, but you cannot ignore it. You need someone to take on that role even if it’s for a limited period of time so that an organization can gear up to take the function in-house. And that’s important, because it’s always going to be better received and more authentic when the message comes from within the company. I’m not a big fan of ghost tweeting.”
While the food industry’s number one goal is to eliminate the need for recalls, they still happen, and on occasion pose a threat to consumers, says US Foods’ Pallaske.
“Our recall system is the last line of defense for our customers. The faster we can communicate with our customers and have them remove recalled products from the marketplace, the more likely we will prevent a foodborne illness. No matter how large the recall, all US Foods’ customers receive direct email and voice message notification via our automated system (built by Seneca) moments after we are notified of a recall. The system then tracks customer response to the messages and provides US Foods with a list of customers who haven’t responded. Those customers then receive one-on-one contact from our distribution centers,” he says.
Technology as the enabler
According to RedPrairie’s Tom Kozenski, vice president of product strategy: “Recalls are a broad issue that require various processes to navigate successfully, not the least of which is collaboration with your customers and your suppliers.”
He adds that, “Technology helps provide very accurate data around inventory genealogy and shipping history. In short, when we are alerted that there are tainted goods in the supply chain, we can find out where those goods are in real time, and all of this information can be maintained in real time in a customer’s database.”
Government regulations are driving greater awareness and demand for technology tools to manage recalls, points out Kozenski. “Customers recognize this and they’re being very proactive around compliance.”
RedPrairie’s software can be used to identify and manage recalled product in a warehouse or even at the retail level. For instance, point of sale devices and cash registers can be integrated into the system so if a store clerk tries to ‘ring up’ a recalled item it will essentially be deactivated to prevent the transaction.
Kozenski says that not only is technology very sophisticated today, it can be deployed without a lot of intrusion into a customer’s operations. Even better, it’s more affordable than ever.
“Our customers have done ROI studies to justify these types of technology projects. They have discovered that when it comes to operations costs, they can save millions of dollars not to mention the risk mitigation they enjoy. In fact, for very large companies with hundreds or thousands of SKUs, millions of dollars in savings could actually be a conservative figure,” says Kozenski.
Improving product disposal practices
For Reverse Solutions, in addition to guaranteeing customers that recalled product will not get back into the supply chain once they are removed, the company adds the extra step of making sure it doesn’t enter the landfill either, explains Bill Carroll, vice president.
“We do not put product in landfills,” he says. “There are alternative sources for absolute destruction of a product other than a landfill.”
If the product is packaged food, for example, Reverse Solutions separates the food and puts it into the proper waste stream while the packaging is also segregated into its appropriate commodity waste stream (paper, plastic, etc.), which is baled and processed accordingly.
“This commitment to sustainability is very attractive to our customers, like the Associated Grocers of New England,” says Carroll. The focus on sustainability also formed the foundation for the company’s Reverse Recycling division, which develops comprehensive waste stream management programs that are designed to relieve the financial and operational burdens that come from waste and turn them into savings of both time and money.
“The best part is that there are no costs for our customers,” says Carroll. “Our experience in the waste and recycling industry gives us a unique advantage when customizing programs for our clients. We know exactly what can be recycled, how it can be recycled, who can recycle it and how to negotiate the best rates and rebates available.”
The Hidden Costs of Recalls
According to Greg Pallaske, director of regulatory compliance at US Foods, monetary costs are only one aspect of recalls. Others include:
- TIME: Management and staff dealing with media, FDA, customers, lawyers, etc. during the recall; reputation repair after the recall
- LEGAL: Cost of maintaining representation if there are legal consequences including personal injury lawsuits
- EXTERNAL: Administrative expenses incurred by customers in contacting customers, removing the product from the market, submitting paperwork, and dealing government agency (FDA and USDA) Effectiveness Checks
- DESTRUCTION OF PRODUCT: This includes landfill costs, transportation, etc.
- DOWN TIME: Paying staff for non-production time until company recovers and begins producing again
- DESTROY vs. CREATE: Wages and benefits for staff to gather and return product for destruction
- MORALE: Morale suffers when an illness or death has occurred from a product that was manufactured or sold by a company
- WASTED: The time that company leadership spends dealing with a recall crisis is time lost from normal business activities
- LOST: The cost of raw materials used, the time of the marketing and sales staff, and transportation to produce recalled product
These are external costs and range vastly depending on the severity of the recall. From a few hundred or thousand dollars per victim to many millions if there is long-term damage, or if there are deaths associated with the recall.
This crosses over multiple above categories—administrative, morale and damages. The illness of a customer or, in the worst cases, loss of a life is the human cost that cannot be measured. At US Foods, we always keep in mind that the foods in our custody are the foods that will feed our families, the families of our customers and the families of our customer’s customers. Food safety, to us, is personal.
Inmar’s Top 10 Recall Practices
A detailed Recall Management Plan or Protocol, which includes Mock Recalls, will ensure that an actual recall event is handled with the best interests of your customers and your company in mind.
A Recall ‘Point Person’ and Recall Team should be established prior to the recall event. Cell phone numbers and back-up personnel should be included in the Recall Team Roster.
Notification to customers and consumers must be clear and concise and should communicate the seriousness of the recall. Industry notification should occur simultaneously to all distribution channels. Notification templates can help speed the notification process.
Business Reply Cards are a highly effective means of documenting receipt of notification.
Call Center staff must be trained quickly to field inquiries appropriately from customers and consumers.
Product retrieval should be executed in a manner that has minimal impact on stores, Distribution Centers and consumers. Dedicated resources should be used if product is being removed from store shelves. In most cases, use of a third-party rather than broker network ensures the most expedient execution.
Payment/credit should be issued quickly and accurately. (Establish upfront whether the payment/credit will be based upon claims or actual product received.)
Replacement product must be available to customers immediately. Often, a coupon for free or reduced-cost product helps retain customer loyalty/confidence.
Product disposition should be managed by a reverse logistics facility equipped with an automated processing system. Product destruction must be handled in a cost effective and regulatory compliant manner.
Reporting must be accessible and updated on a daily basis, preferably Web-based.