Ready, set … recall
Product recalls pose financial, logistical and communication challenges
Part 1 of a two-part series on Product Recall.
Protecting consumers is the number one priority in a product recall. The challenge is whether it can be done without crippling the business.
For large and small consumer goods manufacturers and distributors, recalls can cost millions of dollars in product losses and operational delays, not to mention the potential long term damage to a company’s reputation and customer confidence in the safety of its products.
Companies must deal with a recall from several angles, including financial protection, logistical planning and effective communication with the public and media. Financial protection through product recall or contamination insurance is only part of the solution. These insurance products should be supplemented by a crisis management component that assists companies with logistics and communications considerations, as well as real-time crisis support to safeguard the insured’s reputation.
Accidental contamination
The most common cause of product recalls in 2005 came from “mislabeling.” This type of “accidental contamination” may occur for several reasons including misprinting of ingredients or simply applying a similar but incorrect label to the product. Although the product itself may not be contaminated, the product’s mislabeling could lead to bodily injury through allergic reaction precipitating a recall.
More commonly, accidental contamination is thought of as unintentional contamination by an external source or substance. This would include contamination by a foreign object (glass, metal, stones), chemicals (oil, cleaning solvents), as well as a biological contaminant (listeria, salmonella, E.coli). These contaminations occur either through contaminated ingredients from suppliers making their way through incoming quality control, through faulty machinery or through facility maintenance. A light bulb breaking over a batch, metal shavings from a conveyor belt or improperly sanitized equipment are but a few real life examples of accidental contaminations.
The U.S. Food and Drug Administration (FDA) is responsible for overseeing 80 percent of food and beverage products with the remaining 20 percent administered by the U.S. Dept. of Agriculture (USDA). Non-food recalls are regulated primarily by the Consumer Product Safety Commission, but other governmental agencies regulating non-food recalls include the National Highway Traffic Safety Administration (automobile and related), the U.S. Coast Guard (watercraft) and the U.S. Environmental Protection Agency (pesticides).
Malicious product tampering, a less common but potentially more destructive risk comes from deliberate or intentional contamination. The motives for product tampering vary widely, making managing the exposure very difficult. Motivations can be financially driven as is the case in product extortion incidents which, although uncommon in the U.S., have a history in Germany, Canada, the United Kingdom and Australia.
Other potential tampering involves disgruntled employees or customers seeking to “punish” a company for either real or perceived mistreatment.
The possibility of a biological, chemical or radiological attack on the food supply continues to be a major concern for consumers, manufacturers and the governments. Political, terrorist or extremist groups may target companies due to a country affiliation or controversial product. The Animal Liberation Front, terrorist groups and other special interest groups have all carried out damaging campaigns.
Factors affecting a company’s vulnerability to accidental or deliberate contamination fall into several categories. Some of these categories are more controllable and lend themselves to internal procedures to minimize the exposure.
Others, however, may be largely outside a company’s direct control:
Company profile — Higher profile and visibility equates to a higher exposure.
Type of products — Products aimed at children and those with little protective packaging (fresh fruits, vegetables, meats) make for attractive targets.
Packaging — A well protected product may lessen the exposure to a deliberate contamination simply because it is more difficult to tamper.
Labor relations — Facility closings, downsizings and layoffs, union and employee relations may contribute to a company’s vulnerability.
Geographic exposures — How widely and to where products are distributed.
Quality control/quality assurance procedures — The most obvious and regulated factor to minimize and detect a potential contamination.
Product shelf life — What is the amount of product in the stream of commerce and what inventory is available to replace any recalled products?
Product coding — Smaller lot size, as well as forward and backward traceability will affect the scope and size of a recall.
History — Copycat incidents, as well as effectiveness of past recalls.
Extremists — Sensitive products, company political or country affiliation.
Preparedness — How well is the company prepared to respond to the recall and minimize brand damage?
Next in Part 2: Product Recall losses and risk management.
Bernie Steves is a senior vice president for Colemont Insurance in the Chicago office. He is responsible for developing Colemont’s Product Recall Team.