Dealing with Danger in the Digital Age

In the past, product recalls were relatively straightforward and would usually have passed unnoticed by the public. Today, recalls are much more complex and the stakes higher — both in terms of the potential impact to a company’s profits and its reputation.

Product recall exposures have increased substantially over the past decade, shaped by tougher consumer regulations, the rise of social media and the increasing complexity of supply chains. The regulatory environment, in particular, has changed dramatically over this period.

Many countries — including the U.S., China, Australia and those in Europe — have implemented much stricter product safety laws. At the same time authorities are now far more proactive when it comes to product safety.

Recall exposures have also grown with the rise of large multinational corporations and the development of complex supply chains in sectors ranging from food and beverages to automotives to electronics.

Fifteen years ago the ingredients for a burger purchased in a fast food restaurant would have mostly been sourced locally. Now the spice may come from China, the pickle from the U.S. and the tomatoes from Spain, while the meat could be from multiple sources.

The product value chain is now global, and this has substantially changed the risks. Larger supply chains are more vulnerable, with more critical points where things can go wrong and that are outside the control of clients.

Vulnerable Industries

The food and beverage industry is particularly exposed to product recalls. According to a recent report by Swiss Re, Food Safety in a Globalized World, the number of recalls per year in the U.S. has doubled since 2004. There were 240 U.S. Food and Drug Administration (FDA) related recalls during that year compared with 565 in 2014.

However, non-food recalls have also been increasing in both frequency and severity in recent years, reflecting changes in manufacturing and supply chains. This has been particularly evident in the automotive sector where such processes have been revolutionized.

Sleeker and more efficient production has seen automotive recalls increase exponentially as just-in-time manufacturing and a faster speed-to-market has left less time for product testing.

Many common components are used across models and brands, so an issue with a product can affect millions of vehicles around the world.

For example, during the second quarter of 2015 there were almost 34 million equipment units recalled in the U.S. alone, according to consultant Stericycle’s Q1 2015 Recall Index — one of the largest U.S. recalls in history — after airbags from one Japanese supplier were found to be faulty.

Larger Recalls, Harsher Penalties

Such large incidents are becoming increasingly familiar. An issue with a component or ingredient can cascade through the supply chain, with recalls crossing borders and embroiling whole sectors.

For example, peanut ingredients produced by The Peanut Corp of America were contaminated with salmonella, resulting in one of the largest food recalls ever in 2008. Over 3,200 products were recalled as more than 700 people were taken sick and the company eventually filed for bankruptcy protection. Seven years after the salmonella outbreak, in September 2015, its CEO was sentenced to 28 years in prison, the harshest criminal penalty ever for a U.S. producer in a food-borne illness case.

Earlier in 2015, a recall of spice — originating in India — contaminated with peanuts affected 14 separate product companies, 100 brands and 769 products, according to Stericycle.

Growth of Social Media and Regulation

Regulation has made recalls more public — in many countries recalls are now recorded, closely monitored and disclosed publicly by the authorities. However, growth in use of social media has been a real game-changer. The free flow of information means that even a relatively small product recall can give rise to a major crisis.

“Social media has made it more challenging to manage a crisis as it is free, immediate and open to everyone,” said Simon Weaver, commercial manager at red24, a crisis management assistance company delivering a range of products and services to businesses, organizations and individuals around the world.

“In a genuine case of contamination, social media can help make consumers aware of a problem quickly. This is good for safety but the control will be largely out of a company’s hands unless they have a robust crisis management plan in place, which includes social media,” Weaver said.

Social media also makes it possible for a potential issue to go viral before a company has been able to establish the facts, including whether they are at fault or even if it is their product. One of the biggest issues in a product recall is to determine if there is a genuine case of contamination or malicious product tampering and extortion, he added.

“A company can have an issue even when it is not their fault. Social media gives people much greater power to manipulate the situation,” he said.

Weaver also warned of an emerging cyber risk for food companies and manufacturers. Hackers could compromise automated machinery and alter ingredients, or hack a company’s systems to steal confidential information or take over social media accounts, he explained.

Pre-Crisis Management

For many companies, managing a major product recall is now too big a task and the exposure too great, to go it alone.

Companies understand that product recall is a real cost that can damage the bottom line and destroy a brand. As a result, they are now much more open to help from third parties and consultants than was the case in the past.

Response capability is vital in fighting the size of a product recall claim. A company that embraces crisis management and makes this part of its DNA is far less likely to suffer a major incidence.

One of the main roles of a crisis management expert is to help companies to prepare for a crisis. Some 75 percent of the work is pre-event crisis consultation, testing protocols and recall plans, and running scenario sessions to put the crisis team through its paces.

A crisis management company will also ensure that all parts of the business are operating to the same set of global procedures, and give people a central point of contact to help them through a crisis, Weaver said.

“We focus our experience and skilled personnel where and when it is needed, helping clients reach their own decisions in an appropriate way. It is important in a crisis to get all the facts and not rush decisions,” he said.

For example, Weaver recalled an incident where cross contamination during product testing led to an unnecessary recall. The company risked its reputation but did not carry out secondary tests.

“Companies do not have the luxury of time. Testing of products can sometimes take weeks, yet decisions will sometimes have to be taken in the absence of facts and information,” Weaver said.

“Management needs help to make balanced decisions and understand the regulatory perspective and response. Crisis management can save money, reducing the cost and time of recall,” he said.

Norris is Crisis Management Regional Practice Group Leader in North America for Allianz Global Corporate & Specialty.