Beyond Logistics: Product Recall Risks and How to Avoid Them

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August 3, 2022


Overview

Of all the risks companies face, product recalls can be one of the most visible and damaging. Not only do recalls carry risk in terms of financial and material losses, but companies could also suffer reputation damage and loss of customer trust.

While the food and beverage industry has a long history of visible and publicized product recalls, other industries are just as affected. The automotive industry also has its fair share of recalls, and there have been a series of other high-profile product recalls in recent years.

Some of the largest product recalls include the $5.3 billion cost of recalling Samsung Galaxy Note 7 smartphones in 2016 and the contamination incident with Blue Bell Creameries in 2015. The latter involved customer illness, recall costs and loss of profits, as well as a loss of reputation and employee jobs, regulatory fines and criminal charges filed against the president.

“No industry is immune to having recalls,” says Jean McDermott-Lucey, managing director and national practice leader of Crisis Management at Aon. “It all comes down to your quality control, processes and prevention practices that determine whether or not you’re going to have a recall.”

As highly publicized incidences and social media put product recalls under more scrutiny, what is truly at stake during a product recall and how can organizations navigate the risks and costs?

In Depth

Aon’s 2022 Emerging Trends in Product Recall report states that there were 5,310 product recalls in the U.S. in 2021. From 2018–20, there have been roughly between 7,000–8,000 recalls each year, with 2017 having the most recalls in the past five years with a total of 9,198. At least 75 percent of recalled products each year were medical devices, drugs or other biological products.

The total number of recalls in 2021 is the lowest since 2012. While it might seem like good news for companies that these incidents are becoming less frequent, the reason why is not entirely clear and may have something to do with how regulatory practices changed due to COVID-19.

Despite the low number of products being recalled, the actual total of product units is approaching an all-time high — and this has drawn a lot of media attention.

The Costs of a Recall

For businesses, the most immediate and upfront impact of a product recall is the upfront financial cost.

“The monetary costs are the actual logistical costs of the recall, including transportation of the products, investigation into what happened, storing contaminated products in a warehouse and the cost to pay for additional staffing dealing with the recall,” says Kary Yates, product recall practice leader for Aon’s Global Broking Center in London.

While the financial cost of a recall may seem straightforward, the process itself usually ends up being very complicated. Not only are the recalled units unable to generate a profit, but they must also be transported, stored and accounted for. All of this requires time and effort and introduces new vectors that can generate further problems.

Yates says that these issues are even further exacerbated by the current supply chain shortages. Not only do supply chain issues make the transportation of goods more costly and less reliable, but they also cloud the transparency of the supply chain and make it more difficult to track goods at each point of the process. This makes it even more difficult to manage and recover from a recall.

Reputational Damage

In addition to the monetary cost, the second major risk associated with product recalls is reputational loss. The damage a product recall can do to an organization’s reputation is typically much harder to quantify and can potentially have longer-lasting consequences.

“The recall’s logistic and replacement expenses are finite,’” says Bernhard Steves, global head of crisis management at Aon. “The bigger exposure is your customer base — the trust that’s been developed in your product. If customers feel that the quality of your product is bad, that’s bad enough. If there’s a safety issue, then people will turn to your competitors.”

Certain companies can suffer reputational damage from product recalls due to the fault of suppliers, co-manufacturers or co-packers. “If the company is a household brand name and there is an issue with your product, even if it wasn’t your fault, the brand will be at risk,” says McDermott-Lucey.

Suppliers and manufacturers are also at risk when their client must recall a product.

“If you are the supplier or the co-manufacturer or the ingredient manufacturer, and you have an incident, you are potentially at risk for your customer’s reputation,” McDermott-Lucey says. “Your risk is multifold as you look more downstream, as your customer’s risk then becomes a part of your problem. You might even have multiple customers that are affected by one incident with an issue on your manufacturing line.”

Prepare and Prevent

Even though product recalls can introduce multiple issues that are difficult to respond to and quantify, there are concrete steps that can be taken to reduce the risk of a recall happening. Managing product recall risks starts with preparedness and prevention.

“It all starts before you even suspect you have a situation that could lead to a recall,” Steves says. “Number one is having the plans in place to be able to respond to an incident efficiently and effectively. And number two: practice, practice, practice. Do mock recalls, not only from a traceability standpoint to be able to identify where the products are, but also the crisis communications, the message that you’re sending out to the public.”

While having plans to manage a recall rapidly and effectively is critical, one of the best things companies can do to insulate themselves from recall-related risks is to minimize the chance of a recall occurring.

“Being prepared up front also means having proper quality control and third-party audits to minimize the risk of a recall,” Steves says.

What Insurance Can Do for You

Insurance strategies can also be an important boon in an organization’s endeavors to manage product recalls. Beyond mitigating losses after a recall occurs, insurers can also support a company’s efforts to prevent recalls and spot potential risk vectors before they become an issue.

“Almost all carriers have consultants available to assist you on how you respond,” McDermott-Lucey says. “They can help you write a plan and test it, but they are also available to help you with the numerous aspects that are involved in dealing with a crisis, whether it’s communicating with the media, dealing with regulatory agencies, finding additional outside testing labs or logistical assistance with recalling your product off the shelf.”

While insurance companies already have a lot to offer in terms of product recalls, the benefits they offer may only be more useful and important as industries continue to broaden and mature. “There is a vibrant insurance market for transferring the product recall or product contamination risk,” says Steves. “Appetite is continuously expanding as we see new products come into play. I think insurance needs to be part of every company’s risk management process and procedures as they go through and evaluate their risk.”