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Planning for the Inevitable Product Recall Barry Berman

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safety-related product recall seeks to withdraw products from the market due to one of the following hazards: design flaw, production defect, new scientific information about dangers from a product or material previously thought safe, accidental contamination, product tampering, unforeseen misuse, or failure to comply with safety standards. An example of each type of hazard is provided in Figu t e 1. Although many of the recall examples in this article relate to safety issues, some of the strategies discussed apply to non-safety-based recalls as well, such as when a product does not meet a given performance standard. The importance of planning for a product recall can be seen by analyzing the large number of recalls, the increasing frequency of them, and the high overall costs they incur, both direct and indirect. According to Richardson (1992), an A.T. Kearney survey of more than 500 consumer product companies found that nearly 25 percent of the firms had experienced a product recall. Many major recalls have involved several million units. In 1996, Ford Motor Company recalled 8.7 million cars and light trucks due to an ignition switch thought to be responsible for nearly 900 ignition-related fires. Intel's recall of a Pentium chip that made errors in complex mathematical calculations involved 5.3 million flawed chips. The number of products affected by recalls has grown in the past decade. In 1988. the U.S. Consumer Product Safety Commission (CPSC) negotiated 221 recalls affecting 8 million product units. In 1993, these numbers had risen to 367 CPSC-based recalls covering about 28 million product units. And 1997 saw 362 CPSC-based recalls involving more than 76 million consumer products. In addition to the CPSCs traditional product recall program, the agency now offers a fast-track program that removes the stigma of the CPSC's "preliminary detern~ination" that the product is defective. More than 21 million products Planning for the InevitableProduct Recall

have been recalled under the fast-track program since its implementation. Given the number of parts, processes, suppliers, types of consumers, and product uses encountered, it is probably only a matter of time for any product manufacturer to have one or more of its products recalled. Both direct and indirect costs are associated with a product recall. Direct costs include those for communication to intermediaries, business customers, and final consumers; physical distribution in recovering and returning the recalled product; product replacement or repair; product disposal; and the loss in profits for the recalled and related products due to diminished sales during and after the recall period (see Figure 2). These costs can be substantial, even crippling, for a firm. Toy and Driscoll (1990) estimate that the total direct costs of Perrier's 1990 worldwide product recall, resulting from the discovery' of traces of benzene in its bottled water, came to $30 million after taxes. This estimate did not include Perrier's loss in future sales caused by the product's tainted image. Intel's Pentium replacement program, reports Bertrand (1995), resulted in its racking up a one-time charge of $475 million. Schwan's Sales Enterprises' ice cream was found to be the cause of a major salmonella outbreak affecting 224,000 people. The company was able to recoup a large part of its recall costs from two suppliers and one hauler of its ice cream mix. According to one of Schwan's attorneys, the "claim was over $200 million" (Katz 1997). This covered the costs of the nationwide recall, including the retrieval and disposal of the ice cream, the value of the ice cream that was destroyed, the loss in sales of other Schwan's

When your product problems come back to haunt you, you'd better know what to do.

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