Recalls of consumer products like foods, cosmetics and pharmaceuticals have dramatically increased in recent years, especially for those produced in China. Toymaker Mattel conducted unprecedented recalls of its toys in August 2007, with 21 million toys recalled twice due to harmful magnets and lead paints. And more recently there was a mass recall of dairy products in China that had been tainted by Melamine.
This leads to key questions embedded into the management of the supply chain:
- How to control a fierce race on cost reduction while guaranteeing the quality of products?
- How to efficiently ensure the execution of outsourced activities in a much more complex environment?
- How to identify, assess and mitigate potential disruptions of the supply chain in a systemic way, to control those risks?
The Colossal Consequences
The consequences of a recall always exceed the significant upfront expense of recalling a product.
A recall attracts media attention and may negatively affect a manufacturer's reputation and brand name, which can result in residual damage over the years. It could also either lead to the collapse of an entire organization or have negative implications on a national scale for an industry. For instance, more than 11 countries banned the importation of diary products from China where milk was found to be contaminated by melamine. The impact of such a recall reshapes not only the companies concerned but also their environment:
- Their suppliers: activity disruption (sudden and significant activity fall)
- Their customers: alteration of buying behavior
- Their industry: impact on reputation and strength
- Their competitors: market destabilization, scandal propagation
- Their country: affecting national image, exportation volume and international relationships
1.) The direct costs:
In 1990, the withdrawal of 160 million bottles of Perrier products worldwide (in 120 countries), after a benzene contamination was discovered, cost $263 million to the Perrier company, including $30 million only for direct costs such as the ones described below:
- Recall campaign (press releases, TV and newspaper ads, mailings)
- Customer support hotline/toll-free information line
- Negative news screening (it reached USD $440,000 for Sanlu, a company involved in China's milk scandal)
Loss of sales:
In October 2007, when toymaker Fisher Price recalled 1.5 million infant toys worldwide, the total bill in lost sales rapidly exceeded $30 million (with a retail unit price varying from $5 to $40). And even earlier in 2007, when Mattel issued a recall of 21 million of units of Chinese-made toys, the resulting cost was simply astronomical. Such important costs could seriously affect the company's profitability and lead to bankruptcy.
Cost to maintain "business interruption":
In some cases, companies are forced to interrupt their business. To be able to recover after the crisis they have to cover their revenue loss and necessary continuing charges and expenses during the business interruption period.
This includes any company inventory that has to be destroyed, in addition to any products removed from market circulation.
Cost of refund/compensation:
In most cases, defective products have to be refunded to the customers and, at least, equivalent-value coupons could be offered in exchange for recalled products.
The cost of recall process is often associated to:
- Physical collection of the products or shelf withdraw
- Shipping and redistribution
- Disposing of the defective product
- In case of replacement, the shipping cost of the replacement product
- Potential cost to isolate and store the defective products
- Extra overheads to conduct investigation, evaluation or analysis.