Total Recall – Are you prepared?
By Adam Mussomeli
Recall. It is a word that can cause even the most hardened executives to flinch. To most, it brings up visions of contaminated food, exploding tires, and lead paint on toys. You have built your career by effectively growing shareholder value. Then, on a dime, your world can flip. You have to issue a product recall. Somehow, somewhere, something’s gone wrong, and a product your company produced must be taken off the shelves. What do you do?
Companies that have to issue a product recall often face grave financial consequences — especially when it comes to their stock price. A recent Deloitte analysis that looked at the correlation of recall data and stock prices over multiple industries found that, the day after a recall announcement, company stock tends to underperform the sector index by an average of 2.3 percent. After two weeks, a poorly managed recall execution can cause stock declines of up to 22 percent. (Deloitte/GMA, 2010)[i] Ouch. The burning question is, “How can you mitigate the effect of a recall and keep the stock price from tanking?”
Answers usually do not come easy, and the number of recalls issued has increased over the past decade. The reasons are not totally clear, but perhaps it is due to a massive change in production methods and/or sourcing, and in consumer demographics in general.
While there may be no standard formula for dealing with a product recall — there are simply too many variables — some companies are more equipped to handle it than others. Why? To shed light on the issue, Deloitte worked with the Grocery Manufacturers Association of America, the Food Marketing Institute, and the not-for-profit organization, Global Standard One (GS1 US), to see what companies who effectively handled recalls were doing. One way to deal with the specter of a recall is to just go ahead and do it—as a drill.
Drills are not just for tornado alerts and firefighters anymore. Effective mock-recall drills can provide valuable insight into handling the real thing when—not if—it happens. Yet, 32 percent of manufacturers in the Deloitte study reported that they did not hold mock recalls.
Of the 68 percent of manufacturers that did hold mock recalls, only 37percent actually conducted a broad drill that included their legal, sales, or public relations teams. Almost none included critical external constituents such as customers and suppliers, and few considered hiring third party mock recall specialists. These numbers are startling considering 89 percent of surveyed companies claim their No. 1 objective in conducting mock recall is to find gaps in their internal processes.
Instead, a more effective way might be to conduct two mock recalls yearly. In the first, a problem is imagined with a particular product in a specific plant. The production steps are then traced, as is each place the product was sent, to determine how long it would take to notify customers. In the second, theoretical situations are walked through with different groups to show them how the process works, as well as review their responsibilities in the event of a recall.
Using these two complementary approaches, companies can find, and hopefully bridge, the gaps in their recall processes while the stakes are still low.
There is no magic bullet to help when a recall is issued, and there is no looking glass to tell you the future. What you can do is be prepared for it when and if it happens. The data seems to indicate that companies that are prepared to deal with the almost-inevitable prospect of a product recall before it happens tend to fare better — especially in terms of their stock price — than companies that are not. Where do you stand?
[i] Deloitte/GMA “Recall Execution Effectiveness: Collaborative Approaches to Improving Consumer Safety and Confidence” (May 2010)
A Response from an Industry Leader
Senior Manager at
There are a number of good reasons to address Recall Execution. According to FDA data, the number of food and beverage recalls increased nearly fourfold from 2006 to 2009. There are a number of factors contributing to this increase including a complex global supply chain, tighter regulatory requirements, increased velocity of new product launches and enhanced detection technology. These recalls can be costly for companies. According to the Deloitte/GMA study, recalls can cost upwards of $80 million per event and typically range from $2 to $35 million. Increasing recall execution effectiveness begins by identifying issues early and using multi-medium recall notification procedures to provide timely recall information to regulatory bodies, customers and consumers. Companies can identify issues early by using integrated technology systems, developing ability to communicate potential issues on a near-real time basis as well as gathering and using data from value chain partners. Some companies are starting to apply predictive techniques to consumer data to promptly identify potential recall situations. Similarly companies are also starting to use consumer loyalty programs tied to email as a method of identifying and informing consumers. As companies start to leverage data from value chain partners and consumers in recall execution process planning, they can be better prepared to address these events.
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As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.