Recalls - When the Worst Happens, Part II

by Hannah Kain and Gailen Vick

Reverse Logistics Magazine, Mar/Apr 2008

If not handled properly, recalls can be extremely detrimental to both external and internal brand perception. In the January/February 2008 issue of RL Magazine, the first article in this two-part series covered recall prevention and preparedness, as well as customer impact. This issue’s article outlines operational response options, communication strategies, long-term brand impact, and the costs associated with various recall options.

Long-Term Impact on Brand

Recalls have always had a negative effect on brand equity. However, as viral marketing—and online communities—are taking on a life of their own, the brand can suffer irreparable damage within just weeks or even days. Even false accusations can have that effect, as Wendy's can attest to after having to fight the incident where a customer put a severed finger into a bowl of food, an incident that impacted the company for years.

Customer dissatisfaction at a very basic level “only” involves a transaction between a company and a person and/or another company. We are not making light of that relationship. Current customers are the lifeblood of any company - and the most likely to buy again. However, the long-term brand involves more than the specific sum of the customer transactions and perceptions during the recall.

Damage to the brand can make it unlikely that anybody ever will buy that brand. Perceptions can change overnight as talk-show hosts use the brand name in their jokes.

The only way to protect the brand during a recall is to react quickly, considerately, honestly, transparently, and with integrity.

Operational Impact and Cost

The table (Table 1) illustrates different customer-related actions that can be taken as part of a recall, as well as the expected impact and the cost. Both will vary depending on product and the overall scenario.

Recall committees would do well to consider a cost/benefit analysis. The proverbial pound-wise/ penny-foolish discussion comes to mind. A recall can easily cost $50 - $500 per unit shipped, of which maybe 5% - 20% (or $10-$25) can be attributed to the actual interaction with the customer, such as call center interaction, operational transactions when receiving the old unit or shipping the new unit, and freight. A 10% savings in this area may have very little impact on the overall cost of the recall, but may have a huge impact on the image of the company, customer satisfaction, and the long-term consequences.

Table 1

	Impact	Cost	Notes
Effective public communications	High	Medium	Cost may vary. This could encompass different types of communications from the more passive press releases to actively monitoring and impacting viral marketing
Effective customer communications/recall w. direct communications to impacted customers	High	Medium (note: cost of maintaining a high-quality customer database may be high)
Responsive call center/chat room	Medium	Low	The cost difference between a high-quality responsive call center and a less-responsive call center is marginal compared to the potential risk
Easy to locate and navigate/use recall information on website	Medium to high	Low
Communications through sales channel	Medium to high	Medium
Fast and easy processing for replacement of product	High	Varies	Cost can be kept minimal if few questions are asked
Plug& play replacement unit	Varies	Varies, may not be applicable
Free return shipping	Medium	Varies, low in most cases
Overnight shipment of replacement unit	Varies depending on product type	Varies, low in most cases
Offering a full refund	High	Varies	If no replacement units are available, the refund may be the only acceptable solution
Proper refurbishment of units	High	Medium	If sending out replacement units that are refurbished from returned units, the refurbishment must be done flawlessly to avoid compounding the problem
Sensitivity to stored data when dispositioning defective product	High (note: cost of not doing may be high)	Medium	Return units may have stored data that is sensitive, such as medical information
Environmentally responsible disposition of defective product	Medium	Low	Since this is a high-profile situation, it is dangerous to add to any negative perceptions

Costs—the Entire Picture

While transaction-based costs are obvious there are several expenses that are less obvious:

Managing the recall.

The recall must be managed by very competent staff with full authority, full access to the resources needed and knowledge about product, supply chain, customers, sales channels, etc. This makes for a very expensive, highly-paid committee.

Compliance management.

The cost depends on whether the recall is voluntary, whether a Fast Track option is available, and which agency the company is interfacing with. In addition, public companies have reporting requirements with shareholders having a legitimate interest in information.

Corrective action.

As the legal, communications, and practical aspects of the recall get planned, it is time for learning and correcting. It is important to start the process early so relevant information can be collected as defective or non-defective units are returned. Statistical analysis should be performed and communicated throughout the company.

Suppliers.

If the recall is caused by problems in the supply chain, a complete analysis of the supply chain may be necessary. As supply chains get exceedingly complex, this may be very time consuming and costly.

Opportunity cost.

As senior staff focus on the recall, other issues may be unattended to. However, just as important is the sales force. To avoid a demoralized sales force, the recall committee must communicate fast, clearly, and honestly with the sales force, providing specifics about what the company is doing, and how the company intends to move forward.

Communications management.

The company should perform a complete stakeholder analysis to review that it has communicated appropriately with each stakeholder. This could include vendors who might be concerned about the company's cash flow or survival, service providers who may have to provide changed services during the recall period, public service announcements, employee communications, non-affected customers, as well as the general public.

Repositioning the brand.

On the marketing side, serious consideration must be given to the brand to ensure its survival or comeback.

Potential Litigation Costs

In addition to the cost of managing the recall, companies are faced with risk of litigation, either in the form of individual lawsuits or class action lawsuits. Risk mitigation becomes a legal issue, which also includes the issue of whether a jury would see the company as “doing the right thing.”

Litigation costs can surmount the other costs and can ultimately be detrimental to the company's survival. Certainly, any litigation involves distraction from the company's business. In addition, punitive and other damages can be substantial.

The costs spent on mitigating customer issues and taking action fast can easily be recovered in minimized risk of lawsuits—or minimized risk of punitive damages.

Legal advisors should be on the recall team and readily available.

A Final Word about Managing Your Recall

Recalls must be managed by high-level staff inside a company. However, it may be very productive to use high-level, trusted service providers to implement many of the recall functions. In fact, internal resources are often over-taxed during a crisis situation, causing a drop in service and customer dedication.

Other sources:

CSCP - Consumer Products Safety Commission (www.spscs.gov)

FDA—Food and Drug Administrati0n (www.fda.gov), for policies, see http://vm.cfsan.fda.gov/~lrd/recall2.html

Reverse Logistics Association (http://www.reverselogisticstrends.com/index.php)

Center for Business Intelligence, Recall Conference (https://www.cbinet.com/conferences.cfm)

American Society for Quality Control, The Product Safety and Liability Prevention Technical Committee (PS&LPTC), (www.asq.org) has published a book (http://www.asq.org/qic/display-item/index.html?item=10181)

Hannah Kain is President and CEO of ALOM, a leading package assembly and fulfillment company headquartered in Fremont, California. Kain, who founded ALOM in 1997, has extensive experience in the packaging industry. She has three university degrees and has won numerous awards, including ABWA, NAWBO and Women's Fund, and has been featured in books and articles, including "CEO Chronicles" and "Women Who Paved the Way."

Gailen Vick is the Reverse Logistics Association Founder and President.