In a dynamic business environment, risk is unavoidable. There is no guarantee that the products your company offers will be well received. In the worst case, products can malfunction, resulting in the need for a product recall. If your company could be exposed to a product recall, it is extremely important that you are prepared for a broad range of possible consequences.
The Consumer Product Safety Commission (CPSC) estimates an annual average of 28,200 deaths and 33.6 million injuries related to consumer products, with an associated annual cost to the American public of over $800 billion.
Product recalls can be voluntarily organized and implemented by the company that produces a potentially hazardous product or required by a governing body such as the FDA or USDA. In either case, a product recall has significant financial implications including upfront costs, lost productivity and negative impact on customer loyalty. Resources are required to locate and recover the product, coordinate announcements, and deal with customer complaints and potential lawsuits.
While a product recall always has a negative short-term impact on your company's productivity, how you handle the crisis plays a very important role in determining whether your company will recover, and how quickly. Many of the strategies that contribute to a successful product recall strategy parallel those that help to avoid product problems in the first place. Intuitively, the best way to avoid the problem is to plan ahead and integrate product safety into your research and development programs.
According to HUB International Risk Services experts, here are some ways you can make sure your product recall plan will be effective:
- Establish clear, actionable goals for the safety of the customer and the health and productivity of your business.
- Ensure consistent support throughout your company for the plan, starting with senior management.
- Have a formal crisis management and communication plan that establishes clear roles and responsibilities, and addresses potential product recall events.
- Educate employees on the steps to be taken in a crisis situation.
- Exercise the plan regularly in the form of "mock recalls".
A recall plan cannot be executed without a hitch if it has not first been practiced. Regular mock recalls help ensure that your plan meets current industry regulations and that the response is smooth and efficient. Mock recalls give those individuals with roles in the product recall plan an opportunity to practice and hone their responses without the stress of a real-time crisis.
Here are some steps you can take before a crisis occurs to protect your business:
- Establish a relationship with a public relations and crisis communications firm to assist you through a recall, if necessary.
- Create templates for media response and outreach to be used following a product recall.
- Create an effective product labeling and tracking system to ensure product "traceability" in the event of a recall.
- Investigate product recall insurance.
While you can minimize risk, and even long term costs through effective advance planning, it is impossible to avoid the considerable upfront costs associated with product recall. Product recall insurance can cover losses resulting from the following incidents:
- Accidental contamination of product during manufacturing, processing, or packaging.
- Malicious product tampering.
- Mandatory government recalls (over which your company has little control).
Depending on your company's needs, product recall insurance can cover losses from first or third-party product recall expense, product replacement costs, and even lost profits extending as far forward as 12 months after the date of a product recall. If you plan to expand your sales to international markets, you may also want to consider worldwide coverage.
Product recall insurance offers a broad array of options and it can prove a perfect supplement for preparation and foresight in confronting a product recall crisis. To learn more about product recall insurance, or to get help in developing a crisis management or product recall plan, contact your HUB International broker.