Wake Up Calls

This feature was commissioned by and first published in Euro Asia Industry magazine

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From alarming stories of smoking mobile phones to accidents caused by faulty ignition switches, the total number of product recalls worldwide has reached record levels, according to recent figures. Helena Haimes looks beyond the headlines at the reasons behind the increase, lessons to be learnt from high profile scandals and steps businesses can take to minimise potentially irreparable damage to their reputations.

Unless you’ve had your head in the sand for the last couple of months, you can’t fail to have become aware of the unfortunate fate of the Samsung Galaxy Note 7. Launched to much fanfare and industry-wide praise in August 2016, intermittent reports quickly surfaced of the phone spontaneously catching alight due, as it turned out, to the device’s battery becoming unstable when fully charged. In September, the company implemented what they called a “global replacement programme” (they refused to use the word ‘recall’ at this stage), also releasing a software update and capping the Note 7’s charge at 60 percent. At this point, it seemed as if the issue was restricted to the North American and Korean markets, where the majority of the phones had been sold, and the problem could be contained and solved without too much of an impact.

Then, in October, replacement Note 7s also began to catch fire. It was this phase of the saga that really started to hit the headlines, with a total of 96 devices causing 47 recorded cases of damage to property and 14 injuries to consumers, as well as delays to and evacuations from flights in the US and India when passengers’ devices started emitting smoke. Eventually, Samsung expanded its recall to all 1.9 million phones in circulation and decided to entirely cease production of the beleaguered device in October. A total of $21 billion has been wiped from the company’s market value since August, with this single episode estimated to have chipped away $2.33 billion of the communications giant’s profits.

As dramatic as these figures may seem, they are not the main concern here – an organisation of Samsung’s scale and longevity is, after all, capable of recovery from such a financial belly flop. Since the affair became a favourite running story in the international press, it’s the business community’s widespread criticism of the way the recall was handled that has the potential to cause irreparable, long term damage to the firm’s reputation. “Phones are complex things and the launch of new products is fraught with difficulties and delays….Samsung are probably paying the price for trying to rush the Note 7 to market before the iPhone 7 was released,” said Mark Johnson, Associate Professor of Operations Management at Warwick Business School, who has undertaken extensive research into product recall strategies. “As such, many of the challenges that are ironed out in extensive product testing may not have been found.”

Car trouble

Samsung are far from the only multinational to have learned the value of a solid, transparent recall strategy damagingly late in the day. Car manufacturing giant General Motors also found itself embroiled in a PR nightmare in 2014 and 2015 after a faulty ignition switch that had apparently been known to the company for a decade led to the eventual recall of six of its small car models. Eventually, the company recalled nearly 30 million vehicles and paid compensation of nearly $600 million for 124 deaths caused by the fault – which manifested in power steering shutdowns, airbags that failed to deploy and engines cutting out. It has since been labelled “one of the deadliest auto recalls in history”.

In fact, the fault was only disclosed to the public after an investigation by a US attorney rather than being discovered by GM itself or any government bodies. The saga ended in 2015, with an admission of guilt and a criminal fine of $900 million against the whole firm. Although such perceived willingness to deceive consumers for such a length of time is one of the scandal’s enduring legacies, GM has recovered its reputation remarkably well – its top management were widely credited with acting promptly and ethically once the fault was eventually revealed to them.

An inescapable fact

The fact is, as technological advances snowball and companies in multiple industries strive to stay ahead of their competitors, an increasing number of everyday consumer goods are becoming more and more vulnerable to unforeseen faults. “Recalls are a fact of modern business,” explains Mr Johnson. “As products and processes become more complex then the likelihood of them occurring increases. We can’t get everything right all the time.”

There are plenty of statistics to back up this view. According to figures from the automotive industry, for example, there were around 700 recall campaigns affecting approximately 700,000 units among the largest global OEMs in the 1980s, increasing to 1,300 similar campaigns affecting about 13 million vehicles in the 2000s. As customers become increasingly demanding and the modern appetite for cutting-edge vehicular technology becomes ever more voracious, companies feel the pressure to rush – often incredibly complex – products to market before they’re completely ready.

Blurred supply chains

The construction of such highly engineered automobiles, for example, has led to a concurrent demand for more and more individual components, a state of affairs which leads to a much less straightforward supply chain than even 20 years ago. As automotive technology evolves, the traditional OEM – supplier relationship changes along with it. There has been an explosion in new OEMs in the last decade, some of whom are sourcing components themselves, while others have started their own in-house development and engineering departments.

All these changes may have led to considerable cost savings in manufacturing such cars, but it also means a vastly riskier supply chain as the quality of individual parts can be compromised at any of its growing number of levels. It only takes one of a vehicle’s multitude of components to go wrong and a company can all too easily find itself paying the price – in recall campaigns, warranty claims and, in more extreme cases, class action legal costs. Although supply chains in other sectors are usually less complex than this, the same general principles apply – the more traceable and transparently sourced the components, the more control you have over their quality.

Saving face

As Mr Johnson and his colleagues have discovered, the key to an organisation coming through a product recall process with its reputation relatively unscathed comes down to one thing: strategy. In research that I have conducted with Marko Bastl, of Marquette University, and Mike Bernon, of Cranfield School of Management, we found that firms that have a proactive recall strategy tend to see their share price not hit as badly by investors running scared from the potential costs of the recall,” he continues. “In Samsung’s case, the recall was very passive – it was only when the second batch of phones began to fail that they began to show that there were more serious issues at play. Shareholders rightly get twitchy when firms are seen not to care about customers.”

In the age of social media, it’s easier than ever before for one dissatisfied customer to spread negative information about a product via Twitter or Facebook. Even more worryingly, recent research at the University of Washington’s Foster School of Business into the effects of such adverse chatter identified what they call a ‘perverse halo’ of negativity – whereby a recall by one company in a sector can also have a knock-on impact on its competitors’ bottom lines.

Flexibility is key

For those wishing to set out an effective strategy and learn from Samsung’s errors, Mr Johnson and his fellow researchers recommend pragmatism and ultra clear communication to customers and suppliers as the best approach. “The recall indicates that Samsung is not as agile as some of its competitors and process-rigidity can mean a loss of flexibility,” he tells us. “The process of the recall also indicates that Samsung has very little traceability or integration through the end-to-end supply chain. It was asking customers to identify affected phones in the first round of recalls by examining the colour of the battery signal on the screen. In the 21st century many companies can trace where items are through linking information processes with distributors and vendors.” How this works in practice will obviously vary from sector to sector, but again, the key message is clear: a successful recall plan can only benefit from as much familiarity with every rung of its supply chain as possible.

Once organisations of all scales accept the inevitability of the occasional recall, they can start to act sensibly and calmly when trouble strikes. “When a recall occurs, be proactive about it,” advises Mr Johnson. “Show shareholders that you care about customers and ensure that you have business processes in place to allow you to identify affected products quickly and with minimum hazard to the customer.”

Even having a system in place is next to useless, however, if it hasn’t been given a dry run. Although it can be difficult to recreate being bombarded with thousands of phone calls, endless Tweets demanding immediate responses and constant requests for statements by media outlets while trying to deal with a huge logistical headache, organisations can at least think through worst case scenarios in advance and develop realistic action plans accordingly. Companies should familiarise themselves with recall laws specific to their countries of operation and their own position in the eyes of the law – it’s particularly important for importers to be aware that they’re regarded as the legal manufacturer in most jurisdictions, meaning some firms have found themselves held liable for recalls for a product they had no part in actually making.

It’s also important to bear in mind that the process of actually getting a product back is just the beginning. While this is obviously crucial, it’s the subsequent investigation, assessment and implementation of a well considered strategy that dictates whether one faulty product results in an inconvenient but manageable interruption or a total catastrophe that can sink an unprepared business.

Product recall insurance

A further safeguard worth investigating, particularly for smaller businesses and startups, is a solid product recall insurance policy. There are two policy types offered by specialist business insurers: product recall insurance, which protects companies dealing with durable consumer goods such as cars, electronics and white goods, and a policy known as contaminated products insurance, which caters primarily to the food industry. These policies also cover third party costs associated with the recall process, including recall fees often charged by larger retailers, and can also protect against loss of profit and costs of product repairs – essential for any firm that wants to continue to fulfill orders while the recall is being managed and the product redesigned.

Whatever strategies companies choose to put in place to protect themselves, the advice from experts is clear: in the modern business landscape, product recalls are here to stay – for OEMs, suppliers and importers alike, forewarned is most certainly forearmed.

 

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