By Tricia Drevets
The timing could not have been worse for Samsung Electronics. On Sept. 2, just a week before Apple’s scheduled unveiling of its new iPhone, Samsung recalled all of its newly released Gallery Note 7 smartphones from the shelves in 10 countries.
The action was in response to reports of faulty batteries that may explode or catch fire. Samsung told the approximately 2.5 million customers who had already purchased the new phone that they could trade it in for a replacement in about two weeks.
“If the exploded phone had burned near my head, I would not have been able to write this post,” posted South Korean high school teacher Park Soo-Jung on Sept. 1 along with a photo of her scorched phone.
While this was the first ever company recall for a smartphone, product recalls are not an unusual occurrence in today’s business world. While automakers tend to garner many of the headlines with recalls, product recalls have occurred in many industries, including food, pharmaceutical and home products.
Last year, automakers recalled a record-breaking of 51.2 million vehicles in 868 separate recalls, according to the National Highway Transportation Safety Administration.
The United Sates Food and Drug Administration (USDA) reports 150 recalls for last year, representing 21,104,848 pounds of food.
What is a product recall? It is the process of collecting and replacing defective products for consumers. When a company issues a recall, it absorbs the cost of replacing and/or fixing the product.
Although insurance coverage may help a company replace defective products, many product recalls result in lawsuits.Therefore, the costs of a large-scale recall can be staggering in terms of dollars spent and in business lost. If a company is public, stock prices may plummet as investors worry about the ongoing effects of a recall on a company’s reputation.
According to a report in the Wall Street Journal, Samsung will suffer losses of about $905 million in battery replacements and lost sales; however the long-term impact of the recall is more difficult to predict.
These losses are difficult for large companies, such as Samsung or Honda, which has been grappling with an airbag recall, but they can be devastating for smaller companies that may not be able to survive the cash flow needed for a recall, the loss of sales and the effect a recall may have on its brand.
Are recalls happening more frequently or are companies just more proactive in instituting them? It is hard to say. Certainly, the modern global supply chain, which features products comprised of parts manufactured in different countries with different safety standards, can affect product reliability.
In addition, the swiftness of Internet news reports of a potential product problem and social media commentary prompts companies to take action at the first hint of a problem.
That swift action is a key way to survive a recall, in fact. A study conducted by the Georgia Institute of Technology and the University of Manitoba of toy recalls between 1988 and 2007 found that good crisis management techniques go a long way when it comes to handling a recall.
Researcher Manpreet Hora of Georgia Tech's College of Management, concluded, "Reducing the time it takes to recall a product will have a positive effect on consumers' willingness to purchase other products from the same company and if the recall is handled well, the stock price may recover to the same level as before the incident."
In the early 1980s, Johnson & Johnson set the bar in how it handled the Tylenol tampering case. The fact that the company swiftly recalled the product, communicated openly about the issue and then instituted operational and design measures to prevent future tampering helped the company regain consumer confidence in its popular Tylenol product.
“Consumers are forgiving, so if a firm apologizes, acknowledges the problem, and doesn't make the mistake again and again, consumers will continue to be loyal to that brand," according to Hora.
How can your company be prepared for the product recall you hope will never happen? Prepare for one as you would for any other business crisis with a recall strategy plan in place and a team in charge. Discuss this strategy with your attorney and with your insurance provider.
If you have a product made with parts from other suppliers, it is important that you keep up-to-date with those suppliers. Toyota did not manufacture the faulty accelerator pedal that caused a massive recall, and Honda does not manufacture the airbags that currently are recalled. Samsung SDI supplied 70 percent of the batteries fitted into the Galaxy Note 7, with the remaining batteries supplied by ATL, a Chinese manufacturer.
Require your suppliers and manufacturers to inform you in writing of any changes with their raw materials or with their procedures.
Here are five steps to consider:
1. Communicate quickly. As soon as a problem is confirmed, gather the relevant information you have and make an announcement. Use every form of communication available to you.
2. Be candid. Be clear and specific about what has happened and assure customers that their safety and well-being is your priority.
3. Cooperate with everyone involved. Conduct a full investigation of the problem so you can determine what is wrong and how many products are affected. Work with regulatory agencies for your industry and with the media to get the specifics of a recall out to the public.
4. Determine restitution. Get the product off store shelves as quickly as possible and choose the best way to compensate people who already have the product. Depending on the product, this restitution can be in the form of a repair, a replacement or a refund.
5. Follow up. You can learn from this experience. Follow up with suppliers, vendors and customers about what worked and what did not work during the whole process so that you do not repeat the same mistakes in the future.