In the Event of a Recall

By Alliston Ackerman

Expert Analysts
Lora Cecere, Research Director, AMR Research
Alison Smith, Research Director, AMR Research
Rich Essigs, Director, Industry Solutions, Consumer Products Industry, IBM
Scott Helton, Director in the Consumer Products Practice, Hitachi Consulting
Chuck Desmond, Vice President in the Consumer Products National Practice, Hitachi Consulting

In 2007, the Consumer Product Safety Commission recalled 447 products for safety concerns. In 2008, the incidence of recalls doesn't seem to be slowing down. Already, Westland/Hallmark Meat Co. conducted the largest beef recall in U.S. history. Recalls can be dangerous for the consumer, but they are also downright detrimental to the companies involved as consumers abandon recalled brands for others in the interim, or worse, in the long term. Your company's ability to react quickly and effectively in the unfortunate event of a recall will have profound impact on rebuilding brand trust. In the first part of a two-part Special Report series, CGT asks analysts from AMR Research, Hitachi Consulting and IBM (see box) to identify the primary causes of product recalls and how consumer products companies can monitor external production operations to thwart recall threats.

What are the main causes that lead to product recalls? Is there a difference by category, specifically food versus other consumer products?

Cecere and Smith: Absolutely! Recalls fall into distinct overarching classes: issues with product design; issues likely introduced in the manufacturing process; and issues with materials. Food and food products are particularly sensitive with potential failure points at every step in the chain. How materials are acquired, handled, processed, stored, packaged and transported to their final point of consumption can have a profound impact on whether or not the product is safe for consumption. We all chuckle about the phrase 'farm to fork traceability', but for food products, this needs to be reality.

Essigs: Consumer product companies face unique marketplace dynamics as it relates to supply chain visibility, especially global sourcing, food safety and product traceability. First, increased demand to drive down raw materials costs results in supply chains that source raw materials from lowest cost providers on a global basis. Second, the increased role of both third-party manufacturing and global manufacturing means manufacturers need to monitor and maintain production standards in manufacturing environments outside their immediate control. Third, the Internet allows consumers to have greater awareness and faster access to information regarding the contents and sourcing of products they use and consume. Global supply chain changes combined with the increased empowerment of consumers heightens the industry's need for increased visibility within its supply chain.

Helton: Product recalls can be divided into two main areas: those that are attributable to design defects and those that stem from procurement, production and distribution issues. In production and distribution, contamination or quality defects are more controllable by enforcing proper handling/production procedures. In consumer durables, a firm may contract with one or two suppliers for paint, representing a fairly static supply chain. On the food side, the supply chain is more dynamic. There are often more suppliers and, quite often, alternative sources of raw materials or ingredients that are found on short notice, making the supply chain much more susceptible to quality issues.

Desmond: In either case, the specifics on raw materials and their handling are often not communicated to the supply chain partners. When that communication mechanism is not in place, then the company loses control.

Of the 447 recalled products, only 62 were made in the United States. How can consumer goods companies better monitor production operations to ensure that products manufactured oversees meet the utmost standards of quality and safety?

Cecere and Smith: With today's technologies, detailed traceability across the value chain is eminently achievable, especially within the manufacturing environment. But re-sourcing and enforcing the business processes is expensive. And, in highly competitive industries where margins are thin, making those investments simply isn't desirable. For many companies, paying fines is less costly - in the near term - than bringing processes into compliance. It's the 'near term' thinking and compensation models that get us into trouble. After all, isn't a consumer brand the most important asset? In the face of private label escalation, isn't it time to invest in ensuring that customers have a safe and secure supply chain?

Desmond: According to a November 2007 Action Plan for Import Safety, commissioned by the Bush Administration, 'A careful examination of import safety has been motivated by the recent challenges presented by an increasingly global economy, in which U.S. consumers are purchasing approximately $2 trillion worth of products that are imported by over 800,000 importers through over 300 ports of entry.' As a result, the consumer products industry is swaying under the pressure of hyper-competitive markets, lots of competition, and factor in problems caused by the large amount of overseas production of goods that are shipped directly to customers. Those factors combined have helped to produce some widely known recalls. Companies need to step up the level of controls to monitor manufacturing, especially companies manufacturing products overseas and especially if products are completed and shipped to consumers. No matter where the product is being made, it's critical that the proper quality control steps be in place. The steps, the frequency, measurement methods and tolerance levels should all be part of the product information system. Quality control results should be maintained and tracked closely, especially if a supply chain partner is performing the control.

Essigs: According a study IBM conducted of 1676 consumers in the United States and UK last year, two out of every five consumers say they buy different brands today because of safety concerns. Companies that manufacture products globally understand that consumers will continue to increase their expectations regarding visibility into the supply chain associated with the brands which they purchase. To achieve this required level of visibility, given the increasing global nature of supply chains, many manufacturers are focused on building business process capabilities to support supply chain visibility by converting paper-based data collection to electronic processes. This conversion is best supported by the mass serialization of products with barcode, RFID and other sensors, allowing manufacturers to remotely monitor and manage manufacturing globally. Global standards and products for mass product serialization offer manufacturers with global supply chains a rich set of tools for remotely monitoring and managing manufacturing and supply chain processes.