18 January 2011
Many unhappy returns
Time consuming, costly and, if poorly handled, a rapid route to overnight ruin. Simon Plumridge of Zurich gives the inside guide on how to navigate the pitfalls of a product recall
Finger puppets laced with a deadly carcinogenic dye and a bikini that acts as a strangulation device. Looking over the latest products recalled by EU safety watchdog RAPEX brings to mind a visit to Q's deadly gadgets laboratory in the James Bond movies.
Now pay attention 007. Every four and a half hours, a manufacturer somewhere in Europe is subject to a probe into product safety, according to RAPEX figures. Nearly 2,000 notifications were served against unsafe goods two years ago. These included blacklisting products and ordering manufacturers to carry out extensive recalls.
It's a risk area that manufacturers cannot afford to ignore. Even the safest products can suffer a breach in quality control or be the victim of a malicious product tamper. The resultant damage to brand and balance sheet has the potential to jeopardise the viability of an entire company, says Simon Plumridge, head of product recall at Zurich UK. "Imagine I'm a manufacturer of wine glasses and there's a production problem that results in sharp edges around the rims. A customer cuts their mouth on a glass and phones me to complain."
It would be an unpleasant scenario and most manufacturers would turn to product liability insurance to protect them if a situation like this arose. But Plumridge is about to up the stakes in the unfortunate scenario of the wine glass manufacturer. "Let's say the firm fears they did not just produce one faulty wine glass, but that multiple batches may be affected. Instead of one person who'd cut their mouth, you were suddenly faced with hundreds of thousands."
The manufacturer would have an obligation to remove dangerous product from the supply chain and the financial fallout would extend well beyond the realms of standard liability cover, he says. "The expenses could stack up quickly," Plumridge explains. "If some of the stock is sitting in your warehouse you may need to get staff working overtime to remove it. You've then got to ensure stock is destroyed safely and does not find its way back into the supply chain. In addition, you may need to close down production lines while you work to identify the cause of the contamination or defect. If affected stock has reached retailers then they must be informed which may in turn put valuable contracts at risk." It's a nightmare scenario for manufacturers who may rely on a handful of large retail contracts. This is particularly prevalent for many food and drink manufacturers, stresses Plumridge, where businesses are often dependent on one or two supermarket contracts.
But worse still than riling a major retailer is finding your damaged goods are on the open market, says Plumridge. "If your products are with customers then you're in another world in terms of costs. You'll need to put adverts in the press and ship products back to the factory. Crucially consumers may lose trust in the brand and choose competitors' products until trust is restored. This can lead to a prolonged period of lost revenue.
When preparing or reviewing a strategy for a product recall event, manufacturers should consider a dedicated insurance cover, says Plumridge. Indeed, product recall policies are becoming more commonplace in manufacturing. The cover has been around for at least two decades and provides valuable cover in a number of key areas.
Firstly, policies will cover against the costs of removing a product from the supply chain - including overtime, media adverts and logistics expenses. Secondly, the policies recompense the insured for the interruption to business and other increased cost of working. Thirdly, the policy can provide a fund for marketing expenses to help restore the brand to its pre-recall sales levels. The policy will also provide cover for the additional expense incurred in producing replacement product. Finally, the Zurich proposition provides access to consultancy expertise that can help companies make the best possible preparations for a product recall.
Product recall planning should be a manufacturer's first line of defence, advises Plumridge. Insurers will want to review a company's product recall plan when developing an insurance proposition, he says. A key component of the contingency plan should focus on limiting damage to the brand. That involves a rapid communications plan to let customers know about any problem, he says. "Telling customers you've got everything under control means they remain confident in your product." But, never be tempted to make unsubstantiated assurances, Plumridge adds. "If you have to issue a number of messages to correct or clarify an earlier communication, then it will have an even more damaging effect on your product and on your reputation."
The hangover of a poorly handled product recall can last many months, according to Plumridge. Some companies never recover from the blow - and bankruptcy, though unusual, is not unheard of as a direct result of a poorly handled recall. So how much does it cost to get some peace of mind through the right type of cover? There's no hard and fast price guide: "The factors that drive recall pricing cover will be volume of product sold and the type of product you're manufacturing."
Insurance brokers offer the best start point for those curious to know more. With the onset of regulatory pressure, the cover should no longer be considered the reserve of those producing consumer goods, he adds. "The requirements on manufacturers, wholesalers and retailers have become much more onerous since the EU directives of 2001 were enacted in 2004/2005. There are strict rules in place to ensure businesses that handle products ensure they're safe." Other risk factors are product complexity and consumer profile, for example those supplying products to vulnerable groups like the elderly or very young, like pharma firms or toy manufacturers.
To find out more: visit www.zurich.co.uk/expertise or speak to your insurance broker
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