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Don’t Let a Product Recall Bring Down Your Business

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.

Canadian businesses that think they are immune to the risk of a product recall need only visit Health Canada's online Recalls and Safety Alerts Database to understand how high the probability is. Many businesses have suffered catastrophic financial loss due to faulty products. If your company could be exposed to a product recall, it is imperative that you are prepared for a broad range of possible consequences.

Whether a product recall is conducted voluntarily by a company or required by a governing body, businesses need to understand that they may face not only upfront costs, such as locating and recovering the product, but quite likely lost productivity and reduced customer loyalty as well.

While your company may run the risk of a recall, there are strategies you can use to ensure a recall does not bring your company to a stand-still.

"Recalls undermine trust in a specific brand, and while it can take the company a long time to recover from the damage to its reputation, it doesn't have to if the company uses good crisis management tactics," said Manpreet Hora, an assistant professor at Georgia Tech's College of Management, which, in conjunction with the University of Manitoba, conducted research regarding product recalls for the Social Sciences and Humanities Research Council of Canada. "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. If the recall is handled well, the stock price may recover to the same level as before the incident."

While product recalls will always have a negative short-term impact, companies that respond quickly and with the right strategies stand a much better chance of handling the situation effectively. It is important for companies to  plan ahead and integrate product safety into their research and development programs.

Planning ahead

All businesses should have clear goals and guidelines in mind when it comes to the health and safety of their customers. By making these an integral part of a company's business plan, safety becomes part of a business's fabric that extends from the manufacturing floor to the office of the CEO. Of course, focusing on safety does not guarantee that a recall won't occur. It is with that in mind that businesses should formulate a recall plan in the event of a crisis.

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".

By having procedures in place, companies can ensure clear communication and swift action throughout the entirety of a business. Regular mock recalls help ensure that the plan meets current industry regulations and that the response is smooth and effective. 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.

Besides creating a plan, companies should invest in other ways to reduce the impact of a recall. Here are some steps your organization can take before a crisis occurs:

  • Invest in a public relations or crisis communications firm to help in the event of a recall;
  • Plan ahead for how the media should be addressed if a recall is necessary;
  • Create an effective product labeling and tracking system to ensure product "traceability" in the event of a recall;
  • Invest in product recall insurance.

"Having effective recovery strategies for dealing with product recalls efficiently and in a timely manner is imperative," Hora states. "If a firm handles a product recall crisis well, it can be turned into a positive advantage for that company by actually increasing consumer satisfaction beyond where it was before the recall."

How a company first announces a recall to the public is key to the overall success of the recall. According to the study from the Social Sciences and Humanities Research Council of Canada, it is important for companies to inform the public immediately with all pertinent information. It is also important to appear responsible and sincerely apologetic, regardless of who is at fault for the recall.

"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," says Hora . 

Obtaining coverage

Beside working on ways to avoid recalls and handle them effectively, companies need to make sure they have the proper coverage to help offset any financial loss arising from a recall. Product recall insurance can cover costs from first or third-party product recalls, product replacements costs, and even lost profits extending as far forward as 12 months after the date of a product recall. If plans are in place to expand sales internationally, worldwide coverage should also be considered.

Product recall insurance offers a broad array of options and perfectly supplements a product recall plan should a situation occur. To learn more about product recall insurance, or to receive help with developing a crisis management or product recall plan, contact your HUB International broker.