Product Recalls – Preparation is Key
In 2009 the Consumer Product Safety Commission (CPSC) issued 465 mandatory recalls. In 2010 the CPSC issued 433. While the CPSC was ordering product off the market, the FDA was busy pulling drugs off the shelf. Over the last 10 years the FDA has recalled over 250 drugs off the market every year. The reality is that recalls are here to stay. In fact, you can expect the number of recalls to trend up over the coming years as regulations continue to increase.
In addition, many manufacturers and retailers voluntarily recall products. There are many reasons for voluntary product recalls. Bad buying decisions, seasonal changes, packaging issues, and taking proactive action to minimize risks and liabilities drive companies to pull inventory off the market. ”Stuff” happens and product recalls are a fact of life for retailers and manufacturers. Therefore, it is critical to have a comprehensive recall program in place to deal with these unfortunate yet inevitable events.
Just as manufacturers and retailers have insurance for their people, property and customers, they need insurance for recalls. This insurance is a recall program that lays out a clear plan to deal with recalls when they occur. The financial liability and the risk to human life is too great not to have a well defined recall procedure in place, before it is needed. If a you wait until you need it, the costs and the additional liability could literally put your company out of business.
Recalls can increase exposure to many different risks. Recalling an item due to a known quality problem, or because a regulator ordered the item off the market exposes companies to obvious potential liabilities such as law suits from customers, clean up costs, and fines. However, there could also be even greater risks created by how your organization reacts to the problem and processes the recall. These risks often have a greater impact on customers, employees and stockholder than the actual item itself.
In order to minimize these risks companies must have a buttoned up recall procedure that addresses the following five key areas:
1. Internal communications procedure
2. External communications procedure
3. Physical process to remove the recalled goods
4. Product sorting, accounting and disposal processes
5. Data gathering, reporting and record keeping
Communications is the most critical component of any recall process. The internal communications procedure for a mandatory recall must include emergency communications chain. Key people need to know who has to be notified and each person must know what their roll is in the recall communications process.
Speed is critical.
There must be a clear line of communications and the internal communications must be fast. The first hours after being notified of a recall will determine if the rest of the plan has a shot at succeeding and actually avoiding risks and liabilities. The internal communications process is the start gun to the race to get the recalled goods off the market. This is also where you decide who is going to speak for the company, what they are going to say, and who they are going to say it to.
External communications is the most critical component to minimize the impact of a recall on customers, employees, and shareholders. Honest is the best policy. It is actually the only option. Even companies that try to spin the facts or dodge the truth always end up telling the truth. It is only a matter of time and in some cases that means jail time.
In high profile situations, employees will want to hear from the CEO directly. They will want regular updates and they will want closure when it is over. Remember, employees have families so you must arm with enough information so they can tell their children why their mommy and daddy are good people working for a good company. Many organizations underestimate the impact of bad press and lack of internal communication will have on employees. It is a big deal to them and can cost a company more than just money for years to come. Shareholders have similar concerns and they have a legal right to know about potential liabilities and actions that could impact the value of their investment.
Talking to the press can be very tricky when dealing with recalls. Remember journalists are there to get a story. They aren’t necessarily concerned with right and wrong, or giving your company a fair shake. A professional PR person can be worth their weight in gold during a major recall or any negative event.
The obvious group to consider in any external communications plan are the regulators. There are two ways management teams can deal with regulators. One way is to treat them as adversaries. Don’t offer any help. Answer only the exact question asked. Make them get a court order for everything, etc. This is a terrible way to deal with people who decide the size of the fine and the scope of the investigation.
The other way to deal with regulators is to politely cooperate with them. This means be polite, escort them around, ask if they need help. This means politely saying things like “Sir, I was told to get you a cup of coffee and set you up in my office until our Vice President of Loss Prevention gets here. This is a big deal and we want to cooperate fully.” While you are waiting, talk to them like the intelligent professionals they are.
This is the only way to deal with any kind of public authority figure. You must ensure that your entire staff is trained to be respectful and cooperative. They must have a clear idea of what they can and cannot say, as well. They must know the difference between being cooperative and saying things that will can cause your company harm. Training your staff on who is authorized to speak to regulators, along with what, how, and when to speak to regulators is a prudent, operational best practice. Don’t leave this up to your staff to figure out on their own. Train your management team.
This training should address both verbal and written communications guidelines. Emails have become law firms favorite hunting grounds. As the team at Goldman Sachs will attest, written communications can cause significant damage in a number of ways, even if you did not do anything illegal. You must have clear policies on both verbal and written communications.
Recalls are a fact of life and every company must have a well defined recall process that is focused on doing the right thing, communicating the right message, and minimizing all the liabilities and costs associated with every recall. Your recall plan of action must clearly and directly address internal and external communications in order to minimize the damage caused by the recall.
Podcast #11 – Future Trends in Reverse Logistics
Reverse Logistics Podcast #11 – Future Trends in Reverse Logistics
This podcast is a recording of a presentation given by Curtis Greve to the DRS Customer Symposium on September 9, 2010. The subject of Curtis’ presentation covered four external drivers that will impact every reclamation center and reverse logistics process in the world between now and 2015.
This presentation was directed toward CPG manufacturers but the drivers behind the future changes in the reverse logistics ecosystem will impact every retailer and wholesaler as well.
The DRS Customer Symposium was a great event with a lot of take home value for all attendees. It was attended by over 40 manufacturers who are customers of DRS. For more information on this symposium or about DRS services and solutions visit DRSReturns.com.
The Reverse Logistics Podcast
Reverse Logistics Podcast #9 – Merchandise Exit Strategies
The most important question that an executive in charge of reverse logistics can ask about a new item is “What is the merchandise exit strategy?” It is easy for a company to get excited about a seasonal item or the newest widget in their product line, but it is important for them to think about the exit strategy. Just like an investor who is going to acquirer a company, manufacturers and retailers need to have a clear exit strategy for their goods.
In today’s podcast, Curtis Greve talks about how to develop an exit strategy for products and critical factors to consider when working within an organization to develop merchandise exit strategies. Whether it is a seasonal item that is part of a guaranteed sales agreement, an item with a limited life span like a computer or fashion item, or if it is an item that is coming to the end of it’s life and is going to become obsolete, having a well thought out exit strategy could significantly improve that item’s contribution to the bottom line.
The Reverse Logistics Podcast
Top 10 Things You Need to Know About Return Agreements
Negotiating returns privileges are often overlooked by many buyers and sellers. However, studies have shown that returns can cost a company between 9% and 15% of sales. With an impact this large, nobody can afford to overlook the terms and conditions that govern product flowing back through the reverse logistics pipeline.
There are many factors that determine who pays for returns, required condition, disposition and where the actual product will end up. Usually, it’s a matter for negotiation and there is not one set of rules to go by when working out the critical details. That being said, there are some guidelines or expectations that one can use as a starting point for negotiating return privileges. Those guidelines are:
- The manufacturer / OEM generally pay for freight directly or indirectly for returned assets, whether defective or recalled.
- Retailers typically deduct the cost of returns, including charges for inventory, processing and freight from any outstanding payables they have with the manufacturer.
- Liquidators, meaning buyers of product on the secondary market, generally provide their own transportation.
- Hi-tech, market dominating manufacturers will not pay consolidation or handling fees and will be much more strict when it comes to enforcing terms and conditions for returns.
- Goods returned that do not comply with previously agreed to terms and conditions are generally not returned, nor credited in any way.
- Manufacturers of commodities will pay handling fees but will expect compliance and support where customer abuse is evident.
- Often, off shore OEM’s have no place to receive and process returns. These OEM’s will often agree to allow you to liquidate their product AND cover the cost of the return. They generally don’t pay handling fees but the liquidation revenue is much higher so it is a win/win.
- Consolidation fees are paid on a percent of wholesale cost or a flat dollar amount per unit for higher priced items.
- The basis for the consolidation fees should be the cost of processing returns, not including transportation.
- Disposal fees are passed on directly to OEM’s when required by the manufacturer. This is especially true if assets have to be incinerated or dumped in a hazardous materials landfill. Disposal fees are NOT passed on for private label goods or product that the retailer or customer facing business destroys for brand protection reasons.
All these terms and many more factors involved in processing returns are negotiable so use this list as a base line to work off of when working out return privileges. If you are new to the world of return agreements, this will help get you off on the right foot so you can ensure you don’t leave money on the table while promoting good relationships between you and your partner across the table.
A Quick Exercise That Will Improve Cash Flow from Returns Processing
One of the biggest values that a company can receive from returns processing is that it turns trash to cash. That is to say returned product and goods that didn’t sell, are processed and are ultimately exchanged for cash that is used to buy new goods.
Many co
mpanies take the refund process for granted and never think about the related cash cycle. What they are doing by default is allowing others to keep their cash for free. A great exercise you can use to see if this is happening in your company is to complete a diagram of return items. Note the path the items takes from the time the customer is refunded until you receive payment for the item after final disposition. Document the stops, the dwell time, and the steps required to move the product down the line to when your company receives payment for the returned items.
To start off, select the top five or six items, in terms of dollars
returned, for your analysis. Be sure that the average dwell time is recorded for the various items at each location. Once you’ve charted the path and noted the dwell time for each stop along the way, you will have the total days for your returns cash cycle.
If you have never done this, you will see obvious gaps and delays that can be eliminated, as well as illogical processes to eliminate. You will also see where some of your suppliers, liquidators, recyclers, or vendors are unknowingly taking advantage of the process. Once the cash flow and the returns process flow has been streamlined, you can put together a coherent returns process that your suppliers, liquidators, and other partners can internalize and comply with, resulting in better vendor relations and improved cash flow.
One company I worked with went from over sixty days out to less than forty days between the time they refunded the customer until they received credit from the OEM. The impact was to improve their cash position for 8% of their sales by twenty days. Imagine the impact this could have on your organization.
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