In a previous post, the importance of having a well defined recall process in place was discussed at length.  Our series on “Five Components of a Recall Action Plan” pointed out that the most important component of any recall process is communications.  This is true for any manufacturer involved in any recall but especially for drug manufacturers involved in a recall.  Perception is often more important than reality when it comes to how a recall is processed.  Perception is nothing more than the reaction to the manufacturer’s communications concerning the recalled product.

A good example of this is the recent noise out of Washington DC concerning a recall of Motrin tablets by Johnson & Johnson.  In a recent article titled “U.S. House Widens Inquiry of J&J’s ‘Phantom Recall’ by Drew Armstong appearing on Bloomberg.com, J&J is pummeled by a Representative Edolphus Towns, a New York Democrat and the committee chairman of the The House Oversight and Government Reform Committee – “Rather than doing the right thing and announcing a recall, we have learned that the drug company hired contractors to basically sneak into stores to purchase the products as if they were legitimate customers…”

The actual facts have yet to come out and J&J is not talking to reporters.  The impact, however is significant, even if the “phantom recall” was real or not, or if there are adverse reactions to the recalled Motrin or not.  According to the article on Bloomberg.com “J&J shares declined $1.76, or 2.9 percent, to $58.01 at 4 p.m. in New York Stock Exchange composite trading. The company has declined 9.8 percent since the recall of the children’s medicines was announced.”

J&J is a reliable, honest company.  Inmar, the company that was described as “sneaking into retailers” is a top notch 3PL and very honest as well.  Based on my experience with pharmaceutical recalls, there is a very high likelihood that the Motrin in question poses no risk to the public at all.  There is also a greater likelihood that the only reason this is in the news is for headlines and political gains at the expense of J&J.

While the details of what J&J really did, along with their internal and external communications are not public record, it is clear that appearing and actually being completely open and honest is their only path to avoid future problems.  As pointed out in the article, the facts are going to come out sooner or later.  The impact poor communications and attempting to cut corners to get a product off the market is clear.  As pointed out in Mr. Armstrong’s article “You’ve got a company that’s considered one of the premier companies, that’s spent something like 100 years building its reputation,” Les Funtleyder, an analyst with Miller Tabak & Co., said yesterday in an interview. “This is the kind of thing that can hurt that.”

Dealing with the public fallout over this recall is one headache that J&J can’t cure with a couple of Motrin.

In Part 1 – Five Components to a Recall Action Plan it was pointed out that there are many reasons for product recalls. Causes range from poor buying decisions to mandatory recalls ordered by government authorities.  Product recalls are a fact of life for both resellers and manufacturers.  If your company sells products of any type, it isn’t an exaggeration to say it is only a matter of time before you will have recalled products to deal with.  Therefore it is every organization’s responsibility to be prepared and to have a plan in place to deal with this inevitability.

Whether you are a pharmaceutical manufacturer, infant toy maker, an electronics retailer, or grocer who sells ground beef, recalls can impact both short term costs and long term relationships that your business depends on.  Like many things in life, companies get to choose how they will deal with these recall issues and whether the impact on their organization will be positive or negative. 

When talking about how a recall impacts an organization, we are talking about not only the cost of pulling the product off the market and writing off the inventory, but we are talking about how a company’s reputation with employees, customers and shareholders can be harmed.  Often, these indirect consequences can cost a great deal more than the cost of processing.  In order to minimize the risk of a recall and the unknown product liability you could face, a company must have a comprehensive plan of action to deal with recalls.  This “Recall Action Plan” must include guidelines for:

1. Internal communications procedures

2. External communications procedures

3. Physical process of removing the recalled goods

4. Product sorting, accounting and disposal process

5. Data gathering, reporting and record keeping

In  Part 1 – Five Components to a Recall Action Plan internal and external communications were discussed in detail.  In Part 2 physical processing, sorting and reporting will be addressed.

The first step in the physical process of removing the recalled goods must start with the internal notification of the customers, stores, distribution centers and other partners concerning the recall.  This notification must be designed to standout from the other notifications.  In the old days when everything was on paper, we put all recall notifications on red paper.  Today with emails, companies should designate a specific subject heading such as”

Subject: RECALL NOTIFICATION – IMMEDIATE RESPONSE REQUIRED

You must get everyone’s attention and you must send out notification repeatedly.  I recommend that notification be sent out through a series of six different communications.  In some cases, such danger to the public, potential fines, emanate litigation,  or over exposure in the press, companies will want to have a combination of verbal and written communications.  I’ve had some recalls that were so serious that all parties were required to call in on conference calls twice a day for over a week until it was clear all products had been returned.  Remember, when it comes to product recalls, you cannot over communicate when it comes to providing direction and support when pulling product off the market. When in doubt, repeat.

When developing transportation channels and packaging instructions, do not overlook the normal regulatory requirements.  If a government agency is involved, it is advisable to get their approval on all instructions and logistics arrangements.

Once the product is physically removed from the market, it must be taken to a secured location for processing.  Many companies ship product back to their return center, some use recall outsourcing specialists, and others simply send the product back to a warehouse or storage facility within their supply chain.  Regardless of where the product ends up, the receiving facility will need to know:

1. When the product is going to start arriving
2. When is the last date they should receive any new inbound shipments.
3. What are SKU’s, model numbers, serial numbers, or other identifying codes that are to be received and processed.
4. What is to be done with any receipts that are not included in the list of product on the recall.
5. What are the condition requirements for the recalled goods.  Examples would be sealed cases, or opened box, de-ticketed, or other similar conditions.
6. How is the product to be stored.  (Pallet quantities, in the DC, off site, storage trailers, etc.)
7. What information is needed from the product. (quantities, condition, diagnostics, sender information etc.)
8. What will be the final disposition of the product. (return to OEM, landfill, incinerator, modified, shipped to location etc.)

NEVER destroy or ship any government mandated recalled product unless given approval by internal council and the government agency involved.  When developing these instructions, give thought to the amount of reporting that will be required.  It is better to track to much information and a lot cheaper than it would be to have to go back and get addition information on processed goods.

The last component of a Recall Action Plan is record keeping.  You must keep good track of when, where, and how much was received and processed and where did it come from.  For most recall processes, the information is the only thing an attorney or government inspector will want to see.  You must be prepared to give regular updates throughout the recall and a complete report at the conclusion of the recall.   For the vast majority of recalls a written report is not required but you may be asked to provide quantities and other basic product information.  Failure to be able to produce this type of information could result in fines and a lot more attention from regulators.

It is important to keep detailed records of all activities related to a recalled product.  Many times, companies are able to file claims against another party, and file insurance claims to recoup financial damage.  A companies ability to show how much money, time and effort was spent to ensure they processed a recall “properly” can reduce risks of shareholder suits, customer suits, and employee issues.

As you can see, developing a Recall Action Plan cannot be done on the fly.  Companies must know who is going to process the recall, where it is going to be processed, who is going to provide oversight internally and who will be responsible for reporting on all recall activities.  Companies must plan ahead.  You Recall Action Plan must be thought through and completely locked down before you have a major recall to deal with.  It is like installing the red phone in White House.  You hope you never have to use it, but if you ever do need it, you won’t want to waist any time on details and you will have no time to lose.

There are many reasons for product recalls. Bad buying decisions are a big one reason for recalls. Regulator’s orders is another. Every year for the past twenty years, for example, the FDA has ordered between 200 and 300 pharmaceuticals off the market. Most of these recalls go unnoticed and were recalled for reasons other than any adverse effects on people who may have taken the drugs.

You have probably heard of many of the famous Rx recalls for serious adverse effects such as death, or other serious health problems. However, the vast majority of Rx recalls are for reasons such as a microscopic variance in the chemical compound, or some quality issue with packaging or an issue with the labels and inserts. There are other recalls driven by other regulatory agencies that find an issue with manufacturing of products. Often these recalls are ordered after a significant number of accidents. Recalls for products such as infant products, cars parts, desk lamps, and items such as computer batteries are all good examples of regulator driven recalls.

“Stuff” happens and product recalls are a  fact of life for retailers and manufacturers.  Therefore, it is critical to have a complete recall procedure in place to deal with these unfortunate yet inevitable events.  Having a comprehensive plan of action in place will remove the threat from the public and avoid or at least minimize the liabilities associated with the recalled item.

For many recalls, the liability and the risk to human life is too great not 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. There are the obvious potential liabilities such as law suits from customers, clean up costs, and fines from regulatory agencies. But, there could also be significant risks, costs, and exposure caused not by the recalled product itself but how your organization handles the recall. These risks include the impact on long term customer attitudes and satisfaction because of bad press; stockholder concerns and related lawsuits; and the impact from negative employee morale. 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 of removing the recalled goods

4. Product sorting, accounting and disposal process

5. Data gathering, reporting and record keeping

Communications is the most critical component of any recall process. This post is the first of a two part series on recalls. The rest of this post will focus on communications and the second post will go into more detail are the physical movement, processing, and reporting of regulated recalls.

The internal communications procedure for a mandatory recall must include emergency communications chain. Who has to be notified and each person must know what their roll is in the recall. 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. 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.

Regardless of what anyone may say, it is always better to be completely honest with every communications. External communications is probably the most critical component to minimize the impact of a recall on customers, employees, and shareholders. Again, 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.

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 any credible 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, if not addressed properly.

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. There have been a number of companies that never recovered because management lost the faith of their investors because of their poor communications on negative events.

Talking to the press can be very tricky when dealing with recalls as well. A key thing to remember is that 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. In the middle of a major recall is not the time to try to your hand at press relations. You will have plenty to keep you busy.

The last group to address in you 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. We want our best and brightest here to assist you with your needs so please bear with us for a few minutes until they arrive.” 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 really do anything illegal.

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.

In part 2 of Five Components to a Recall Action Plan, I will discuss the best practices and steps to be taken to properly remove, process, and record physical products that have been recalled.

Today I am launching my new web site under the new company name of Greve Consulting, formerly known as Metreks.  The focus of my practice is to help companies develop their returns management, aka reverse logistics capabilities.  Viewers will find a lot of useful information on returns including the Reverse Logistics Podcast, which will feature industry leaders from the world of reverse logistics, and my blog which is packed with articles and information to help service providers, manufacturers, retailers, and liquidators make more money.

Register to get the blogs sent to your desktop automatically or save www.GreveConsulting.com as a favorite on your browser.  Your comments, questions, suggestions and feedback are encouraged.  I will use your feedback to improve the value delivered from the site.

Check in from time to time to see what is new.  For example, you might want to check out The Cost of Doing Nothing.  This is a form you can fill out to find out how much opportunity you and your company have in developing your reverse logistics capabilities.

Whether you call it returns management or reverse logistics, it’s all about improving returns and maximizing profits.  I hope you enjoy the new site and get a lot of value out of GreveConsulting.com.

Companies outsource supply chain operations for many reasons. Some need quick expansion and don’t have the manpower nor the infrastructure in place to expand as efficiently as outsourcing. Others are looking to cap exposure to worker comp expenses, inventory shrinkage, or hiring costs when starting up a new operation.

All of this can be done by outsourcing supply chain operations to a qualified third party operator (3PL). However, the key to achieving the goals that justified the decision to outsource is to ensure you have level of service (LOS) measures, budgets, and the other metrics in your contract that will result in the desired financial results. These goals and the strategies used by the 3PL must be in alignment and support the customers goals and strategies. Contracts must be written to ensure that success for the 3PL is success for the customer.

Just about every outsourcing relationship that goes sour, does so because of one of three reasons. Often the relationship fall about because the contract terms were not in alignment with the original RFP and the final response from the winning 3PL. The outsourcing party wakes up one day and their costs are higher and their customer service is worse than before they outsourced. They call up the 3PL and they are told that more can be done, but it is out of scope and will cost more money.

Many companies, new to outsourcing, don’t include key metrics in the contract. Often they don’t have good benchmarking data for items such as damage rate, inventory shrinkage, annual inventory turns, and thru put numbers to ensure they are getting what they expected. These details have to be carefully spelled out along with who will be responsible for the associated costs if the benchmarks are not met.

Another reason outsourcing contracts fail is that the contract was not flexible enough to address the real world market conditions and one of the parties was put in an untenable position as a result. It isn’t a good contract unless it is flexible. Outsourcing agreements should include language addressing how costs will be paid based on a wide range in volume. Many companies use volume bands to calculate variable costs. Some companies use a fixed dollar fee for the provider. There are a variety of tactics one could use based on the individual business. The key is to have contract language that allows for a win/win scenario in a flexible market environment.

Finally, outsourcing relationships fall apart because of poor performance. There are times when the winning bidder just can’t perform at the level you need so you have to fire them. It isn’t like firing a bad employee, it closer to getting a divorce and can be just as painful and costly.

Many companies that outsource don’t seem to think about the details and what they are going to do if they have to fire the service provider. Make no mistake, terminating a contact with or without cause can cost millions. You need to think about what happens to the inventory, the capital equipment, the building, ongoing worker comp issues, shut down and closing costs. All of these and many more issues need to be considered and you must spell out who is liable for each issue under each scenario. Once you’ve decided to end the relationship, you could save yourself millions if the contract addresses the shut down process correctly and if the shut down process is management right.

There are many reasons to outsource. The key is to have a good contract that will protect everyone’s interest, achieve the original goals that drove the decision to outsource, and ensure win/win relationships between the parties. If not done properly, however, outsourcing will end up costing your company a lot of money, and it could ruin your career.

Click on the image or the link below to download the March 2010 issue of Warehousing Forum, published by The Ackerman Company.  Warehousing Forum is a leading supply chain newsletter that is recognized around the world as a great resource for supply chain executives.  This award winning publication is dedicated to helping warehouse managers and their bosses improve productivity and manage more profitably with tips, comments and articles written by practicing professionals.  If you are in supply chain management at any level, you will want to subscribe to this publication.

The featured article in the March 2010 issue discusses critical components to keeping warehouses and distribution facilities union free, and was written by Curtis Greve.  Enjoy your free download of this thought leading publication.

Warehouse Forum March2010

Over the course of the next eight weeks, most consumer goods manufacturers will receive and process between 30% and 50% of this years total returns volume. How they deal with this tidal wave of volume and the reconciliation of credits with their retail customers will have a profound impact on their future relationships.

As the former head of Walmart’s reverse logistics division, I use to be amazed at how many manufacturers set themselves up for a fall. Many seemed to go out of their way to earn a poor reputation that would carry over to the spring when the buyers place their orders. Before I go on, I realize that Walmart was tough to deal with and overly demanding in many cases. However, as the head of all reverse logistics for Genco, the largest third processor of returns in the world, I saw the same behavior even for smaller, seemingly nicer retailers.

There are number of things a manufacturer can do to avoid taking a customer service hit resulting from how they deal with returns. Regardless of the retailer, manufacturers can set themselves up to actually improve their standing in the eyes of their retail customer, as opposed to becoming the target for ridicule and revenge come deal making time in the spring.

The biggest mistake that many manufacturers make is to shut down their factories and returns operations in January or February for maintenance and retooling. The impact of this on the retailer is huge. The reverse logistics pipeline gets backed up and that usually means damage rates go up, accuracy goes down, and tempers start to rise. If you must shut the factory down, fine, just don’t shut off the flow of returns during the most important time of the year.

Another area of consternation is around what “cost” to use when processing returns. This is perhaps the biggest area of debate between the retailers and manufacturers. To exacerbate the situation, arguments over cost usually land on the buyers desk, in spring, just when he is getting ready to negotiate the next year’s deals. Great timing.

To avoid this, the manufacturer should proactively address what cost basis will be used for returns, when they negotiate the terms of sales in the first place. Along with the cost basis for returns, manufacturers should ensure that the following impact items are clearly defined and agreed to:

• Consolidation fees if the retailer uses a return center
• Freight charges from movement of returns
• Product condition and packaging requirements
• Model or serial number ranges that are acceptable, if appropriate
• Restrictions on throwing the product away or selling it on the secondary market

Keep in mind that the above points of clarification and resulting financial terms will vary depending on if the item returned has been sold to a customer and returned or it is a guaranteed sale item.

Manufacturers should view returns as an opportunity to differentiate themselves to their customers.  “Easy to do business with”, does not mean “make bad business decisions”, or “negotiate a bad deal.”  If your sales person can engage the buyer upfront with a proactive approach to deal with the realities of selling products and dealing with returns, the overall relations benefits.