2. Takeaways What is Product Recall Risk? How can firms measure recall risk? When in the product lifecycle should firms hedge this risk? What strategies can firms take to hedge recall risk?
3. Agenda Methods for measuring product recall risk Quantitative strategies Qualitative strategies Recommended risk mitigation strategies Product recall insurance Product recall effects on… Brand value and equity and consumer loyalty Stock Price Conclusions
4. Background The 1980’s Tylenol recall changed the game for recall risk. Toyota’s recent troubles have renewed attention on the risk.
5. Product Design Risk Risk is a given Risk is measureable but manageable Risk can be hidden Risk management requires collective understanding Disciplined execution enables risk mitigation Focused diversity is highly desirable Systemic risk is significant Experience enables economic risk management Too little risk, just like too much requires correction Risk mitigation is best addressed at project start
9. Deming Quality Model Consistently improve Adopt new philosophy Cease mass inspection Don’t reward on just price alone Find the problems Modern job training Modern supervision, quality over quantity Drive out fear No barriers Eliminate gimmicks Eliminate numerical quotas Give hourly workers ability to take pride Vigorous education & training Management must push all above points
10. Product recall insurance Expense coverage Pre-recall expenses Identifying & isolating problem, public relations consultants, planning & managing recall Recall expenses Transportation, storage, staffing, quarantining of affected product Data capture Accounting accurately for the directly attributable costs associated with the recall Loss of profit Time period for sales to re-stabilize at pre-recall levels
11. Product recall insurance -cont’d Direct vs. Indirect liability Direct: Recalls associated with own-products Indirect Recalls for products where you are the supplier and the recall is as a result of your component failing Can include coverage to rehabilitate third-party brand
12. Product recall effect on brand & loyalty Denying the defect has a strong negative effect on a manufacturer’s image; The impact on image is significant and positive when a product is recalled voluntarily; An even greater positive impact results when the manufacturer embarks on an improvement campaign; Both image and loyalty positively impact on consumer purchase intention towards a manufacturer with past or potential experience of a product crisis situation; and Contrary to expectation, involuntary recall has no substantial effect on image.
14. Financial Value & Recall Under results A the -0.59% abnormal returns for a proactive recall are statistically significant with a t-statistic of -2.31 whereas the passive abnormal return are not significant. When compared together using a two-sample test (test B) proactive recalls have significantly more negative abnormal returns than do passive recalls with a statistically significant t-statistic of -2.24. Investors may see proactive strategies product recall strategies different from consumers: Investors may see a proactive recall strategy as a signal that something serious is wrong, and then therefore drive down the stock price Consumers as mentioned earlier may appreciate the forthrightness of a proactive product recall strategy Also noted was that less reputable firms used more proactive strategies, and firms with strong brands used passive recall strategies
15. Toyota Stock Price Example Toyota took a proactive recall strategy From a high of $90.42 to $71.78 during recall. Now $80.33
16. Conclusions Recalls represent HUGE financial liabilities Firms can take steps to reduce recall risk before, during, and after production Hedging this risk is often expensive, but rarely as costly as the price of the recall If a recall occurs, firm response should be enacted in coordination with pre-determined goals
