When a product recall happens, you see it hit the headlines. You may have even experienced a few yourself. Product recalls can be severe or minor, but they are despised by consumers and companies alike and are exceptionally costly to companies experiencing them. Products may be recalled for seemingly trivial things like inaccurate label information or for much larger issues, such as the use of unsafe materials, the presence of foreign materials in the product, or product exposure to a potential allergen.
Main Direct Costs
Product recall direct costs depend upon the scope or severity of the problem but include notification of retailers and regulatory bodies, the cost of finding products along the full supply chain and pulling them, storage, or disposal of the contaminated or mislabeled product, and investigation of the problem source.
Direct costs themselves are very high with the average cost of a food product recall sitting about $10 million, which makes it good practice for most retailers and manufacturers to carry insurance for their risk financing needs. Recall costs of items that are more expensive to bring to market, like medical devices, can be closer to $100 million.
Additional Direct Costs
If the root cause of the product recall shows a violation of the law or resulted in harm to someone or something, companies face compounding costs of government fines and litigation. If the recall results in a class action suit, litigation costs can be very high.
If the root cause uncovers a flaw in manufacturing, the company will face additional costs in reworking the manufacturing processes. If an entire plant is compromised, the plant may have to shut down for a period, resulting in workforce layoffs that then translate to workforce hire and mobilization costs when the plant starts back up.
Biggest Cost of All
The biggest cost of all many times over is usually the brand damage sustained and the resulting lost sales from a major product recall event. Recalls negatively affect consumer trust, especially if they affect children, the elderly, or pets. Loss of consumer confidence not only results in immediate loss of sales, but competitors work hard to snap up displaced customers and solidify market share gains over their struggling competitors.
Companies spend an exorbitant amount of time and money working to prevent recalls due to their incredibly high cost. Unfortunately, recalls still happen, and strong mitigation and high transparency are a company’s best route to keeping consumer confidence.