Four actions to mitigate rising product recall risks

By Geoffrey Mills ,

Practice Leader, Product Recall Practice

07/25/2023 · 3 minute read

Baby formula, fresh fruit, and hoverboards were among the 800-plus products recalled in the US during the first quarter of 2023, when recalls hit a four-year high.

And while the number of individual units recalled during the first quarter dropped significantly from last year, it is important to note that 2022 was one of the most active years, with around 1.5 billion units recalled. The sheer numbers emphasize the importance that manufacturers identify potential risks and take action to protect their customers and businesses.

A wide range of risks

A defective or contaminated product could lead to injury or illness for users. For manufacturers, other challenges include significant interruptions to their business, reputational damage, lawsuits, and regulatory action. And when an affected product is sourced from a third party, manufacturers may be faced with challenges to secure an alternate supplier, potentially at a higher cost.

While a general liability insurance policy may provide coverage for certain third-party risks, they do not typically cover other losses, such as costs associated with cleaning a contaminated plant, lost business, or expenses required to rehabilitate the brand.

What should manufacturers do?

Considering the rise in product recalls, it is important for manufacturers to have plans in place that allow them to immediately take action if one of their products is impacted. Following are four actions manufacturers can take to mitigate their potential risks.

1. Understand your exposure

Companies should take action to map out what could go wrong at every step of the manufacturing process, and the potential impact on their final product. Keep in mind that different product categories are likely to have specific risks; while contamination could be a major challenge for a food and beverage company, a car manufacturer will be more concerned with a faulty component or a manufacturing defect.

It’s important to have a clear view of your suppliers and to set up robust tracing capabilities that allow you to map the journey of each component that was included in your products — whether manufactured in-house or purchased from a third-party vendor. Consider that if one of your vendors has a recall, you want to know exactly which of your products included the affected components, allowing you to be more targeted in your own recall. It is also important to trace your products once they leave your plant, for example being able to identify the retailers that were sent affected products.

2. Review your vendor contracts and insurance coverage

Understand the contractual liability of your vendors in case a component supplied by them is found to be problematic. For example, who is responsible if an externally sourced ingredient that you include in a food product is contaminated with a known allergen? Or if batteries used in electric scooters pose a fire hazard?

Manufacturers should also review their insurance programs to determine whether they have adequate coverage both for third-party risks, such as injury or illness, and other costs. Specific product recall coverage will typically cover certain types of losses that are unlikely to be covered by a general liability policy, such as business interruption, the costs of recalling and disposing of affected products, and expenses related to responding to a recall.

A product recall can impact brand reputation, requiring significant investment in rehabilitation. Communications and efforts to attract customers, such as discounts, can be costly, but are potentially covered by a product recall policy.

3. Have a product recall plan

The way companies respond to a product recall can have a significant impact on their recovery and reputation. It is therefore important that your crisis management plan specifies your response to a product recall. Identify your response team, including who will be responsible to communicate with both customers and regulators, and make sure they have access to the necessary information ahead of an event. Mock recalls and tabletop exercises can help your team go through different scenarios and determine the best response at every step of the process, including how to respond to customers’ and regulators’ questions.

Preparations should include building relationships with regulators so that your first interaction will not be in the midst of a recall. Instead, take the time to get to know your contacts and explain your operations so that if a recall is required they are already familiar with your operations.

4. Analyze data to identify potential problems early

From complaints to returns, customer information can provide important early alerts about potential product defects. Analyze all information, looking out for potential patterns, and set up processes for internal escalation in case a potential issue is identified. Monitor social media and other public forums for discussions about your products.

A company’s internal culture can have a major influence on the way it reacts and responds. Build a culture that values collaboration and transparency and encourages employees to alert their superiors when they notice a problem. This can help you identify potential problems early, possibly allowing you to take action while an issue is more manageable.

The U.S. Supreme Court building at dawn in Washington, D.C., U.S. Photographer: Samuel Corum/Bloomberg

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