Monthly Archives: March 2012

Last year UK product recall jumped 27%, the second year in a row. This has been driven in part, by increasing regulatory pressure, the influx of cheap goods and through the economic downturn. The rise has created an increased financial burden at a time when businesses are still struggling.

What is driving the increase?
Reynolds Porter Chamberlain LLP said last year’s increase was driven by a rise in faulty electrical consumer products. RPC partner Stuart White commented, “From natural disasters to political unrest, the last 12 months has seen substantial supply chain disruptions. These will inevitably have put pressure on manufacturers who may well turn to third or fourth tier suppliers to cope with the supply shortage.”

Intense competition has forced a focus on reduced production costs, which has led to sourcing from overseas suppliers, resulting in complex and extended supply chains, posing a greater challenge to quality assurance.

What is the impact?
Product recalls can have substantial cost implications and impact on the reputation of a business. If consumers lose confidence in the brand and the product, loss of sales and the effect on profits can be enormous.

In 2010, Toyota suffered an estimated $2bn (£1.26bn) in extra costs as a result of a global safety recall which affected millions of cars, as it attempted to address safety concerns following the recall of millions of cars with potentially lethal acceleration faults.

Toyota officials said the projected $2bn cost of the recall includes an estimated ¥70bn to ¥80bn in lost sales. The firm said it had not factored in the potential costs of a new defect reported in its Prius hybrid model that could result in yet another recall.

Toyota’s battle to repair its battered reputation suffered another setback after it admitted it was looking into around 180 complaints about brake problems in its flagship green hybrid.

It had already recalled more than 8million other vehicles worldwide to repair defective accelerator pedals and floor mats. The most recent recall, of 4.45million vehicles, includes 2.3million in the US and 180,000 in the UK.

In some cases some product defects can be fatal. In September 2011, a blaze in which a mother and five of her children died could have been caused by a faulty fridge at the centre of a mass recall. Police said they believed the tragedy was caused by an electrical fault of the fridge, which was later confirmed by the London Fire Brigade’s investigation Team who had identified a link between a faulty switch on the appliances after a series of fires.

Legislative issues
Tightened legislation and better enforcement is driving increased scrutiny of product safety by enforcement authorities. Authorities are now empowered to levy fines and enforce a product recall. The maximum penalty for directors in the UK is imprisonment.

What can you do?
You cannot completely eradicate any chance of a product issue arising. However, by adopting a more robust approach to risk management you can minimise the likelihood of a recall and the potential impact upon your organisation.

Review your current policy, is product recall covered? Key features to look for include: pre-recall, recall and third party recall expenses, post-loss crisis, crisis consultancy, malicious extortion, loss of gross profit and contamination and/or defect cover.

Perkins Slade recommends the following actions:

• Implement a product recall plan and have a crisis plan, should it be required.
• Introduce effective product safety controls, personnel training, auditing of suppliers and rigorous testing processes at all stages of product development, design and production process.
• Ensure contractual controls with suppliers are in place to allow the risk to be passed back if a supplier’s components have caused the problem.
• Limit run sizes to ensure swift identification of the defective products.
• Keep back a sample from each run (to be tested if/when a company is deciding whether a recall is necessary).
• Ensure all production areas (UK/worldwide) have consistent standards of quality and controls, including testing and reporting procedures.

Contact
If you would like to discuss any aspect of product safety and recall insurance or supply chain risk, please call your usual Perkins Slade contact, alternatively telephone 0121 698 8000 or email b.ramos@perkins-slade.com  who is available to advise on the coverage you will need to protect against such eventualities.

For up-to-date product recall information visit: www.tradingstandards.gov.uk

Perkins Slade is authorised and regulated by the Financial Services Authority.