(originally published by Booz & Company)

Shortening the Time Line for a Recall

Three key factors can delay — or accelerate — an announcement.

Title: Safety Hazard and Time to Recall: The Role of Recall Strategy, Product Defect Type, and Supply Chain Player in the U.S. Toy Industry (Fee or subscription required.)

Authors: Manpreet Hora (Georgia Institute of Technology), Hari Bapuji (University of Manitoba), and Aleda V. Roth (Clemson University)

Publisher: Journal of Operations Management, vol. 29, nos. 7–8

Date Published: November 2011

Product recalls are on the rise, according to media and research reports, in industries as diverse as automobiles, electronics, food products, medical devices, pharmaceuticals, and toys. Deaths, injuries, and property damage resulting from defective products cost the United States more than US$800 billion annually, the Consumer Product Safety Commission (CPSC) estimates.

As recalls become more prevalent, attention is being focused on why some companies take longer than others to announce potential problems. Despite rising concern over delays in the issuance of recalls, little is known about the factors that determine the time line between the date a defective product is first sold and the date a recall is announced. Shortening that time line could help companies prevent significant losses and limit damage to their reputation.

The authors of this paper studied the experience of the U.S. toy industry, a nearly $22 billion business, analyzing 528 recalls issued by 216 firms between 1993 and 2008. They identified three key factors that affect the time it takes to recall products: the strategy adopted by the firm (preventive or reactive), the type of defect uncovered (manufacturing or design), and where the recalling company is in the product’s supply chain.

The authors focused on the U.S. toy market for several reasons. Although most toys sold in that market are designed in the U.S., the majority are manufactured overseas. The global supply chain features many players that can potentially issue recalls — distributors and retailers as well as the toy companies themselves. In addition, the source of a defect in a toy is more readily identifiable than might be the case in a complex product such as a car, and, because toy recalls are announced in cooperation with the CPSC, the data about them is publicly available. The authors first identified firms’ basic recall strategies. A preventive stance features ongoing quality checks and inspections so that companies can discover a defect and issue a recall before someone is actually hurt. A reactive recall, on the other hand, is initiated only after a safety hazard has caused damage or injury.

On its face, the first strategy would appear to be the superior one. A company that preventively recalls a product before it has caused any damage sends a signal to consumers, media, and regulators that the company is diligent about quality control. And the authors’ analysis showed that most firms prefer this strategy: 62 percent of the recalls were issued before any reported injuries or damage.

However, the authors also found that companies actually take about 750 days (more than two years) to issue a preventive recall after a product hits the market — 150 days longer, on average, than the time line for reactive recalls. The difference can be explained in part by the urgent need to react once reports of damage and injuries become known to the public, and in part by wariness about investors’ reaction to preventive recalls. Investors often view preventive recalls in a negative way, seeing them as admissions of guilt that could hurt sales.

“Our findings suggest that firms might be delaying recalls in a bid to protect their market value,” the authors write. The “preventive strategy taking longer to recall than reactive strategy suggests that balancing the concerns of multiple stakeholders is a serious challenge faced by managers.”

The type of product defect is also crucial to timing. Problems in manufacturing involve raw materials or the production process — for example, the use of toxic lead paint in some toys. Design flaws, in contrast, precede manufacturing, as in the case of a toy that comes with tiny magnets that children could pry loose and swallow. Design flaws were involved in 76 percent of the recalls, the authors found. And products with design flaws took, on average, about 130 more days to recall than those with manufacturing problems.

Defects in manufacturing may be quicker to trace, the authors note, because raw materials are generally provided by a single source, and the problems often affect several firms in the industry (as with lead paint). The broad nature of these problems sets global supply chains in motion and enables toy firms to identify the source of the problem among their contract manufacturers.

Design flaws, however, are more problematic. For toy companies, announcing a design defect not only involves pointing the finger at themselves; it could also expose the intellectual property of the designs to competitors.

Finally, in terms of a firm’s position along the supply chain, the authors found that toy companies initiated more than half of the recalls, but these took much longer to issue than those announced by retailers (who have a closer proximity to customers) and even distributors.

What should companies do to speed up announcements and reduce their risk?

To decrease the time it takes to recall products with structural flaws, the authors suggest that companies study competitor recalls, conduct product safety tests in real-world situations, and carefully track customer feedback. (Some of these steps will also help prevent future design defects.) Companies that are further away from the consumer, and that thus might face delays in uncovering defects, should set up organizational systems that counter this disadvantage.

And firms that favor a reactive strategy might still find it prudent, the authors advise, “to strengthen their control and inspection systems so that product defects are identified in-house rather than brought to the notice of the company by outsiders, following incidents of harm to consumers.”

As for being wary of investor reaction to preventive recalls, companies have to learn to take decisive action, the authors suggest. Otherwise, what might have been a preventive recall could wind up as a more painful reactive one.

Bottom Line:
As firms in many industries face the challenge of handling recalls, it is important for company leaders to understand how three key factors affect the time it takes to announce a recall: whether the company is following a preventive or reactive recall strategy, whether the defect is one of design or manufacture, and what the proximity of the recalling company is to consumers.

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