Product Recall Risk
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Product Recall Risk



This presentation gives an overview of product recall risk.

This presentation gives an overview of product recall risk.



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    Product Recall Risk Product Recall Risk Presentation Transcript

    • Product recall risk
      Collin Shaw, Jonathan Ritchie,
      Phillip Coddington
    • 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?
    • 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
    • Background
      The 1980’s Tylenol recall changed the game for recall risk.
      Toyota’s recent troubles have renewed attention on the risk.
    • 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
    • Quantitative recall measurements
      Check sheets
      Scatter diagrams
      Pareto diagrams
      Flow charts
      Cause-and-effect diagrams
      Control charts
    • Qualitative recall measurements
      Affinity diagram
      Tree diagram
      Process decision program chart (PDPC)
      Matrix diagram
      Interrelationship diagraph
      Prioritization matrices
      Activity network diagrams
    • Qualitative– examples
    • 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
    • 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
    • Product recall insurance -cont’d
      Direct vs. Indirect liability
      Recalls associated with own-products
      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
    • 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.
    • Financial Value & Recall
    • 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
    • Toyota Stock Price Example
      Toyota took a proactive recall strategy
      From a high of $90.42 to $71.78 during recall. Now $80.33
    • 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
    • Q&A
      Any Questions?