Product Recall Risk


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Product Recall Risk

  1. 1. Product recall risk<br />Collin Shaw, Jonathan Ritchie,<br />Phillip Coddington<br />
  2. 2. Takeaways<br />What is Product Recall Risk?<br />How can firms measure recall risk?<br />When in the product lifecycle should firms hedge this risk?<br />What strategies can firms take to hedge recall risk?<br />
  3. 3. Agenda<br />Methods for measuring product recall risk<br />Quantitative strategies<br />Qualitative strategies<br />Recommended risk mitigation strategies<br />Product recall insurance<br />Product recall effects on…<br />Brand value and equity and consumer loyalty<br />Stock Price<br />Conclusions<br />
  4. 4. Background<br />The 1980’s Tylenol recall changed the game for recall risk.<br />Toyota’s recent troubles have renewed attention on the risk.<br />
  5. 5. Product Design Risk<br />Risk is a given<br />Risk is measureable but manageable<br />Risk can be hidden<br />Risk management requires collective understanding<br />Disciplined execution enables risk mitigation<br />Focused diversity is highly desirable<br />Systemic risk is significant<br />Experience enables economic risk management<br />Too little risk, just like too much requires correction<br />Risk mitigation is best addressed at project start<br />
  6. 6. Quantitative recall measurements<br />Check sheets<br />Histograms<br />Scatter diagrams<br />Pareto diagrams<br />Flow charts<br />Cause-and-effect diagrams<br />Control charts<br />
  7. 7. Qualitative recall measurements<br />Affinity diagram<br />Tree diagram<br />Process decision program chart (PDPC)<br />Matrix diagram<br />Interrelationship diagraph<br />Prioritization matrices<br />Activity network diagrams<br />
  8. 8. Qualitative– examples <br />
  9. 9. Deming Quality Model<br />Consistently improve<br />Adopt new philosophy<br />Cease mass inspection<br />Don’t reward on just price alone<br />Find the problems<br />Modern job training<br />Modern supervision, quality over quantity<br />Drive out fear<br />No barriers<br />Eliminate gimmicks<br />Eliminate numerical quotas<br />Give hourly workers ability to take pride<br />Vigorous education & training<br />Management must push all above points <br />
  10. 10. Product recall insurance<br />Expense coverage<br />Pre-recall expenses<br />Identifying & isolating problem, public relations consultants, planning & managing recall<br />Recall expenses<br />Transportation, storage, staffing, quarantining of affected product<br />Data capture<br />Accounting accurately for the directly attributable costs associated with the recall<br />Loss of profit<br />Time period for sales to re-stabilize at pre-recall levels<br />
  11. 11. Product recall insurance -cont’d<br />Direct vs. Indirect liability<br />Direct:<br />Recalls associated with own-products<br />Indirect<br />Recalls for products where you are the supplier and the recall is as a result of your component failing<br />Can include coverage to rehabilitate third-party brand<br />
  12. 12. Product recall effect on brand & loyalty<br />Denying the defect has a strong negative effect on a manufacturer’s image;<br />The impact on image is significant and positive when a product is recalled voluntarily;<br />An even greater positive impact results when the manufacturer embarks on an improvement campaign;<br />Both image and loyalty positively impact on consumer purchase intention towards a manufacturer with past or potential experience of a product crisis situation; and<br />Contrary to expectation, involuntary recall has no substantial effect on image.<br />
  13. 13. Financial Value & Recall<br />
  14. 14. Financial Value & Recall<br />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.<br />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.<br />Investors may see proactive strategies product recall strategies different from consumers:<br />Investors may see a proactive recall strategy as a signal that something serious is wrong, and then therefore drive down the stock price<br />Consumers as mentioned earlier may appreciate the forthrightness of a proactive product recall strategy<br />Also noted was that less reputable firms used more proactive strategies, and firms with strong brands used passive recall strategies<br />
  15. 15. Toyota Stock Price Example<br />Toyota took a proactive recall strategy<br />From a high of $90.42 to $71.78 during recall. Now $80.33<br />
  16. 16. Conclusions<br />Recalls represent HUGE financial liabilities<br />Firms can take steps to reduce recall risk before, during, and after production<br />Hedging this risk is often expensive, but rarely as costly as the price of the recall<br />If a recall occurs, firm response should be enacted in coordination with pre-determined goals <br />
  17. 17. Q&A<br />Any Questions?<br />