Product recall riskCollin 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 Conclusions

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 Histograms 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› Direct:

Recalls associated with own-products› Indirect

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 & RecallA: Abnormal Stock Returns (AR) for Proactive and Passive Recalls

Recall Strategy N Abnormal Returns t-statistic t-Patell t-BMP

Proactive 38 -0.59% -2.31 -2.27 -2.35

Passive 115 0.097% .63 .45 .46

B: Comparison of AR between Proactive and Passive Recalls

Two Sample t-test Wilcoxon Rank-Sum Test

AR Difference t-statistic W-score Z-statistic

-0.69% -2.24 2406.00 -2.19

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&AAny Questions?