How to Source a Recall Effectively: From Volkswagen to Samsung

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Spend Matters welcomes this guest post from Pranav Padgaonkar, of GEP.

2016 has seen a surge in product recalls across industries, from Volkswagen’s “dieselgate” to Samsung’s Galaxy Note 7 and subsequent washing machine recall.

A product recall is a huge disruption to the supply chain, and a huge dent to brand image. Managing a recall effectively is crucial — sometimes to the survival of the product in the market and sometimes to the survival of the company itself. Despite the risks, organizations have traditionally viewed preparing in advance for such as bad luck — it is seen as “betting on a recall.” As a result, most recalls are handled in a reactive manner, leading to inflated cost and reputation damage.

Recalls should be seen as what they are: a severe business risk that requires commensurate risk mitigation measures. The various costs associated with a recall, and strategies that can limit the resulting costs, are listed below:

Cost Area Approach to Sourcing and Minimizing Cost
Tracing products needing recall In the automotive and pharma industries, serialization is a mandatory requirement at the SKU level. In others industries, as well, it can be taken up as a proactive risk mitigation measure.

However, the difficulty is when a specific supplier’s parts are defective, and they have been used over a span of time across a wide model portfolio, such as the Takata airbags. Even more complexity comes in when products are sold under different brands. Samsung’s defective washers have also been sold as Maytag Neptune washers, and now recalls will involve a lot of coordination.

The ability to trace which products got the defective spares directly affects recall costs — less accuracy in tracing the products means that a wider range of products have to be recalled.

Reaching out to end users Companies and authorities will always publish recall notices. But the difference between a well-managed recall and a PR disaster is often a comprehensive customer database — dollars spent in proactively reaching out to customers and urging them to exchange the products are a great investment, salvaging brand perception and reducing downstream PR and marketing costs.

Customer databases can be created either through sales channels or direct end-user outreach. In the latter, end-users can either be mandated, or at least incentivized to register products with their contact details.

Reverse Logistics Logistics as a sourcing category is dependent on the lane profile, so it is difficult to source fully in advance. However, there are several process optimizations that can yield substantial savings if and when a recall does hit. These can include deciding on the packaging material, the mode of return shipments, getting negotiated labor rate cards and evaluating the cost/benefit of transportation versus disposal-at-site.
Repair vs. Disposal A deep cost-benefit analysis can unearth significant value when options such as disposal at site, return and central disposal, repair on site and repair and re-ship are compared with each other. Disposal-at-site turns out to be more economical in a surprising number of situations, although it comes with the risk of the product finding its way back into the market.
Marketing and Legal Costs For professional services used at extremely short notice, significant premiums are charged and also justifiable. However, these premium charges should only apply to the first month of service, after which normal discounted, pre-negotiated charges should apply.

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