The Recall Risk

While there may be some discussion amongst electronics purchasers about what exactly constitutes a product recall, all the main data sources on the subject agree on one thing that total product recalls in the UK have been steadily rising since the millennium. Navigator Customer Managements managing director, Rob Denton, explains the reasons behind this. Between 2006 and 2007, there was a staggering 35 per cent increase in product recalls and safety notices in the UK. There are various reasons for this increase, most notably the introduction in 2005 of product safety legislation that requires manufacturers to inform both the authorities and consumers of any potential risk from their products.

Secondly, there is a growing awareness amongst consumers and authorities about potential health and safety issues. Thirdly, manufacturers are also sourcing ingredients, components and packaging from further afield, meaning they have less control over their supply chain and thus a higher risk of recalls. Furthermore, an increasing volume of goods are being imported from countries outside the EU, notably China, whose legislation is not wholly inline with that of Europe.
Identifying risks
For several reasons, the rise poses a particular risk to the electronics industry. Between 2004 and 2007, electronic goods accounted for a quarter of non-food consumer goods recalls, second only to toys and childrens equipment. Furthermore, the risk of electric shock was the reason for 14 per cent of recalls of non-food consumer goods. As electronic components are integrated into more and more products that would not necessarily be classed as electronic goods (in toys for example), it is possible that the percentage will increase further in the future.

The increase in recalls poses both direct and indirect risks to purchasers. A recall due to poor quality components is likely to lead to the components being returned and sourcing companies being charged with replacing them. Extensive or repeated recalls will also pose a serious risk of losing a contract and permanently damaging a companys reputation.

Brand damage
It is also important that those who source electronics understand the risks recalls pose to brands. That product recalls have a damaging effect not just on brand sales, but also mid-term perceptions and choice of the brand, is beyond question. A series of research studies have provided evidence to this effect. Most recently, a poll from survey group Harris Interactive, found that following a product recall for health and safety reasons, 55 per cent of customers would temporarily purchase another brand and then purchase the recalled brand once it was safe, 15 per cent would purchase another brand and never purchase the recalled brand again, and 21 per cent would avoid using any brand made by the manufacturer of the recalled product.

The rise in prominence of the concept of corporate social responsibility has also meant that companies are increasingly concerned with being seen to do the right thing. Needless to say, supply chain failures caused by negligence which put their customers safety in danger will rapidly damage any good will companies have built up.

Economic downturn
During an economic downturn, brands will be particularly keen to protect their customer care reputation and will thus be increasingly sensitive to the dangers posed by a recall. As disposable income decreases, companies will place a higher emphasis upon maintaining the loyalty of existing customers. As a result, they will be even more anxious to ensure that the components they use are of a high quality.

The economic downturn may tempt purchasers to improve profits by reducing costs, yet while cheap offshore production may seem alluring in the short term it is important to be wary of the long-term damage that may come from a reduction in quality. Provenance in the supply chain is a growing issue in product recalls as firms are tempted offshore parts of their manufacturing process, or product sourcing, to less rigorous legislatures or regulatory regimes. The electronics sourcing industry is no different in this respect.

As a result, extra vigilance will be required on the part of those involved in sourcing electronics to ensure that they are sourcing good quality components. Weaknesses in the supply chain will lead to weaknesses in the product that in turn lead to a recall. By failing to properly assess the quality of electrical components (and whether or not they conform to the relevant European safety standards), purchasers place themselves and the brands for whom they are working at risk. They will also need to develop contingency plans for rejections, facilities for storage and the capacity to replace recalled components.

The future
The increase in recalls charted in our research shows no signs of slowing down and the underlying causes are unlikely to relent soon. Safety legislation is only likely to increase in the future, and given the high profile recalls issued by Dell, Mattel and Cadburys over the last few years, it is unlikely that consumer concern will lessen either. Many companies have long term investments in offshore production and extracting themselves from these arrangements will prove even more difficult when margins are slimmer. Neither is it likely that the impact of these recalls will lessen as their frequency increases as consumers perceive them as a risk to their safety caused by a companys negligence, rather than as simply an inconvenience.

As a result, it looks likely companies will experience a high and increasing level of product recalls in the near future, and that managing these risks will become an ever more pressing priority. Those who source electronic components must ensure that they recognise this risk and react accordingly. Given the potential damage resulting from recalls, companies must be wary not to sacrifice long-term reputation for short-term profits. After all, a company that proves its quality during a downturn will reap the rewards when the economy recovers.