product recall risk
DESCRIPTION
This presentation gives an overview of product recall risk.TRANSCRIPT
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?