The Hidden Cost of Product Recalls: EQMS as a Proactive Preventative Measure

June 23, 2014

By Sparta Editorial


Regardless of industry, the best recalls are the ones that never happen.  Recalls are not only costly to a company’s bottom line, but also to its reputation. Since so many entities are involved in the process of manufacturing, packaging, and distributing a finished product, it’s crucial to have insight into each link in the supply chain to avoid a costly recall. The cost of a recall can range between $10 million and $90 million with 67% of these costs attributed to the removal and disposal of an unsafe product. According to a 2010 Deloitte Recall Execution Effectiveness Report, replacement delays may account for a 12% loss in sales, as well as a 22% drop in a manufacturer’s stock price following a recall. Further underscoring the reverberating effects of a recall, the 12% decline in sales does not include the longer-range loss and brand damage due to consumers switching to another competitor’s product.

Packaging Can Be a Cereal Killer

Sometimes, it may not even be the product itself, but its packaging that is a cause for recall. In 2010, a large cereal manufacturer issued a voluntary recall of 28 million boxes of some of its most popular cereals due to an odd smell. The company identified a substance in the package liners that produced the unusual taste and smell. Besides the 28 million recalled boxes, the company had to destroy millions of additional boxes of inventory in its warehouses. The incident impacted the company’s annual profits, brand reputation and customer goodwill.

In 2011, the cereal manufacturer sued the packaging supplier for compensation for cost associated with the recall and destruction of “contaminated” product and defective liners, totaling more than $70 million. This amount did not include the loss of sales, replacement vouchers issued to customers, the cost to investigate the problem, and the submission to the FDA regarding a health hazard assessment.

The packaging supplier filed a third-party action against the company that supplied the wax used in the liners, which was found to be the source of the odor.

It shows how one part of the product developed by a supplier’s supplier can have a catastrophic impact on tens of millions of products and millions of consumers.

EQMS as an Aid in the Internal and External Quality Risk Management Process

An Enterprise Quality Management Solution (EQMS) can help to protect a company’s brand and market share by breaking down the silos between other links in the supply chain, improving communication and aiding in both the internal and external quality risk management process. EQMS integrates with other IT systems, such as ERPs and CRMs, and stands as a centralized connection between these systems so issues can be communicated and shared. Quality issues trigger alerts, even when other parts of the supply chain do not have an EQMS of their own.

Companies today, especially in the food and beverage space, need to create a connection with suppliers. However, many suppliers still use archaic, manual, paper-based processes. Updates sent via phone, email, or fax -- as opposed to real-time, electronic updates -- prevent companies from making timely, qualified business decisions. With a cloud-based or web portal system in place, vendors can log into the system and report quality incidents without having EQMS.

Connection and communication with suppliers is important -- not just with Tier 1 suppliers, but also with Tier 2 and their suppliers’ suppliers. This can help to provide greater visibility and accountability into the supply chain. By putting an EQMS in place, notifications can be fed back into the system via the cloud, providing greater security to an enterprise.  Feeding it back into EQMS over the cloud provides security to the enterprise and across the value chain.

For instance, if there is a contamination issue with a product, the quality system records the issue into the system and alerts key personnel about the problem and allows all parties to effectively quarantine it before it reaches consumer hands.

EQMS: “Lessons Learned” and Looking Toward the Future

Additionally, an EQMS provides visibility into the CAPA process and change management, giving other facilities visibility into issues.  From a “lessons learned” standpoint, an EQMS can offer a historic look back at previous problems with a product that can inform future production efforts. With an EQMS in place, if an issue crops up, previous issues logged in the central EQMS repository can be queried to see what actions were taken and the most effective way to resolve a current problem -- or head off a future one. This allows for individuals, manufacturers, and suppliers to be more proactive and reflect on what they’ve done in the past.

Although many companies initially look at EQMS from a regulatory compliance standpoint, this system eventually becomes a trusted workflow process that helps employees work smarter -- not harder. By implementing an EQMS, a company stands to gain greater efficiency because quality checkpoints, and risk management standards become more routine and recognized by various facets of an operation. Not only does this impact employee efficiency, it helps to positively impact a company’s bottom line as a result of fewer recalls and eliminating the cost that is associated with poor quality.

For example, an EQMS may allow a company to catch issues with a supplier’s raw material earlier on in the process. Although there is a cost to have new materials expedited, it will still be cheaper than scrapping an entire production lot. By utilizing EQMS effectively, a company can prevent a flawed product from being released because it’s being checked before it leaves the facility.

Vendor Risk Management Best Practices: Tips For Avoiding Recalls

An ounce of proactive prevention can be worth its weight in gold when it comes to avoiding a potentially damaging recall. Although thinking proactively, instituting HAACP training, and identifying critical control points and establishing critical limits can go a long way toward internal risk management, external risk management can be slightly more difficult.

Here are a few tips for vendor risk management that may help prevent a recall:

- Evaluate and audit your vendor network. Remove vendors who are either too high risk or who do not exist anymore. Very often, upon further evaluation, many companies find out that roughly 20% of their vendors are no longer supplying products.

- Update vendor or supplier score cards. Divide each supplier score card up into high and low-risk areas. This will help to drive continuous improvement.

- Take a look at your audits and be sure they are up to date. Depending upon industry, Standard Operating Procedure (SOP) audits may be called for every 3 to 5 years, whereas other risk-based audit procedures call for some suppliers to be audited once every 6 months to 1 year.

- Perhaps most importantly, create a collaborative relationship with your supplier instead of an adversarial one based around cost. By removing the emphasis from price in a supplier relationship and supplanting it with a focus on trust and quality among partners in the supply chain, you open the door to more sharing of ideas. In turn, this can lead to more sharing of R&D projects in development, leveraging other experiences in developing new products, creating more efficiencies across partner relationships, and accomplishing product release sooner

To take a deeper dive into more best practices for preventing recalls, check out this SlideShare presentation below. To reiterate an earlier point: the best recalls are the ones that never happen.

Your Best Recall is the One You Never Have to Do from Sparta Systems

To learn more about how an EQMS can help you protect your reputation and revenue, download our whitepaper, Protect Your Brand: Ensuring Food Safety and Compliance with a Quality Management System.

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