Managing product recall risk in complex global supply chains

Product recalls have become more commonplace and no longer raise the same levels of concern they once did. This shift can be attributed to stronger regulatory oversight, technological advancements and heightened consumer awareness. As a result, recalls have evolved from potential crises into opportunities to showcase resilience and a commitment to quality.

However, the potential harm posed by defective products remains as significant as ever. Whether it is E. coli in carrots from the world’s largest producer, or a faulty braking system in a BMW, the risk to manufacturers and brands is ever present.

A single defective component sourced from one corner of the globe can ripple through an entire supply chain, triggering widespread consequences. Clearly, any failures must be corrected to avoid injury, lawsuits, regulatory action and brand damage.

The process and how to respond

When a recall occurs, the response typically begins with a retailer or brand owner seeking to recover, discontinue or destroy the product. From there the spotlight falls on a “faulty” supplier in the quest for compensation, with the supplier being the first cause of the supply chain issue.

It could be a US retailer has no carrots to sell heading into Thanksgiving or a BMW dealer has to tell customers their prized vehicle may be off the road for months – there will always be a price to be paid.

If recurring financial and reputational damage are to be avoided, brand owners need to examine why the fault occurred in the first place and work out how to avoid a repeat.
Failures in the supply chain need to be addressed to mitigate risk and to seek compensation. Increasingly, this is a focus in contractual requirements, which can require suppliers to provide evidence they are insured to reimburse lost income in the case of a recall for which they are at fault. This shift not only protects brand owners but also incentivises suppliers to maintain higher quality standards and implement rigorous risk management practices.

Complex supply chains

The interconnected nature of the networks of suppliers, manufacturers, warehouses, distributors, shippers and customers that make up today’s global supply chains is incredibly complex and adds additional layers of complexity to recall management as well.

Identifying the root cause of an issue can be difficult, as was evident in the UK last year when a small importer of spices, FGS Ingredients Ltd, triggered widespread recalls due to undeclared peanuts in mustard powder.

This cascaded through the supply chain, affecting multiple food manufacturers and rendering finished products unsellable. While the cost of the seasoning was small, there was a knock-on effect and the damage to end products has been significant.

Who picks up the cost of the unsellable finished product is one of the biggest challenges in the supply chain. It is a key discussion point for any consumer product company seeking to avoid bearing the financial loss. 

The goal is to shift the cost either back down the supply chain or through product recall insurance. How this is managed and the decisions that are made can have a significant impact on relationships with suppliers, manufacturers and distributors, as well as the company’s overall profitability.

Specific cover for specific risks

Recalls are more prevalent in certain industries, particularly those where products directly affect public health, safety and wellbeing. Food and beverages, consumer products and vehicles are all often affected and can garner much mainstream attention when a recall occurs.

For companies at risk, one of the biggest misconceptions is their general liability cover will respond to such economic losses. Unfortunately, it will not.

This is the critical role of specialist recall/contamination policies, which protect brand owner balance sheets from harm. Product recall cover helps safeguard a business from the impact of a recall, both to the balance sheet and to reputation. Often, the most challenging and expensive part of a recall is keeping the business operational in the face of intense public and regulatory scrutiny.

Proactive risk management

Recent events have highlighted that even faults with the smallest product components in our increasingly interconnected global economy can lead to significant losses. 
Companies must remain vigilant to risks throughout their supply chains and regularly review their product recall insurance. This is particularly true as supplier relationships evolve and introduce new variables such as unfamiliar manufacturing processes, quality standards or regulatory requirements.

Assessing these risks is essential to minimising disputes, preserving consumer trust and speeding up financial recovery during a recall crisis.

By adopting a proactive approach, companies can position themselves to respond with agility and precision, effectively mitigating both short-term disruptions and long-term financial and reputational damage. 

Ian Harrison is partner for product recall at McGill and Partners