Product recalls can be a disaster for equipment suppliers and retailers. Smart risk management strategies, however, can soften the pain.
If there’s a phrase sure to send shivers down the spine of tech executives throughout the world, it’s ‘product recall’. While software can be patched or updated, hardware’s a different kettle of fish altogether. Exploding notebooks, smouldering laptops and bending smartphones can potentially kill a promising product line, end a corporate career, depress share prices and cripple a technology vendor. Users of recalled products often endure enormous upheaval as they attempt to identify, remove, replace and return equipment suspected of being defective. The high costs and bad publicity associated with product recalls can quickly damage the businesses of both suppliers and users.
While pharmaceutical firms, car manufacturers and food retailers have been the focus of the biggest product recall campaigns, technology suppliers are increasingly forced to recall products they discover to be faulty or dangerous. Earlier this year, HP and Lenovo warned customers they might have a potentially hazardous device nestled in their laptop bags. HP is recalling an estimated six million notebook power cords shipped around the world. Lenovo is looking to call back around 15 000 lithium-ion batteries installed in its ThinkPad notebooks. In their histories, Dell, Apple, Toshiba and Sony have experienced similar travails.
Shout or whisper?
Improved quality controls and closer checks on component suppliers may reduce the likelihood of product recalls, however no technology supplier is immune from such setbacks. Effective management of product recalls is vital to avoid these events escalating into corporate disasters.
UK insurance group Catlin Crisis Management points out that governments around the world are passing stricter consumer legislation that gives state agencies greater power to intervene in local markets and order product recalls. Safety standards and the testing capabilities of such agencies are also improving. Regulations, however, differ considerably from one country to another. Recalls of technology products are still rare in South Africa but are likely to increase as consumer laws get more clout and more advanced devices continue to proliferate.
“The big challenge is to communicate with customers affected by a problem without triggering mass panic,” says Mark Parsons, technical director at Apple reseller Digicape. If a problem is widely broadcast, he adds, resellers and dealers are likely to be swamped by customers concerned that they may have faulty equipment.
Extending the warranty
Parsons says he has been involved in several Apple warranty extension programmes in South Africa but not any actual product recalls. These extension programmes allow customers to have faults remedied at no charge provided they bring their equipment to an Apple supplier for repairs within the new warranty period. Apple’s MacBook Air, iMac and iPod Nano are among the products that have been affected by such programmes. The warranty extensions can be as long as two years beyond the original expiry date of the warranty, he adds.
Unlike product recalls, where a supplier endeavours to recover and replace faulty equipment or components, warranty extensions merely give customers the opportunity to have their products repaired at no additional cost. Product recalls are usually triggered when a product is discovered to be potentially hazardous. They’re often prompted by a public safety agency such as the Consumer Product Safety Commission in the US or the National Consumer Commission in South Africa.
Parsons says Apple carries the cost of warranty extension repairs. He points out that Apple is able to communicate directly with customers who register their products. The setup process of the Apple machines and devices automatically provides this facility. Apple will then know the serial number of the equipment bought by a specific customer and can e-mail them if it becomes aware of a fault on that product, says Parsons.
Peter Cheales, customer service champion
Nicole Orr, national marketing executive at Mustek, says the company operates an indirect business model and relies on its resellers to communicate with customers. “We have more than 7 000 resellers and distribute 26 brands, including products from Acer, Lenovo, Asus and Toshiba, as well as our own Mecer brand,” she says.
Orr says she’s only aware of two product recalls in Mustek’s 27-year history. A few years ago, the company sent technicians to customer sites to replace faulty motherboards. Before that, the distie had to recall a Fujitsu hard drive. “We accepted all the returns from customers and either replaced them with an equivalent hard drive or issued a credit,” says Orr.
Suppliers striving to recall a defective product need swift and accurate communications with their customers. Users of technology products are quick to broadcast their frustrations and disappointments to vast audiences on Facebook, Twitter and an array of blog sites. News of product faults is fast seized upon by online news services and rapidly relayed across the globe.
Admitting liability
“The first step companies must take when they have a faulty product is to issue a public apology. The second step is to apologise to each user of the product,” says customer service champion Peter Cheales. The second apology mustn’t be a generic response, he warns. It must be a communication to a specific person from a specific person stating the reasons for the problem, asking for forgiveness and notifying them what the supplier is going to do to remedy the situation, he says.
Honesty and humility are essential if a supplier wants to repair and retain customer relationships, says Cheales. He adds that suppliers need to be proactive when they have a problem and respond quickly rather than wait and try to resolve customer complaints. “This allows them to better control and manage the situation,” he says.
The Hellopeter.com website, which Cheales founded in 2000 and recently sold, provides an online forum for consumers to share bad and good experiences of customer service. It often includes responses from companies whose service has been singled out. Technology firms, particularly cellphone service providers, frequently appear on the site.
Cheales says large organisations tend to provide far better customer service than their smaller counterparts. “The big exception is state-owned companies, whose service is often dismal,” he says.
Effective product recalls require suppliers to back their communications initiatives with speedy and efficient customer support. They need to replace faulty products promptly, with little inconvenience to customers. Digicape’s Parsons says turnaround of warranty replacements is quick if the local distributor has the required component or product in stock. If it has to be imported, it can oviously take longer, he acknowledges.
Gary Hadfield, CEO at Loot SA, says the online retailer takes responsibility for informing customers if it discovers they’ve been supplied with a faulty product. “We usually arrange for our couriers to collect the product,” he says. “The distributor would have to specify if it wanted us to return the faulty item. If so, we would package the item and make it available for collection. If not, the distributor would issue us a credit note,” says Hadfield.
Catlin Crisis Management recommends companies prepare themselves for possible product recalls by using social media to monitor customer complaints, keeping product batches small, enforcing strong supply-chain management, maintaining good communications with their distributors or retailers and implementing a robust crisis management plan. Not surprisingly, it also encourages companies to buy insurance. Product recall insurance not only covers the cost of refunding or compensating consumers affected by defective products, it can also offset the expense of withdrawing the product and reimburse the company for lost revenue.
Prudent risk management may not be able to eliminate product recalls but it can limit the damage caused by such events. In business, as in other aspects of life, calamity is sometimes unavoidable.
Counting the cost of product recalls
Direct costs:
• Tracing and returning the defective products
• Repair or replacement of faulty products
• Laboratory and other investigation costs
• Legal and other professional advice
• Business interruption
• Redesigning and re-engineering defective products
• Brand restoration and rehabilitation.
Indirect costs:
• Loss of market share to competitors
• Opportunities missed because senior staff occupied with product recall
• Product may become obsolete
• Channel relations may be weakened
• Damage to brand and fall in sales of other products
• Damage to company reputation may increase cost of finance and impair ability to hire and retain staff.
Source: Catlin Crisis Management