“RIPPLE EFFECT"

“Ripple effect" behind larger product recalls

RIPPLE.jpg

Product recalls are increasing in size and number, predominantly driven by the increasing complexity of global supply chains and concentration of certain components or ingredients on a smaller number of suppliers, as well as tougher regulation.

Global companies now sell their products to millions of consumers. For example, since launching the iPhone in 2007, Apple has sold over a billion units. Meanwhile carmakers VW and Toyota produced over 10 million vehicles apiece in 2016 [1].

At the same time, many manufacturers are sourcing their components, ingredients or raw materials from fewer suppliers, as supply chains become leaner and more global. This has seen huge increases in values at risk and the emergence of a multiplier or “ripple effect”, where a single recall can impact numerous manufacturers, brands and countries, causing reputational damage and large financial losses.

This “ripple effect” has contributed to a number of large product recalls recently, most notably in the food and automotive sectors. For example, in 2016, a recall of sunflower seeds due to possible listeria contamination impacted hundreds of products across dozens of brands. Similarly, a 2015 recall of cumin spice (contaminated by nuts) affected 14 companies, 100 brands, and 153 individual products, and 756 products in different packages [2].

The extent of supply chains in the food sector was also revealed by the 2008 Peanut Corporation of America (PCA) recall – one of the largest ever – which was sparked by a salmonella outbreak. Although PCA handled just 2% of the US peanut supply, its peanuts found their way into around 4,000 products, produced by over 200 different companies. The recall was estimated to have cost the food industry some $1bn after an industry-wide 24% reduction in peanut sales. Some leading brands saw sales almost half [3], even though they were not implicated. The company had to file for bankruptcy.

In the automotive sector, large airbag and ignition switch recalls have rippled through the supply chain, affecting millions of units across multiple brands and countries.

“Today the automotive supply chain is totally different to 15 or 20 years ago. Consolidation in the automotive industry has brought efficiencies but it has also increased product recall risk,” explains Christof Bentele, Head of Global Crisis Management, AGCS.

“In the automotive segment we see an increasing number of recalls with higher units,” says Carsten Krieglstein, Regional Head Liability Central & Eastern Europe, AGCS. “This is driven by factors such as automotive engineering becoming more complex, faster speed-to-market, leaving less time for product testing, outsourcing of research and development to first and second tier suppliers, as well as increasing cost pressures. Modular strategies of original equipment manufacturers (OEM) means the number of recalled units is likely to increase further."

“The technological shift in the automotive industry towards electric and autonomousmobility will create further recall risks.”

“A previously innocuous product can result in billions of financial losses for a sector without any recourse,” says John Turner, Director of Crisis Management at McLarens, a global loss adjusting company.

“Companies are usually confident in their ability to manage their own risks but it’s a different story when it comes to suppliers. You just can’t manage a complex global supply chain 24/7/365. That is a big driver for buying protection such as product recall insurance.”

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