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Product Recall Your Reputation And Your Balance Sheet David Palmer - Crisis Management Aon Limited is authorised and regulated by the Financial Services Authority in respect of insurance mediation activities only Agenda • Causes and contaminants • Current environment • Industry sector stats • Brand damage corporate reputation • The supply chain • Case studies • Solutions – Risk Transfer & Risk Management Recalls Are Increasing, But Why ? • In EU recalls have risen steadily from 2,300 in 03 to 3,100 in 08 • Increased recall legislation • Silent recalls outlawed! • Improved testing • More sophisticated products • Consumers more willing to complain • Manufacturers keen to protect their brand • Retail pressure What Causes A Product Recall? • Hygiene • Manufacturing problem • Process error • Cross contamination • Raw materials (supplier) • Mislabelling • Human error • Product tampering Contaminants • Microbiological Salmonella E.Coli 0157 Listeria…..etc • Foreign bodies • Heavy metals • Food additives • Chemical migration • Toxins • Banned substances… Product Recall For Manufactures Contaminated Products • Food & beverage • Growers • Cosmetics and beauty products • Distributors • Pharmaceutical • Packaging companies • Tobacco • Retailers • Pet food Consumer Products • Children’s toys • Electrical goods • Sports equipment • Electronics • Tools & hardware • White goods • Aftermarket • Franchise groups Automotive • Component manufacturers Restaurants • Corporate chains FSA Food Supply Chain FARM COMMODITY INTERMEDIATE FINAL RETAIL FORK ! UK Incidents in the Supply Chain (FSA) Environmental Contaminants Additives 5% 1% 6% Microbiological - on farm 2% 2% 1% 28% Biocides Physical Deliberate 5% Micro processing / post processing Natural Chemical Contaminates Physical Accidental 9% Radiological Pesticides 14% Vet meds Allergens 17% 2% 2% 6% Food Contact Materials Process Contaminants Chemical GPSD (2001/95/EC) 15th Jan 04 (Replaces 92/59/EEC following 4 year review) • Applies to any product supplied in course of a commercial activity • Must be able to demonstrate absolute trace-ability • Obligation on producers to have adequate recall systems in place • Obligation on producers to advise authorities “immediately” • Local authorities have powers to enforce mandatory recalls FDA Recall Role • FDA role in recall misunderstood ! • The Federal Food, drug and Cosmetic Act (Law) does not generally authorize the FDA to “order” a recall • The FDA can “request” and most recalls are voluntary • However if a manufacturer does not recall the FDA can… 1. Seek legal action under the FD&C act 2. Seize products 3. Obtain an injunction 4. Make a court request Salinas Valley California • 200+ sick, across 21 states, 16 with kidney damage, 3 dead ! • FDA warns the public not to eat ANY fresh spinach or salad blends • Over 30 brands named by the FDA • Generic E.coli in the Salinas valley waterways used to irrigate crops • Entire Salina Valley farming community struggling to recover Spotlight on: Sanlu China Saturday, 2nd August 2008 BEIJING Suppliers are believed to have added melamine, a banned chemical normally used in plastics, to diluted milk to make it appear higher in protein. Melamine was first found in baby milk powder made by the Sanlu Group. In total, melamine has been found in products made by 22 companies. 13,000 babies in hospital 53, 000 people affected and milk recalled around the world. Electronics Industry Sony - Dell laptop recall Nintendo Wii Counterfeit Food • EU customs seized over 75 million counterfeit goods in 06 • Over 5 million were foodstuffs, drinks and alcohol • EU and US authorities have taken a joint initiative against counterfeit and intellectual property theft • Initial efforts focused on Russia and China • Some 40% of all alcoholic beverages, and 36% of all foodstuffs on sales in Russia were counterfeit (est cost to Moscow $1bn) • Although low compared to DVDs (80%) tobacco and other items Landmark Incidents • Walkers Crisps Source – Press-Association 96 • Perrier Source – Press-Association 90 • Sudafed Source – New York Times 93 • Coca-Cola Source - BBC June 99 Counterfeit Goods • 21 people die after drinking counterfeit Raki • 200 times amount of methyl alcohol • Labels stolen, and used on fake product • Millions of bottles withdrawn from shops and markets Recall Costs - Perception Vs Reality Actual Perceived Effect on Brand/Reputation Logistics Loss/Replacement of Stock "Soft" Costs Business Interruption Public Relations Retailer Charges 0% 5% 10% 15% 20% 25% 30% 35% Reputation What Is Reputation ? What Is The Value Of Your Reputation ? Counting The Cost • Share price drops • Loss of customer confidence • Brand value reduces • Employee morale sinks • Management in the spotlight “ Buildings age and become dilapidated. Machines wear out. Cars rust. But what lives on are brands” Source – Confederation of British industry Restaurants • How does a restaurant deal with contamination • Corporate sales • National & Internationally recognised brands • Suppliers coverage Wendy’s – The Headlines ‘Diner Puts a Finger on What's Wrong with the Chilli’ ! ‘Finger Food ! Leaves Diner with Really Bad Taste; Chilli had a Human Touch ‘ ! ‘Wendy's "Finger" Has a Chilli Effect on Sales’ ! ‘Finger in Chilli Not Getting Any Easier to Digest’ ! ‘Police Aiming to Point Finger at the Owner of Missing Digit’ ! Six-Digit Reward for Origin of Wendy's "Chilli Finger" ! ‘Woman Bites Off More than She Can Chew’ ! Wendys • Anne Ayala - ‘There’s no words to describe what I felt. Its sick, its disgusting, just knowing there was a human remain in my mouth’ • Hoax always suspected… • Infact, a Wendy’s employee Plancencia conspired with Ayala • Placencia bought finger tip from a friend (for $100) who severed it at a paving co. • Wendy’s lost $2.5m in sales, dozens of workers laid off Malicious Product Tampering & Product Extortion • Disgruntled employees / ex-employees • Special interest groups • Criminals • Cranks ! Coverage • Recall Costs • Business interruption • Loss Of Gross Profit • Rehabilitation • Mislabeling • Third Party Recall • Extortion Costs • Consultant Costs • CCC Trigger Accidental Contamination Any accidental or unintentional contamination, impairment or mislabelling of an Insured Product(s), which occurs during or as a result of its production, preparation, manufacture, packaging or distribution; provided that the use or consumption of such Insured Product(s): (i) has resulted in or would result in clearly identifiable internal or external physical symptoms of bodily injury, sickness, disease or death of any person(s) within three hundred and sixty five days (365) days following such consumption or use or Insured Product(s) means… (i) all topical and ingestible products for human consumption or any of their ingredients or components, that are identical with or similar to and requiring the same manufacturing processes and infrastructure as products reported to the Insurers on the Application on file with the Insurers or by addendum to such Application and which are specified as Specified Insured Product(s) in the Schedule AND are a. in production by the Insured or b. have been manufactured, handled or distributed by the Insured or c. manufactured by any contract manufacturer for the Insured or d. are being prepared by the Insured for or are available for sale, (ii) any product(s) which are newly introduced or newly developed by the Insured provided that… Key Definitions - Claims made - Each & every loss / annual aggregate - Worldwide (manufacture and sales) - “ reasonable and necessary…” Endorsements • Third party loss of GP • Adverse Publicity • Re-instatement • Governmental Recall Risk Management Services • Recall planning • Recall simulations • Crisis management planning • Quality control audit • Legislation compliance audit • Third party suppliers audit • Crisis communications / PR planning • HACCP training • Production line security