The crisis that can finish your business

So you have a section on product recall in your Quality Manual, and maybe even a standalone product recall plan. Who knows, you might have had a go at a simulation. But is it enough? Is it only the Quality Manager's responsibility? We say no - but how would your company cope with a product recall crisis if one happened today?

If you're the quality control manager, you've probably included a product recall section in your food safety manual - job done, right? Wrong.

Can you honestly say that if your company had a product recall crisis you have the systems and processes in place to handle it without serious cost and brand damage? A beautifully written ISO compliant section of your HACCP document on food safety that is not permanently with the members of the recall team simply won't cut it in the future.

What about your crisis management team? Are they battle-ready? Can they cope in a crisis? Does your CEO take a leading role in managing this risk? The involvement of senior management up to board level is critical if the risk is to be managed well with the right sort of buy-in to make it a priority.

There are five main areas of concern for food producers:

• Accidental contamination with foreign objects;
• Accidental contamination with incorrect ingredients;
• Deliberate contamination with inorganic foreign objects or organic contaminants intended to cause harm, or provide leverage for extortion;
• Accidental presence of residues from production or processing; and
• Detection of migrated components of packaging, etc into foodstuffs at very low levels.

According to Richard Punter, technical director of Intercept Management Ltd, (a company set up last year to provide training and support to consumer goods manufacturers), roughly a third of companies have a product recall program in place, another third like to think that their quality control manager has it sorted, while another third have adopted a fingers-crossed approach.

A poorly-handled product recall can be fatal to a business, particularly in the food and beverage sector. There are numerous examples of companies around the globe that have failed when a recall has been mishandled, especially when the crisis has resulted in death or serious illness, and the company has decided to adopt a '3D' approach - that is, Deny, Delay and Decry.

Widespread public cynicism finds its focus when a spokesman seeking to protect the company from liability adopts this approach.

The backlash can be ferocious and immediate. Consumers can and will make a devastating switch away from brands or companies that had seemed impregnable. And the damage can spill over to affect an entire sector - remember Pan Pharmaceuticals? The sector has mostly recovered but the cost to innocent companies was high.

In fact, customer and consumer perceptions of the company and the demonstration of a caring and responsible attitude in the media during a crisis can be make-or-break. A genuine sense that the company has the situation under control can prove reassuring - vital if you are to retain consumer trust.

What if your company is an ingredients manufacturer? How much tolerance will your customers show if you cause them to recall a product because of a defective ingredient? How understanding will they be if you cannot easily track and trace your product through the supply chain?

Even if you have outstanding manufacturing processes, the great unknown is malicious product tamper (MPT). Of course an MPT event could well be no fault of the company (provided there are no glaring security lapses anywhere in your facilities, and providing nobody within your business is generating these).

Even if the crisis is not your fault, your customers expect you to put it right.

Other important questions centre on meeting the requirements of your insurer. September 11th sent a shock wave through an insurance industry already wary of extortion and product tamper claims. This in turn drove a lot of capacity out of this market and drove up premiums for some time, and the market is only now beginning to recover.

Insurance companies are seeking reassurance form their clients that they are working to mitigate cost and risk. Different underwriters set different standards for this cover. All too often the fine print of this small but vital part of a company's insurance portfolio (dealing with the protocols and processes to be followed in a crisis) is not known to senior management and can be overlooked. If you are the author of your company's product recall section of the Food Safety Manual, have you read the insurance policy?

There is another area of significant liability to be considered if you are an exporter; knowledge of the destination country's laws and legislation around product recall. Is there a corporate understanding of the consequences of a product failure in the United States, the European Community or the diverse legislatures of our Asian neighbours?

There can be substantial difficulties in effectively running a product recall crisis at arms length. These can be compounded by:

• A scramble to engage qualified counsel and advisors;
• The threat of substantial damages arising from lawsuits;
• Fines for breaches of specific legislation; and
• The potential destruction of an entire market.

Ongoing incidents of BSE (French goats for example, 7 February 2005), foot and mouth, Asian Bird flu and various mishandled product contamination scares in Europe in recent years have sensitised consumers to the point of paranoia.

This not just an operational and management issue. This is a corporate risk management issue.

"One thing is clear - the heightened vulnerability of companies to these events together with increasingly proscriptive legislation and the consequent negative impacts have combined to create an argument for pushing this matter right up the governance priority ladder," says Mr Punter.

As a matter of good corporate governance, it is the board's responsibility to ensure that management has in place an experienced crisis management team under the leadership of the CEO, supported with the data, systems, processes and training to completely manage every facet of a recall situation. This system must be regularly reviewed and realistically tested.

Every member of that team must understand their part in the crisis management process. Their ability to remain ruthlessly proactive in an emergency can literally save the company. The team must have the facilities to run an efficient operation.

But perhaps the most important ingredient is a culture of recall awareness that extends throughout the company.

It means that the senior management team has created a recall policy, putting their weight behind a solve (not blame) culture. They have devoted adequate resources to the management of this risk. It also means that there must be a level of awareness among customer services, quality management, production, sales and merchandising teams so that staff can pick up and notify any problems that could point to a recall situation - without fear of recrimination.

So far we have referred to the damage sustained by the company in terms of brand damage, consumer perception and the associated costs and losses. In addition to this we must be aware that legislators around the world have felt for some time that executives and boards do not take this matter seriously.

We are now seeing the creeping escalation of financial penalties built in to legislation that are focused on individuals at senior management and board level. Any careful reading of the various acts in Australasia demonstrates that penalties can be significant and are personally targeted.

In conclusion, the management of product recall events and other like crises is a matter for the personal attention of the CEO and their senior management team, and shouldn't just be covered by a few pages in the Product Safety Manual.

A good recall process has the understanding and approval of the board (or at least the risk management committee), is understood by the insurance company, is regularly reviewed, tested under realistic conditions, and finally, its existence is well publicised to all staff.