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International Journal of Production Research

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Managing recalls in a consumer product supply chain root cause analysis and measures to mitigate risks
Sameer Kumar & Stephanie Schmitz
a a a

Opus College of Business, University of St. Thomas, Mail # TMH 343, 1000 LaSalle Avenue, Minneapolis, MN 55403-2005, USA Available online: 19 Nov 2010

To cite this article: Sameer Kumar & Stephanie Schmitz (2011): Managing recalls in a consumer product supply chain root cause analysis and measures to mitigate risks, International Journal of Production Research, 49:1, 235-253 To link to this article: http://dx.doi.org/10.1080/00207543.2010.508952

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International Journal of Production Research Vol. 49, No. 1, 1 January 2011, 235253

Managing recalls in a consumer product supply chain root cause analysis and measures to mitigate risks
Sameer Kumar* and Stephanie Schmitz
Opus College of Business, University of St. Thomas, Mail # TMH 343, 1000 LaSalle Avenue, Minneapolis, MN 55403-2005, USA

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(Final version received 25 May 2010) The focus of this study is to analyse the management of recalls in a consumer products supply chain, as well as the reasons, costs, and measures to prevent recalls. A Six Sigma DMAIC methodology is used to understand the root causes and management of recalls and also analyse the costs in a consumer products supply chain. There are many variables in a supply chain, so it is essential for manufacturers to have procedures in place to prevent failures that result in a product recall. It is important that companies have traceability capability or containment measures for parts, products and processes throughout a global supply chain in the event a quality or safety issue arises. Companies in the consumer products industry need to consider not only the cost to their financials in an event of a product recall, but also the loss in terms of goodwill and consumer risk. It is clear from recent Toyota recall and others, companies need to seriously examine their strategic business objectives with their priorities in mind. Which is more critical, rapid business growth and profits or quality design of their products that are less vulnerable to failures? Keywords: supply chain management; quality management; EDI and tracking systems; real time product data; RFID; effective manufacturing practices; product quality and reliability; competitive factors; product data management; continuous process monitoring

1. Introduction Product recalls can present a major crisis for manufacturers, especially those involving adverse media publicity, and a negative effect on the stock price for publicly held companies (Chu et al. 2005). Further, it can result in permanent damage to the product brand, reduced profits, and loss of reputation and goodwill with consumers (Choi and Lin 2009). The entire global supply chain should have plans in place to ensure that defective products are quickly removed from the marketplace and distribution chain in order to minimise risks. Product recalls interrupt the supply chain and affect players across the entire manufacturing spectrum. Ensuring quality and product liability does not rest solely within manufacturing and operations. As Goodden (2008) notes, product liability prevention is multifaceted and spans many different functional roles. The example he gives is in reference to the recent massive toy recalls where poor supplier quality was first blamed. However, the products had marginal designs from the start, and thus unaware of

*Corresponding author. Email: skumar@stthomas.edu

ISSN 00207543 print/ISSN 1366588X online 2011 Taylor & Francis DOI: 10.1080/00207543.2010.508952 http://www.informaworld.com

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the design issues, the quality department made sure the toys were built consistently per specification which created a proliferation of consistently bad product. This led to massive recalls. Goodden offers several components of product recall prevention as illustrated in Figure 1. The purpose of this study is to show how a Six Sigma DMAIC quality management approach can be used to understand the root causes and management of consumer product recalls in a global supply chain for a manufacturer, to analyse cost implications, and identify measures to mitigate risks. Based on extensive professional literature review and widely publicised news reports on consumer product recalls, the authors were motivated to examine the following research questions in this study: . . . . Why do recalls take place with consumer products? What measures can be taken in the supply chain to reduce risk to consumers? What is the true cost of consumer product recalls? What processes are in place to prevent product recalls from recurring?

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Most reported product recalls take place with food and pharmaceuticals, making it more difficult to find articles and data on recalls of general supply chain problems in consumer products. Companies are disinclined to state why failures happen or how defects occurred. There is a tendency to keep this information under wraps. The next section provides a literature review of related work on product recall and quality management in global supply chain. A Six Sigma DMAIC methodological framework is presented to study the management of product recalls in a global supply chain for a manufacturer. This paper ends with lessons learned, managerial implications, final conclusions and recommendations for possible future study.

2. Literature review In todays global market, the supply chain presents significant risk management challenges. Having an appropriate traceability and recall plan in place is critical to managing supply chain risks. Ability to track products through all stages of the supply chain has always been important for companies, but in the event of a product recall,

Figure 1. Concepts of prevention for recalls.

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having an efficient system in place is critical. Traceability will help to build trust and the establishment of long-term relationships among supply chain partners and consumers (Alfaro and Rabade 2008). Providing information as to what, when, and where the product is, within a required time frame, demonstrates how a manufacturer can respond to a situation and protect themselves against litigation if they can show due diligence to ensure the safety of their products and reduce the cost of a recall (Crichton 2007). Real-time product data is the best resource for dealing with a tainted product situation (Casper 2007). Wang et al. (2007) propose a conceptual design of a distributed information system for remote condition monitoring and fault diagnosis of industrial systems that affect consumers. Such a network information system design can be utilised to track and retrieve tainted products in the marketplace. In another research study by Li (2006), it is demonstrated that assisted with advanced information technology, successful collaboration among supply chain echelons does positively impact a firms market performance provided effective communication in the process of decision making is promoted. Advances in track and trace technologies such as RFID is giving companies more visibility to the supply chain and can be beneficial in a product recall (Philips 2007, Zang and Fan 2007). New supply chain management initiatives such as e-commerce, electronic marketplace, web service selection, interoperable electronic product catalogue, collaborative planning, forecasting and replenishment, enterprise integration based X party material flow, data mining, knowledge management, business intelligence and Q-learning as a tool for calibrating agent-based supply network models and the SCOR model for the alignment of business processes and information systems can help develop robust closed loop supply chains for products (Beheshti et al. 2007, Guo 2007, Hou et al. 2007, Li 2007, Li and Wang 2007, Wang and Archer 2007, Zhang and Bhattacharyya 2007, DMello and Ananthanarayana 2009, Guo 2009, Millet et al. 2009). For product tracking, particularly in the case of product recalls, the industrial network flow information integration model proposed by Hsu and Wallace (2007) can facilitate in developing an effective closed loop supply chain. Improved product and manufacturing process designs will minimise likelihood of quality issues and product recalls. Li and Li (2000) point out manufacturers need to incorporate an integrated manufacturing information systems approach to build competitive manufacturing capabilities, achieve manufacturing excellence and sustain a reasonable level of growth. Wang and Xu (2008) recount that manufacturers have felt the increasing need of integrating manufacturing applications in order to accelerate product development paces and improve design qualities. They focus on parameter mapping and data transformation which is of pivotal importance to integrating engineering applications. Xu et al. (2008) propose an evolutionary approach to support dynamic enterprise modelling for enterprise process co-operative scheduling and management. They also discuss various scheduling strategies and process-driven scheduling mechanisms which may be useful in designing a product recall process. Shu and Wang (2007) propose a framework to define and represent product lifecycle data and to maintain data interdependencies. Web-based integration is proposed to support interoperability of distributed product data sources. Staley and Warfield (2007) suggest how manufacturers can use a system similar to an enterprise-wide information system known as C3P used by Ford which is applied to design, engineer and manufacture automobiles and further to provide product information across and beyond the entire enterprise, extending to the supplier and customer base.

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Companies should have testing procedures and inspection protocols in place for the material or sub-components being received from suppliers. Testing and inspection will help detect if the material is adversely affected and will help prevent its introduction into the consumer product (Mitchell and Gruler 2008). Effective manufacturing practices can have a significant influence on production performance. Li et al. (2008) uncovered companies with successful ERP implementation already had a TQM focus, based on a study involving 154 manufacturing companies in the US. Similarly, Zhou et al. (2008) inferred that the strategic business alignment indirectly affects enterprise information management to achieve improved business performance from a study of 226 manufacturing firms in the US. Karim et al. (2008) found that product quality and reliability are the main competitive factors for manufacturers and price surprisingly has become a relatively less important factor. Simultaneous pursuit of advanced quality practices can neutralise the potential negative impacts of manufacturing difficulties and significantly improve product quality and manufacturing performance. Failure mode and effect analysis (FMEA) is shown to be an important tool for improving product quality and on time delivery performance. FMEA practice driven by the intention to improve customer satisfaction is more effective than that practised to fulfil customer requirements. Maintaining a supplier rating system and product data management and regularly updating them with field failure and warranty data are important manufacturing practices. Xu et al. (2005) used polychromatic sets approach in developing conceptual design of a variety of products including machine tools. They suggest this technique can also be applied to design evaluation problems related to manufacturing systems including process planning. Zhao and Li (2009) also used polychromatic sets to build an assembly information model and apply this model for auto body assembly planning which facilitates assembly sequence optimisation under robust and reliable conditions. Xu et al. (2007) presents a strong case for using a decision support system to facilitate quality product design and manufacturing processes as part of concurrent product development process. Li et al. (2005) conducted a large scale study that examined the effects of management control systems on product development and process decisions. They found that when pressure for change is coming from the external environment, companies use strategic control which emphasises R&D and new product development and aligns manufacturing strategies with corporate objectives.

3. Analytical framework The DMAIC approach is an acronym for a Six Sigma problem solving methodology with similar traits to a plan-do-check-act approach using the stages of Define, Measure, Analyse, Improve and Control. The DMAIC model uses the theory that y f(x), or the output y is a function of all the inputs or x. By knowing and controlling x, variability in y is reduced. Controlling variation in the supply chain, whether common cause or special cause, is the key to consistent, defect-free products and processes delivered to consumers. Using the DMAIC quality management approach for the purpose of this study, the Define step will outline the current consumer product recall problem definition. The Measure step will determine the current baseline and address what data is currently collected regarding recalls of consumer products. The Analyse step will review an example of how a current state can be scrutinised using a fault tree approach to get to root

International Journal of Production Research Table 1. Four-year statistics on voluntary product recalls and number of product units involved (Source: CPSC 2009). Number of voluntary recalls 471 472 563 465 Product units recalled (in millions) 124.0 110.0 60.8 229.6

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Year 2006 2007 2008 2009

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cause, and how to verify the cause-and-effect relationships, cost implications and gap elimination techniques. During the Improve stage, recommendations will be made as to avoiding recalls in the future. And finally, during the Control stage ideas on sustaining positive results will be made.

3.1 Define phase The first phase of the DMAIC process is to understand and document the projects problem definition, scope, goal, and expected benefits. The charter for this study is: . Problem definition: Millions of consumer products being recalled each year costing companies millions and putting consumers at risk. . Scope: Consumer products, non-food and non-pharmaceutical items, with special interest on products manufactured outside the United States. . Goal: Illustrate how companies need to re-think supply chain controls and implement processes that would result in fewer recalls and improved consumer safety. . Financial benefit: An improved bottom line since recall is costly. . Non-financial benefit: Improved company reputation and goodwill.

3.2 Measure phase The US Consumer Product Safety Commission (CPSC) has jurisdiction over products such as toys, cribs, power tools, automotives and household chemicals. According to CPSC, there were 465 voluntary product recalls involving 229.6 million product units in 2009, the largest number of recalls in the last 10 years. These recalls included over 320,000 wooden cribs with slats and spindles that could break, resulting in an entrapment and strangulation hazard to infants. Additionally, recalls of childrens toys or products containing lead and in violation of the lead paint requirements were high. Recent four year statistics on voluntary product recalls and number of product units involved are shown in Table 1 and illustrated in Figure 2. The CPSC reports an annual average of 28,200 deaths and 33.6 million injuries related to (not necessarily caused by) products under its jurisdiction in recent years, costing the American public over $800 billion each year. The average cost of a product recall is $540,000 according to a study by Washington State University (Levick Strategic Communications 2006). Significant product recalls cost much more. For example, in 2007,

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Figure 2. Voluntary product recalls and product units (in millions) recalled during the period 2006 to 2009 (Source: CPSC 2009).

Table 2. Direct and indirect costs of recalls. Direct costs of a recall Communication costs Loss of sales Cost to maintain business interruption Inventory losses Cost of refund/compensation Logistics costs Fines/lawsuits Indirect costs of a recall Loss of market share Subsequent loss of sales Negative impact to brand image Cost to rehabilitate image Cost to rehabilitate reputation Collapse of organisation Negative impact to morale

Mattel Inc. recalled 1.5 million toys due to excessive lead levels and saw its gross profit reduced by $71 million as a result. The costs included lost sales (53%), recall related expenses (29%) and inventory (18%) (Mattel Annual Report 2008). Recalls have several costs associated with them, both direct and indirect. Table 2 lists direct and indirect cost drivers adapted from an article on the consequences of recalls (Gomer 2009). In tough economic times it would be easy for companies to analyse the cost of goods sold and cut expenses wherever possible. However, ignoring the potential costs of a recall that could be attributed to cutting corners would be detrimental to the long term success of a business. Understanding what recalls have cost other companies and learning from their mistakes is important in supply chain management. We provide a business case of a Toyota recall to illustrate how the direct costs of recall can become sizable.

3.3 Toyota case The relevancy of this study has come to the forefront in the wake of recent massive Toyota recalls. A company whose reputation and brand image have been built around quality and

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dependability; a firm revered as the gold standard for Lean and Six Sigma practices now finds itself at the centre of the biggest product recall since the Firestone tyre fiasco in 2000. It started with a car crash in August 2009 in California that took the lives of an off-duty police officer and his family and has now led to the recall of almost 8 million vehicles and a suspension of sales (MacKenzie and Evans 2010). So, what went wrong for the auto giant? In Toyotas case its just-in-time processes and its kaizen philosophy of continuous improvements had hidden flaws. Aaron Bragman, Research Analyst at IHS Global Insight thought it was Toyotas ambitious goal to capture 15% of the global market share that led to a focus on growth at the expense of quality. It is reported that a drive for efficiency may have led Toyota to cut corners and they may have stretched their resources of engineering, marketing and manufacturing too thin (Haq 2010). In Toyotas quest for efficiency another failure mode may have been in choosing to use common parts in several different models proliferating the inventory so exposure to defects is widespread (Haq 2010). A timeline of events published on motortrend.com shows Toyota began recalling vehicles in late November 2009 for an accelerator pedal issue. Since then, its been reported that nearly 4.3 million vehicles have been recalled for a risk that the accelerator pedal could become trapped by the floor mat, according to the National Highway Traffic Safety Administration. In January 2010, another recall for 2.3 million vehicles in the United States due to the risk that the accelerator pedals might stick (MacKenzie and Evans 2010).

3.4 Cost of Toyota recall It may take Toyota years to realise the full financial impact of the recalls since indirect costs like loss of market share and negative impact to future sales are yet to be determined. Several online news journals have estimated that the price tag for the recalls of floor mat entrapment and sticking accelerator pedals is upwards of $2 billion, including warranty repair costs and lost sales (Fisk 2010). In the following paragraphs, the direct costs (listed in Table 2) of Toyotas recalls are quantified. 3.4.1 Communication costs Toyota has launched a recall advertising campaign across radio, television, print and online seeking consumers forgiveness and patience as the company works through the safety issues. As a company whose reputation was built on quality and loyal customers, some think Toyota needs a large amount of their advertising budget dedicated to this issue. A review of the auto industrys advertising spend from 2008 (excluding dealer advertising) shows Toyota spent just over one billion dollars in media (Ad Age 2009). A former automotive advertising and marketing executive, Peter DeLorenzo estimated that Toyota would have to spend up to 50% of its advertising budget or almost half a bilion dollars just to move the needle back in the right direction (Ad Age 2010). 3.4.2 Loss of sales Toyota suspended sales of eight models including its top-selling Camry and Corolla on 26 January 2010, saying the accelerator pedals could get stuck and cause runaway acceleration. The company estimates it will lose about $880 million in lost vehicle sales (Hirsch 2010).

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Table 3. Cost to repair Toyota vehicles. Floor mat recall Number of cars Price of part Labour cost per hour Required hours Total cost (in millions) 4,200,000 $125 $120 0.75 $903 Accelerator recall 2,300,000 $5 $120 0.75 $219 Total 6,500,000 $83 $120 0.75 $1122

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3.4.3 Cost to maintain business interruption Toyota has made a commitment to get warranty repairs done quickly and has stated that many dealers will be open 24 hours a day, 7 days a week. For this study, it was assumed that the roughly 1200 Toyota dealers across the United States would be compensated $75,000 by Toyota for their added staff and support, a cost of $90 million. 3.4.4 Inventory losses For the purpose of this study, inventory loss was assumed to be the decreased value of Toyotas inventory due to the drop in market value as consumers willingness to pay decreases. Varying news sources have estimated that due to the recall a Toyotas value will drop up to 6%. Assuming a normal distribution, the average value decrease used is 3.5%. If we assume 1200 North American dealers all have 250 vehicles in stock and 50% of those are affected by the recall, at an average value of $20,000 then a 3.5% drop is $105 million. 3.4.5 Cost of refund/compensation Two major recalls are the focus of this study. Approximately 4.2 million vehicles are being recalled for the first, and 2.3 million for the latter. In the case of the floor mat entrapment recall, the Toyota website states that the shape of the accelerator pedal will be reconfigured to address the risk of floor mat entrapment. For the Camry and Avalon models involved, the shape of the floor surface underneath will also be reconfigured to increase the space between the accelerator pedal and the floor. New floor mats may also be installed. Part cost for this repair is assumed to be $125. For the accelerator or pedal recall, the friction concerns in the pedal design are being fixed by adding a steel shim, roughly the size of a postage stamp. Part cost for this repair is assumed to be $5. The authors contacted several local Toyota dealers to collect repair cost information. The responses indicated the time ranged from 30 minutes to one hour and standard service fee was $120/hour. Based on that information an estimate of the repair cost to Toyota was calculated in Table 3. The total warranty cost for both recalls is $1.1 billion dollars. 3.4.6 Logistic costs This category encompasses costs like deploying human resources; ordering, manufacturing and overnight freight costs of replacement parts. It may also include costs to notify customers and to track which vehicles have been repaired. Logistics costs are difficult to

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estimate, so for the purpose of this study, they are assumed to be $45 million, or 50% of the cost to maintain business interruptions. 3.4.7 Fines/lawsuits One of the largest costs of consumer goods recalls can be the fines and lawsuits filed against a company. It is inevitable Toyota will be faced with individual lawsuits based on the reported accidents and deaths in which these accelerator pedal defects have allegedly played a role. Putting a price tag on a life is difficult at best but usually reaches into the millions. In addition, the number of class action lawsuits against Toyota is mounting. As of February 2010, a reported 39 class action suits have been filed (Fisk 2010). Based on an article in Business Week, class actions claiming product defects rarely go to trial in the US, usually settling for cash or coupons or some combination of both, court records show. In 2007 Ford settled a class action suit for its Explorer tyre problem, offering $500 discounts to owners of the Explorer sport-utility vehicles (Fisk 2010). For this study, an analytical approach was used to estimate the costs Toyota may be faced with for the class action suits, under the premise that Toyota would be required to pay lost suggested market value to vehicle owners in a form of coupon payment. The first step in the analysis was to collect the affected models of the two major recalls referenced earlier from www.toyota.com/recall. Although models can be sold in years other than when they were manufactured it was assumed that a years sales roughly matched the number of models affected. Sales data by year and by model were collected from theautochannel.com. 2010 data was for the month of January only. For this analysis, certain models was interpreted at an 80% affected rate. Next, the value of the model and year was researched from kellybluebook.com. A table was generated to calculate the suggested market value of the cars affected (see Table 4). As in the cost of inventory analysis, it was assumed that a Toyota will lose 3.5% of its value due to the stigma of the recalls. The total reimbursement per owner is calculated by taking the lost suggested retail value and dividing it across the number of affected owners. Since some models overlap both recalls, adding just the unique models, RAV4 and Sequoia, from the acceleration recall to the floor mat recall, the estimated settlement is $601 per owner. This settlement multiplied across 4.3 million vehicles creates a $2.6 billion price tag for Toyota. Based on this study, Figure 3 gives a Pareto chart of the direct costs Toyota can expect from two major recalls.

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3.5 Analyse phase Product recalls can occur for a multitude of reasons and the majority of the time the recall is voluntarily initiated by the company. Most companies aim to find defects before shipment of the product to customers, but often it is the consumer feedback that informs the company of the problem. Figure 4 illustrates several reasons why a recall might be initiated. Methods like planned inspections, reliability or life testing, continuous process monitoring with trend analysis and supplier feedback are common ways defects are found. Recalls are also initiated when enough common complaints from customers contact the company to take action. Looking at the value chain map of a typical consumer products supply chain shown in Figure 5, one can see the challenges companies face to control quality while maintaining low cost. In this example, the parent company is based in the US and the products are

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Table 4. Calculation of average reimbursement per owner for the two Toyota recalls.
2004 N/A N/A N/A N/A N/A N/A N/A N/A N/A $ 53,991 12,800 N/A N/A N/A N/A N/A N/A Floor Mat Recall 2005 2006 2007 2008 2009 95318 88,938 72,945 42,790 26,935 $ 13,500 $ 14,900 $ 16,795 $ 19,300 $ 24,700 N/A N/A 473,108 436,617 356,824 N/A N/A $ 14,715 $ 16,250 $ 18,085 N/A N/A N/A N/A 296,874 N/A N/A N/A N/A $ 13,830 N/A N/A N/A 104,661 83,118 N/A N/A N/A $ 27,230 $ 28,059 N/A N/A N/A N/A Not Available 107,897 106,971 181,221 158,884 139,682 $ 14,285 $ 15,970 $ 17,580 $ 19,250 $ 21,570 168,831 178,351 173,238 144,655 111,824 $ 10,860 $ 11,580 $ 12,965 $ 14,695 $ 16,704 N/A N/A 196,555 137,249 79,385 N/A N/A $ 17,700 $ 19,630 $ 22,830 N/A N/A N/A N/A 54,410 N/A N/A N/A N/A $ 29,100 Floor Mat Recall 2010 $ $ $ $ 944 26,973 15,794 19,923 17,121 16,421 4,478 31,335 Not Available 8,484 24,500 6,747 17,545 3,904 23,841 3,664 27,907 $ $ $ $ Total 327,870 5,353,684,487 1,282,343 20,824,636,372 313,995 4,386,911,361 192,257 5,322,445,122 757,130 13,405,901,235 783,646 10,256,829,346 417,093 8,078,656,184 58,074 1,685,582,248 4,132,408 69,314,646,355 2,416,770,670 585 Total $ $ $ $ 327870 5,353,684,487 1,025,874 16,659,709,098 251,196 3,509,529,089 3,582 112,254,504 0 417,093 8,078,656,184 125,522 3,011,484,776 47,724 1,894,917,284

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2005-2010 Avalon KBB Sugg Retail value 2007-2010 Camry KBB Sugg Retail value 2009-2010 Corolla KBB Sugg Retail value 2008-2010 Highlander KBB Sugg Retail value 2009-2010 Matrix 2004-2009 Prius KBB Sugg Retail value 2005-2010 Tacoma KBB Sugg Retail value 2007-2010 Tundra KBB Sugg Retail value 2009-2010 VENZA KBB Sugg Retail value

$ $ $ $

$ $ $ $

Total Cars Affected Total Value $ Lost Retail Value $ Reimbursment/owner $ 2010 $ $ $ $ 944 26,973 12,635 19,923 13,697 16,421 3,582 31,335 Not Available 3,904 23,841 6,315 22,515 644 39,716

2005-2010 Avalon KBB Sugg Retail value Certain 2007-2010 Camry KBB Sugg Retail value Certain 2009-2010 Corolla KBB Sugg Retail value Certain 2010 Highlander KBB Sugg Retail value 2009-2010 Matrix 2007-2010 Tundra KBB Sugg Retail value Certain 2009-2010 RAV4 KBB Sugg Retail value 2008-2010 Sequoia KBB Sugg Retail value

2004 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Acceleration Recall 2005 2006 2007 2008 2009 95318 88,938 72,945 42,790 26,935 $ 13,500 $ 14,900 $ 16,795 $ 19,300 $ 24,700 N/A N/A 378,486 349,294 285,459 N/A N/A $ 14,715 $ 16,250 $ 18,085 N/A N/A N/A N/A 237,499 N/A N/A N/A N/A $ 13,830 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Not Available N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A $ 196,555 17,700 N/A N/A N/A N/A $ 137,249 19,630 N/A N/A 30,693 38,195 $ $ $ 79,385 22,830 119,206 24,070 16,387 42,535

$ $ $

$ $ $

N/A = Not Affected by Recall

Acceleration Recall Total Cars Affected Total Value $ Lost Retail Value $ Reimbursment/owner $ Total Cars Affected Total Value $ Lost Retail Value $ Reimbursment/owner $ 2,198,861 38,620,235,421 2,317,214,125 1,054 4305654 74,221,048,415 2,587,840,555 601

Sources Affected Models - www.toyota.com/recall Yearly Sales by Model - www.theautochannel.com/news/2010/02/02/464237.html Suggested Retail Value - www.kbb.com/

Non-overlap

being manufactured in China with different raw materials (plastic, woods, textile, and metal) coming from other countries in Southeast Asia. Manufacturing of these components usually requires manual assembly processes; therefore outsourcing to lowcost regions is a common strategy. While outsourcing typically lowers the direct costs for the company, it creates a larger supply chain, thus more difficulty maintaining reliable relationships and communication across participants, and country borders. Differences in laws and regulations along with language barriers can jeopardise a companys ability to maintain quality control in a global supply chain. Quality product supply chains are difficult to maintain with inadequate product specifications, poor assumptions, and the pressure to maintain production and delivery

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Figure 3. Pareto chart of direct costs of Toyota recalls.

Consumer products recall

And / Or

Company initiated recall

And / Or

Government regulation

Company finds defect

Protect goodwill

Consumer complaint

Outbreak

Audit / inspection finding

Planned inspection Reliability / life testing Production testing Trend analysis Supplier feedback

Figure 4. Reasons for consumer products recall.

schedules at all costs. Potential for quality defects increases substantially for products that are subject to demand peaks. This results in a situation in which suppliers must produce a large amount of product that must be shipped in a relatively short amount of time. In the end, a quality assurance system may be so overloaded that it cannot check for defects among all of the units (Brandt 2008). Once a company becomes aware of a problem, management must assess the risk; including the nature of the potential defects, the level of risk to the health and safety of the

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Figure 5. Global value chain for consumer products.

consumers and the potential of the total product population affected by the defects. The following fault tree (Figure 6) illustrates typical failure modes that may result in a recall. Examining these failure modes early in the design phase and during pre-production may drive preventive action and countermeasures to reduce risk. Exploring these failure modes a level deeper and continuing to ask the question Why? is essential to identifying and isolating the true root cause. Further analysis of likely failure modes is necessary to establish the cause effect relationships. For multiple failure mode occurrences, the product recalls should be evaluated in aggregate to determine what the real causes of recalls are and then focus on those issues. Possible causes for different failure modes can be found by establishing separate causeeffect relationships for each failure mode similar to the one shown in Figure 7 for contamination.

3.6 Improve phase Six Sigma tools can help companies identify the source of a problem and more importantly help identify sources of variation before it turns into a problem. Once a company identifies potential failure points and sources of variation from the cause and effect diagram, a failure modes effect analysis (FMEA) can be performed to identify the highest priority issues and assign actions. Prioritisation of where to take action and assign resources is crucial for the toy industry where it is not cost effective to require 100% inspection at all levels of the supply chain. Having a risk assessment done beforehand is proactive, and should a recall occur the company is in a better position to react quickly and effectively, helping to minimise the negative reputation and financial impact (Wix and Mone 2007). Since the massive recalls of toys in 2007 for lead paint, several companies have made improvements to their processes. Mattel Inc. has taken action to audit and control sub-tier suppliers and end relationships with those that were unable to control quality. The retailer

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Consumer products failure modes resulting in a recall

Fire hazard

Contamination Mislabeling

Mishandling

Package defects

Explosion hazard

Defective components

Lead

Injury

Tainting Manufacturing Pressure Mixed lot Packaging Tampered Shipping Distribution Instructions Wrong/ missing ingredients Instructions Temperature storage Lack of warnings

Faulty elect.

Leaks

Fails out of box

Pinch Levels exceed allowable limit Choke

Spoilage

Flammable material

Chemical

Latent failure

Biological Intermittent failure

Asphyxiations suffocations

International Journal of Production Research

Combustible

Physical

Carbon monoxide Electrocution Laceration Burn

Figure 6. Fault tree illustrating the failure modes associated with consumer products recall. 247

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248

Method

Materials

Measurement

Policies

Process variation No Poka Yoke Record retention

Poor labeling

Infrequent quality checks

Shipping

Wrong materials used Statistical process control Work instructions

Expired Supplier quality Tracebility Spills Spoiled Raw materials contaminated Inspection sample plan Quality system

Packaging

Storing

Manufacturing

Human error Faulty-lack of TPM

Lack of temperature control

Cost cutting

Consumer products recall due to contamination

Lack of humidity control

S. Kumar and S. Schmitz

F oregetf ulness E rrors i n identifi cation errors

Lubricants leak

Willful

Distra c fatigue tion, , slown ess

Unders taffed Elimin a of train tion ing

Lack of pest control Poor hygiene

Not capable

Lack of air quality control Education on policies

Disabled auto protection

Lack of product recall thought

Lack of personal Protective Equipment (PPE) Poor communication

Malfunctions

Improper setup Lack of training

Culture that doesnt support continuous improvement

Environment

Machines

People

Management

Figure 7. Causes of consumer products recall due to contamination.

E limina quality tion of contro ls

Lowes t at any cost (suppli cost ers)

Cleaning between Batches

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Toys _ Us has increased its quality assurance budget by 25%. McDonalds, which uses Chinese suppliers for its promotional toys, has developed a system to monitor paint all the way through the supply chain back to the paint suppliers. The company requires its Chinese toy makers to agree to use only those suppliers (Supply Chain Digest 2007).

3.7 Control phase The control phase of Six Sigma is intended to create a plan that will ensure results will be sustained and lessons learned will be integrated into other processes. Due to cultural and legal disparities in a global supply chain, companies must also ensure such business documentation and procedures are well understood and validated by all stakeholders prior to being adapted in a coordinated supply chain operation.

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4. Lessons learned It is important to ensure that manufacturers are in a position to implement corrective measures as quickly and effectively as possible. Before a safety issue arises, companies should plan for a global product recall as a contingency. A product recall campaign typically is implemented quickly, and notification to the appropriate authorities is required when a significant safety issue becomes known (Wix and Mone 2007). Companies need to have quick access to product information to have efficient recalls. Examples include full details of the affected product, number of products involved, dates when affected products were manufactured, distributed, or sold to customers, and a description of the potential defect and possible injures that may be caused (Wix and Mone 2007). Speed is one of the keys to removing defective products effectively from the marketplace. The Toyota recall example amply demonstrates the implications of delayed company action. If a company delays or suggests a potential safety risk is isolated, it may be in breach of its duty to notify, and could be fined or exposed to criminal sanctions (Wix and Mone 2007). Companies need to understand the risk and be prepared to defend their decision whether or not to recall the product. The choice of communicating the product risk and the method used to communicate to its customers depends on the type of product, volume of products involved, location, and how the company sells the product to its end customers. In addition to selecting the most appropriate method of communicating with consumers, the company must also decide on the method for actually recalling, retrieving, and replacing the products. Also, if a notification to a government agency is required, it is important to ensure the notification satisfies the appropriate legal requirements (Wix and Mone 2007). Companies need to adopt a proactive approach for preventing recalls. Proactive activities may be grouped into four basic types of learning study, listen, test and track. These activities begin at product design and follow all the way through to customer feedback (Smith et al. 1996, Bapuji and Beamish 2008). Manufacturers may face a product recall at some point in time; therefore, ensuring an effective and tested product recall plan is in place before a product recall takes place is essential. Also, implementing an efficient plan when a recall occurs can minimise the

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effects a product recall can have on a companys profits, products brand name, and the companys goodwill and reputation with its customers.

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5. Managerial implications Companies within the consumer products industry, participating in the global supply chain need to improve their product recall processes. This can be achieved through the use of technology which will track parts throughout the entire global supply chain and more diligence with the analysis of failure modes that result in a product recall. Using the Six Sigma DMAIC approach to identify root causes of product failures and identify potential improvements that can be made, will ultimately reduce the number of recalls and the risk to consumers when a recall takes place. Companies need to rethink if cost is their ultimate goal when manufacturing consumer products by considering the quality that is provided to their parts and products when manufactured in low cost regions and look beyond direct material and labour costs when making outsourcing decisions. If goals compete, companies need to consider which is more important; cost and rapid business growth or quality design of their products that are not (or at least less) susceptible to failures.

6. Conclusions This study would be of interest to those within the consumer products industry. During the course of this study, cost implications of product recalls were analysed using the Toyota recall example and examples of major failure points in a consumer product supply chain were highlighted and broken down using fault tree, cause and effect diagram, and global value chain map. The fault tree showed that there are many failure modes such as contamination, mishandling and mislabelling, package defects, and defective components that might result in product recalls. This study further broke down the failure modes to understand the reasons for failures. The cause and effect diagram allowed details of possible causes that would lead to a product recall due to contamination. The global value chain map shows the complexity that takes place to produce consumer products. This study also highlighted ways to mitigate consumer risk in a product recall. Traceability is essential for quick containment and to minimise financial exposure. Effective traceability through complex supply chains should include components and subassemblies. Also, final products need to be traced to distributors and retailers so the affected product can be removed from the shelves. Overall, an effective supply chain uses traceability such as RFID to trace the raw material to the final product, as well as incorporating real time data. An effective supply chain also expects high quality products from their suppliers and takes an active approach in audits and inspections. Lastly, they have systems in place to detect defective product and hopefully remove these products before they reach the consumer.

7. Recommendations for future work It would be interesting to research the implications of the latest Toyota recall and how it may influence the auto industry as a whole, to enable companies such as Toyota, Ford,

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General Motors and others to focus on the quality of product design instead of focusing on rapid growth in market share and profits. In researching the topic of traceability within the consumer products supply chains, we found that while some pilot programs exist in the use of RFID, it was difficult to find any data regarding companies who have successfully implemented it. The cost of RFID tags represents a significant limiting factor. In effect, only products with high added value are currently able to absorb the impact of RFID cost; consequently, the application of RFID in the consumer products sector remains limited. Once RFID costs do reach a reasonable level, product traceability using RFID will be very attractive. Another hurdle to consider in implementing RFID is the disputes that are likely to arise among manufacturers, logistics providers, distributors, and retailers over how to share the costs. Finally, the use of RFID will require a change in culture, process, and technology within supply chains. Another area of future research is implementing the concept of effective, simplified and accelerated communication where we identify the key stakeholders in the supply chain and explicitly state their roles and responsibilities in the event of a recall. The consumer products industry, as a whole, has to recognise the importance of communication with the creation of the Product Recall Web Portal. Its design is to foster a forum for information sharing and tracking between producers and retailers in the event of a recall. The portal will act as a notification mechanism to those participating members at a reasonable price. One must recognise this is not an absolute solution. The information that goes into the notifications generated must be compiled in a timely manner in order to announce the pending recall. If the work behind the scenes is not done in a timely and efficient manner, the proposed portal will not be able to perform to its fullest potential.

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