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Product Recalls And Their Extensive Effect on Finances

Business FinanceNo business would continue to exist and make profits without stringent quality control. The main reason: expensive product recalls. Just ask Ford. Sixteen years ago, 6.5 million tires from Bridgestone/Firestone which were on Ford Explorers and Mercury Mountaineers were recalled. It’s due to tire failures that caused some 200 deaths and about 3,000 injuries.

The recall cost Ford $3 billion. About $600 million worth of lawsuits also burdened the company. It’s this reality that makes quality control processes like accelerated life tests critical. What follows is a deeper look at how extensive product recalls are in terms of financial damage.

Several Truths

The world’s consumer protection laws make companies suffer the brunt of product recalls. And rightfully so, since people pay good money for products and services. Lost sales, replacement costs, lawsuits, and legal sanctions are what comprises the majority of the financial effects.

How do these recalls happen? Lots of reasons exist. For instance, a product may not be defective on its own, but its packaging might be. This rings true for companies who work with others for packaging their products. Or it can happen as early as in the supply chain. Small, defective components can always cause much bigger problems down the line.

When people get harmed due to a defective product, issues grow further in complexity. The Ford recall incident is a great example: 200 deaths and thousands of injuries indicate that the product is dangerous. As per consumer laws, the distributor and/or manufacturer are held liable.

How Do Companies Recover?

Product recalls are not insurmountable. But they are tough to rebound from. Smaller companies are at greater risk of going bankrupt. The solution lies in fast action and the acknowledgment of responsibility for the losses. Companies have no choice here. They can either assume liability and cover all associated costs or lose face and stand to lose much more by doing nothing.

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It’s scary to think that even the smallest kink in business processes can spell a company’s downfall. But this is a fact of life. Businesses must simply be as human as possible in their dealings, especially in the face of such a crisis.

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