Managing product recalls - factors that influence recall restitution and time to recall

Abstract

A decision to recall products by firms can lead to negative consequences such as erosion of shareholder wealth and loss of customer goodwill. Further, the way a recall is managed can lead to more negative consequences than the recall decision itself. Therefore the manner in which firms manage such decisions can help mitigate these negative consequences. This thesis examines two such decisions: recall restitution and time to recall. A firm’s decisions on restitution offered to affected customers and time to recall may evoke conflicting reactions from shareholders and customers, where serving the interests of one stakeholder affects the interests of the other. While higher restitutions and faster recalls improve customer goodwill, they lead to erosion of shareholder wealth. This finding is used to hypothesize the influence of organizational characteristics (position of the firm in the value chain, firm’s internal operations, and firm’s recall experience), and key crisis factors (ambiguity and severity) on these decisions.

This thesis uses data on toy recalls issued in the U.S. from 1988 to 2011. The results show that firms tend to favor shareholders by offering lower restitutions to affected customers when they are situated farther from the customer in the supply chain, when they have more experience with recalls, when the crisis is severe, and when the cause of the crisis is ambiguous. When the recall is due to the internal operations of the firm, restitution offered to affected customers is lower only when the severity of the recall is high. Firms issue recalls quickly when the crisis is severe in order to reduce customer hazards and avoid negative publicity. Severe recalls, however, may be delayed when firms are experienced in recall management, and when such recalls are caused by the internal operations of the firm.

The findings of this thesis highlight one of the dilemmas that firms face in a crisis decision making situation and help foster an understanding of the conditions under which firms manage shareholder versus customer reactions in order to mitigate the negative consequences of recall management decisions.