Say "product recall" now, and the first thing that comes to mind is probably peanuts. Since an initial announcement on Jan. 13 that some shipments from the Peanut Corporation of America were contaminated with salmonella, wave after wave of recalls have been announced for more than 2,800 foods that contain peanuts as an ingredient. Yet even as peanuts were center stage, in mid February the Toy Industry Assn. (TIA) announced the launch of a Toy Safety Certification Program—a direct response to a series of high-profile recalls of lead-contaminated products in 2007.
The toy industry program aims to document oversight of product safety through every step in the supply chain. The response is typical of what happens in most industries, says Philippe Tesler, co-founder of Enablon, a company that develops software for businesses to monitor "corporate social responsibility," such as environmental or labor practices. "There's one crisis that makes companies realize they are at risk and makes regulators focus," he says. It happened in the financial area after the frauds at Enron and WorldCom, and it's happening in the food industry in the wake of tainted milk in China and the peanut contamination in the U.S. The TIA retained Enablon last September to develop the technology for its safety certification program.
Product safety is a problem companies struggle with on a regular basis. A visit to the Web site of the U.S. Consumer Product Safety Commission reveals that every month companies recall everything from meat to medicine and cars to cosmetics. The costs can be enormous. Peanut Corp., based in Lynchberg, Va., has been driven into bankruptcy since health officials linked tainted peanuts to more than 600 illnesses and nine deaths. Mattel (MAT) said the first of several toy recalls it announced in 2007 cut its quarterly operating income by $30 million. Earlier this decade, Ford Motor (F) spent roughly $3 billion replacing 10.6 million potentially defective Firestone (BGTG) tires.
Avoiding Legal Headaches
Recall costs are only part of the trouble. Tainted or faulty products frequently spur lawsuits and government investigations. And when the problems generate headlines, companies must quickly formulate a public relations strategy, often in a crisis atmosphere.
Despite all this, Arvin Maskin, an attorney who specializes in product liability, says "many companies are not taking product risk seriously." While Maskin, a partner at Weil, Gotshal & Manges in New York, regularly defends companies in lawsuits involving allegedly defective products, he says that manufacturers could often avoid such legal headaches if they would conduct product risk assessments before problems arise. To do that effectively, he argues, companies must create "a culture of risk avoidance."
The toy industry program represents one such effort. To be sure, toy sellers had a particular impetus to act. In 2008, Congress passed the Consumer Product Safety Improvement Act (CPSIA), which strengthened toy safety standards and mandated third-party testing and certification of compliance. Various requirements of the act are being phased in during 2009. The TIA's Toy Safety Certification Program is designed to let companies demonstrate compliance with the new law. It will also earn them a TIA stamp of approval to place on their products. Applicants to the program will have to conduct risk assessments of toy design, make sure manufacturing is monitored, and have products sample-tested by an accredited laboratory. These steps must then be verified by accredited certification bodies, which have yet to be named.
A centerpiece of the TIA program is a Web-based platform, developed by Paris-based Enablon, that will allow manufacturers, distributors, retailers, and regulators to document and review CPSIA compliance. To use the system, companies will pay a fee to the not-for-profit TIA. By banding together through industry associations, says Enablon's Tesler, companies can share the cost of making information available to the public.
"It becomes a much more manageable process," he says. Elizabeth Borrelli, executive director of the TIA certification program says TIA chose Enablon because of its prior experience in the area. Tesler, who heads business development for Enablon, says the company got its start providing companies with corporate social responsibility software, which tracks practices along a business' entire supply chain. Product safety is a readily incorporated component of such an analysis, Tesler says. Enablon's customers include shoemaker Timberland (TBL), tech giant Texas Instruments (TXN), and food company Group Danone (GDNNY).
As the TIA explored developing its technology platform for product safety, it consulted officials in the food, apparel, and other industries, says Borrelli. "Now," she says, "a lot of those industries are coming to us."