www.capitalthinkingmagazine.com

PRINT PDF     SUBSCRIBE

HOW TO GET BACK ON TRACK

In this global marketplace, how can a consumer products
company protect consumers and keep its supply chain safe?

By Melanie Lasoff Levs
Illustration by Lorraine Tuson

Today’s consumer marketplace can seem fraught with dangers—lead paint in children’s toys; dangerous tires; toxins in catfish, juice, toothpaste and pet food. Deaths, injuries and property damage from consumer product incidents cost the nation more than $700 billion annually, the Consumer Product Safety Commission reports. The CPSC issued 320 recalls through the third quarter of fiscal 2007.

While the number of dangerous or shoddy products is actually quite small relative to the tens of thousands that reach the market each year, one negative story can be—and has been—enough to frighten consumers and impact business. And the potential source of risks for consumer products makers is growing. Thanks to globalization, more products and components are being manufactured and imported from overseas. Supply chains are longer than ever, and more companies are forging complex partnerships to maximize efficiency and remain competitive. Avoiding recalls and bad publicity can seem a daunting challenge for any consumer products company. Fortunately, there are a variety of ways to prevent these problems through proper planning and oversight.

PROBLEMS, PREVENTED

In the fall of 2006, some 37 brands of bagged spinach were found to contain E. coli bacteria that killed three and sickened more than 200 people in 25 states. The U.S. Food and Drug Administration eventually concluded that the epidemic could be traced to a single lettuce field. In September, 1 million cribs were recalled after three infant deaths were traced to design flaws.

And over five weeks this past summer, a major toy manufacturer recalled about 21 million toys over concerns about lead paint and tiny magnets that could be harmful if swallowed. (No injuries from the toys had been reported at the time of the recalls, though the magnets had caused injuries earlier.)

The spinach incident and the escalating number of recalls illustrate the dire need for companies to be take a proactive approach to safety, says Nick Simeonidis, a Patton Boggs partner in New York City.

“The mistake most companies will make is failing to address issues before they become critical, before the lawsuit is filed, before the front page article appears in The Wall Street Journal, before the attorney general issues an investigative demand,” he says.

This requires a variety of strategies, Simeonidis adds. Corporate responsibility programs demonstrate to the public how the company is being a good public citizen—for example, a beer company educates consumers not to drink and drive. Internal compliance is maintained through enforcement of codes of conduct and proper training of employees. Companies should have crisis management plans in place to anticipate any potential problems. And finally, companies should forge strong relationships with regulators such as state attorneys general.

“To the extent that the company can demonstrate it’s doing its part to help minimize any negative impact from its operations, that benefits the company and its shareholders for a long time,” Simeonidis says. “The public at large and regulators then will be more likely to think of the company as a good company.”

STRONGER SUPPLY CHAINS

Underlying much of the control issue that companies face in maintaining the quality of their products is the fact that, increasingly, they rely on overseas suppliers in countries where environmental or workplace standards are different than in the United States. That’s why, as Paul Rubin, a Patton Boggs partner in Washington, D.C., notes, it’s important that companies keep a close eye on their supply chains. “If you don’t audit and monitor your suppliers, you can find yourself confronting significant problems with regulators along with unnecessary product liability exposure,” Rubin says. “More than ever,
it’s imperative that companies audit suppliers, have contracts with appropriate provisions, and generally engage in efforts to ensure that the goods they receive are in compliance with U.S. laws. In the current environment, simply relying upon a Certificate of Analysis may no longer be sufficient.”

Many companies hire third-party auditors to conduct inspections, though larger companies often send their own personnel to inspect suppliers, Rubin explains. Inspectors check for documentation of compliance with U.S. laws, compliance with the FDA’s good manufacturing practices (GMPs) and evidence of product testing.

One way for a company to increase control over manufacturing is to own and operate its overseas factories. But even this does not insulate a company from problems.

After being accused of running sweatshops in Asia in the 1990s, for example, the aforementioned major toy manufacturer took ownership of Chinese factories producing core products and was considered a model in its attention to workplace condition and product safety.

But in September, the company acknowledged that the root of the massive summer recall was not in manufacturing problems but in product design flaws. And some of the recalled toys were produced at factories the manufacturer still does not own. In any case, owning your own factory “is very unrealistic in many situations,” Rubin says, “particularly for companies that sell hundreds or thousands of different products.”

A solid contract is also important for preventing supply-chain breakdowns. Such contracts should include assurance that the supplier has the financial resources and insurance to deal with a product problem as well as adequate internal compliance regimes. The contract should include appropriate regulatory provisions (such as an “FDA guarantee”) and indemnification provisions. Other provisions should clearly delineate which party is responsible for reporting to regulators, implementing recalls, and generally complying with legal and regulatory obligations in the United States. Some contracts also require suppliers to engage in specific testing regimens before shipping goods to the United States, Rubin says.

FOCUS ON THE FDA

The recent spate of recalls and food-related problems has led to increased scrutiny of government agencies charged with ensuring product safety. The FDA, for example, inspects less than 1 percent of
food imports, down from 8 percent in 1992, when imports were less common. A former associate commissioner of the FDA, William Hubbard, told a House subcommittee in July that the agency should at least double its food-safety personnel.

“The FDA’s import screening process was designed for an earlier era, and there is ample evidence that it is not adequate in today’s world,” Hubbard told the committee. “The changes wrought by a globalized economy are stark—and even alarming—in the context of the FDA’s responsibility to assure the safety of our food.”

Patton Boggs’ Rubin agrees that additional scrutiny at the border is necessary. But, he adds, American government agencies and companies should also be more proactive in ensuring that foreign suppliers are fully informed about U.S. safety and security procedures. “We don’t rely on the police exclusively to make sure people are good drivers—you have to go through training and get a driver’s license,” he explains. “You can’t fail to provide guidance and training and just rely on enforcement.”

FDA inspectors are expected to prioritize inspections, particularly of facilities located outside the United States. Rubin proposes mandating a triage system so that products more likely to pose risks—such as high-risk food or other ingestible items—get more scrutiny. Products from countries known to have lower product standards than the U.S. would also face stricter inspection.

Given the recent concerns about food safety, the FDA is likely to increase enforcement activities in the short term, says Chris Hagenbush, a partner at Patton Boggs and former senior counsel at the Coca-Cola Company. Companies that produce, store or sell food should be prepared for an FDA facility inspection at any time.

Hagenbush urges all such companies to adopt a process for managing inspections. Among other things, the process should identify who will be notified when an inspection occurs and which employees are trained and qualified to handle such inspections. These employees should know, for example, what circumstances would allow the FDA to inspect records and documents. “There is no room for improvisation during a factory inspection,” Hagenbush says. “You have to prepare long before it occurs.”

REGULATORS UNDER FIRE

The CPSC, which handles product recalls, has also faced criticism. Some in Congress have accused the agency of acting too slowly in the crib recall. Meanwhile, the agency’s full-time staff has shrunk to half its 1980 size. One commissioner, Thomas Moore, has charged that the agency is being starved through underfunding. In a press statement released in July, he said many at the agency “are looking for other jobs because they have no confidence the agency will exist (or will exist in any meaningful form) for many more years.”

This year the agency endured a vacancy on its three-member commission for more than six months, which crippled its ability to make rules about product standards and to mandate recalls. Nonetheless, CPSC spokeswoman Julie Vallese says that the agency is continuing its enforcement and compliance efforts.

Manufacturers, distributors, importers and retailers are required by federal law to report to the CPSC any potential hazards from a product within 24 hours. Most companies heed that law and voluntarily issue a recall, says CPSC spokeswoman Patty Davis. “The vast majority of businesses are, in fact, responsible. They sell quality products, and they want to keep consumers safe and build a loyal
customer base,” Davis says. “More businesses today are understanding that it’s good business to keep consumers safe.”

Even the most well-intended companies, however, may be tempted to blame suppliers or regulators when things go wrong. But it is the company that puts its name on the box that is also putting itself on the line when it sells a faulty product. That’s why companies must be willing to shoulder the time, the expense and the commitment that is required in order to secure the supply chain and establish procedures to handle worst-case scenarios, Hagenbush says.

“In the short term, you’re at a competitive disadvantage with companies that don’t take care of these issues,” he says. “But in the long term, you’ll win, because those companies don’t have a long term.” CT

 - top of page -

Home    |   COVER STORY  |  FEATURE STORY  |   Privacy Policy    |    Feedback    |    Subscribe    |    Back Issues   

Copyright ©2007 Patton Boggs LLP   All rights reserved.  Capital Thinking Magazine