Product Recalls, Product Quality and Outsourcing

Do Firms Learn From Product Recalls? Insights from the automobile industry

The impetus for this stream of research was massive recall by Toyota in 2009 following NHTSA's safety investigation for its stick pedal problems (click here). The first paper in this area sought to examine if there was a silver lining to recalls and whether firms improved reliability following significant recalls. Surprisingly, this research revealed that firms that pursued a strategy of using common parts across models and lower tier brands are more likely to improve quality after recalls. This research was covered in several leading mass media publications (see here ).

 

The full text of this paper is here

 

 

 

 

Buyer-Supplier Networks and Modular Product Designs in the Automotive Industry

The automobile industry is a significant cog in the U.S. economy. Given the prominence of this industry, there is speculation often about why there are quality lapses in this industry. It turns out that the quality woes have multiplied after the automobile industry has pursued modularization and vertical disintegration of product development. While modularity as a strategy has worked well in the computer industry, the automobile industry appears to be far more complex. The benefit of modularity is that it offers a form of embedded coordination that reduces the need for product designers to exchange information.

 

Our research (published in Customer Needs and Solutions) seeks to understand whether the degree of interdependence in buyer-supplier networks is lower for modular systems compared to integral systems. We construct social networks to infer the degree of dependence between buyers and suppliers and a design structure matrix (DSM) to capture dependencies between various automobile systems. Our findings suggest that for achieving higher quality in modular systems, buyer-supplier dependencies need to be stronger rather than weaker. The greater incidence of product recalls in the marketplace for modular systems is in part because of the misplaced idea that modular systems do not require coordination or information sharing.    

 

The research paper is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2618096. This paper has been selected as the best paper in the OM division of the Academy of Management.

Outsourcing new product development in the automobile industry

 

Does outsourcing product development compromise product quality? The business press is awash with sentiment about the perils of NPD outsourcing and how it weakens the competitive position of the firm. Following the high-profile recall of Toyota in 2009, concerns resurfaced that outsourcing may be responsible for Toyota’s quality woes.

 

It is believed that the safety recall for faulty gas pedals is the result of quality problems associated with the extreme and expanding practice of outsourcing common in the automobile industry. Toyota has been outsourcing accelerator pedals and its assembly to CTS Corp for a long time. 

 

Similarly, the toy recall in 2007 involving 1.5 million Thomas & Friends trains and rail components — about 4 percent of all those sold in the United States over the last two years by RC2 Corporation of Oak Brook, Ill raised questions about the practice of outsourcing. The toys were coated at a factory in China with lead paint, which can damage brain cells, especially in children. Sets of toy drums and a toy bear were also recalled because of lead paint, and an infant wrist rattle was recalled because of a choking hazard. Over all, the number of products made in China that are being recalled in the United States by the federal Consumer Product Safety Commission has doubled.

 

Our recent research (in the Journal of Marketing) examines the relationship between outsourcing of NPD and product quality using data on vehicle transmission choices of car makers in the North American automobile industry. The results paint a nuanced picture of the product quality impact of NPD buy choices. Interestingly, we find that NPD capability is a valuable resource for improving product quality of both NPD make and buy choices. Although firms tend to vertically integrate in domains in which they possess superior NPD capabilities, firms also outsource in domains in which they have adequate capabilities. We find that NPD capability is a valuable governance resource in outsourced NPD environments and a learning resource for vertically integrated NPD. We find that NPD capability improves immediate product quality for NPD buy and future product quality for NPD make. The implication is that NPD outsourcing and NPD capabilities are complements rather than substitutes. Firms outsourcing without baseline NPD capabilities will be unable to mitigate the risks stemming from NPD outsourcing.

 

The full text of the paper is here

Does Recalling Your Product Early vs Late Matter?

Toyota was fined $20 million for delaying a product recall involving a defective floormat. The U.S. Department of Justice fined GM $900 million for willfully delaying the recall for a faulty ignition switch and defrauding customers. GM has asked U.S. safety regulators to a delay a recall of 980,000 trucks with Takata air bag inflators to allow it to demonstrate the vehicles are safe and avoid a hit to profits.

 

In November 2017, The U.S. government denied requests from Ford and Mazda for more time to test potentially dangerous Takata air bag inflators as the companies try to avoid massive recalls. Both automakers petitioned safety regulators to escape recalls, which involve about 3 million vehicles made by Ford and 6,000 by Mazda.

 

In December 2017, government investigators from the Office of Inspector General (OIG) for the Department of Health and Human Services looked at 30 voluntary food recalls reported to the FDA between October 2012 and May 2015. They found that the "FDA could not always ensure that firms initiated [food] recalls promptly." For example, in a salmonella outbreak in 2014 linked to nut butter, investigators found it took 165 days from the date the problem product was identified to the date of the firm's voluntary recall. There were 14 illnesses in 11 states. During a listeria outbreak later that same year linked to cheese products, auditors determined, a series of recalls took 81 days to complete. At least nine people became ill, including an infant who died and two pregnant women lost their fetuses.

 

Our research (published in the Journal of Marketing) examines why firms recall later than others after a product recall investigation is opened. We find that a brand's structural position plays a critical role in influencing the time taken by firms to recall when faced with serious problems. Further, we find that on average, time to recall is penalized by stock markets because of the possibility that firms are not committed to protecting consumer safety.  The penalties exacted by stock markets are severe when firms delay recalls especially when there are accidents and injuries associated with a safety investigation.

 

 

The full text of the paper is here

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