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Case Study May 28, 2020

Contract manufacturer catastrophe

Contract manufacturer uses wrong material and causes huge product recall

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An eco-friendly start-up* was formed back in 2017 by two friends looking to help save the planet. The start-up specialised in bio-degradable cups and straws, designed by the founders, and manufactured by a third-party and distributed.

Originally the start-up sold through local retail stores and via online platforms, however during the last couple of years public sentiment towards plastic use has resulted in large restaurant chains opting to use bio-degradable cups and straws in their restaurants. As such, business is now booming, and the acquisition of a new contract with a large fast food chain has doubled their annual turnover to $30m, with latest annual profits in the region of $1.5m.

Recently, the start-up was notified of multiple incidents from the fast food chain involving their cups. Reportedly, when the cups were filled with hot liquids they began to leak, and in many cases, this resulted in the bottom of the cup falling through. After thoroughly checking the designs and finding no faults, further analysis on some of the returned cups evidenced a faulty join between the base and the walls of the cups. 

The fast food chain stopped using the cups across all their restaurants and removed them from stock and cancelled all future orders to prevent further customer injury. This contract represented 50% of the start-up’s annual sales, and the cancellation was a significant blow to the forecasted growth of the company, with $5m worth of orders no longer in place. 

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The start-up’s contract manufacturer used a batch coding system allowing forward and backward traceability and were able to ascertain the total amount of faulty batches which were valued at $1.8m. The manufacturer halted production and the start-up appointed a crisis consultant to confirm the root cause of the fault and conduct an investigation which was charged at $15k. It was discovered that the glue sourced by the co-manufacturer, which was used to seal the base of the cup, was not the specified quality and resulted in it failing. It took a further 5 days to source a new glue supplier, with re-manufacturing costs amounting to $1m. The start-up also sought legal advice as the fast food chain began to press them for additional costs which they claimed they were contractually owed, costing $15k in total.The total cost of the recall incident was nearly $8m and there was significant reputational damage and contractual fallout with the fast food chain.

The start-up had CFC’s product recall insurance, which covered the fees for the crisis consultant, investigation, and legal advice. The insurance policy also meant there was minimal business interruption and offered a public relations consultant to smooth over any negative publicity and rectify consumer and supplier trust. CFC’s product recall policy also offers protection against contract manufacturing errors. Without comprehensive cover in the place the start-up would have unlikely
been able to continue operating.

*The companies and circumstances in this case study are fictional, but the scenarios are realistic and reasonable based on our experience

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