Risk Management 101: Manufacturing and Distributing Products

By Kristi A. Davidson

Recently, I saw an announcement that made me chuckle: Candle Holder Recalled for Fire Hazard. Even I was a little surprised by that one.

Product recalls are one way to respond to a risk discovered after the product has already been sold to the end user. Better practice combines thoughtful deliberation and careful execution in the design, manufacturing and distribution chain before the product reaches the end user. This requires designers, manufacturers, distributors, retailers, suppliers and any other company involved in the chain of distribution to employ proactive strategies to reduce, eliminate or shift the risk of a defective product being sold to a consumer.

Products liability refers to the accountability any or all parties along the chain of manufacturing, distribution and sale have for damages caused by defective products. Products can be any kind of consumer good. In addition to pharmaceutical, automobile and other high-profile cases, you probably have heard of claims alleging defects in mattresses, miniblinds, electric kitchen appliances and protective coatings on furniture and carpets, just to name a few.

There are three types of defects: design defects, manufacturing defects and marketing/labeling defects. Design defects exist even before a product is made; the design itself makes the product unreasonably dangerous for the intended use. Manufacturing defects occur during the production/construction process. Typically, manufacturing defects affect a small percentage of all products similarly made. Marketing defects involve insufficient use instructions or inadequate warnings.

Those at any level in the distribution chain may be held liable for damages caused by a defective product—even if they exercised exceptional care. And when one plaintiff sues, more follow. There are even people (called “trolls”) who scour the markets looking to certify a class of affected consumers.

Manufacturers have the largest targets on their backs because they are often in the best position to identify and correct product defects. The manufacturing goal is to make reasonably safe products. This requires consideration of the following, among other things: Is there a reasonable safer alternative design? What is reasonable? What is cost-prohibitive? What is cost-inefficient? If the product design is reasonably safe, was the product manufactured as it was designed and without defect? How do you know? Are the components and materials used in the manufacturing process of good quality? Are effective quality-control mechanisms in place? Are products inspected before they leave the manufacturer, and are the results documented? Is the manufacturing process monitored and randomly audited for anomalies? If design cannot eliminate certain risks (and, let’s face it, few products are free of all risks) does the product packaging incorporate adequate warnings and instructions? Are there so many warnings that a consumer cannot be expected to heed them all?

Others in the distribution chain also face risk, particularly if they alter the product in any way or if they have demanded that the manufacturer make a product to their specifications. In all events, however, the distributor, retailer or other entity should inspect the product upon delivery and document the results of the inspection. If the distributor has not designed and does not damage or alter the product, then absent contractual provisions to the contrary, the distributor may demand that the manufacturer indemnify it against damages caused by a dangerous or defective product.

Nothing is risk free. But by carefully designing products and following thoughtful compliance programs during the manufacturing and distribution process, many risks can be reduced. Other risk management options will be discussed in future articles.

Kristi Davidson is a shareholder in the New York City office of Buchanan Ingersoll & Rooney. She can be reached at kristi.davidson@bipc.com.

Editor’s Note: The comments are those of the author and are not necessarily views shared by HFN or Macfadden Communications.