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The Berlin based on-line fashion retailer Zalando initiated a product recall action on the afternoon of Friday 4th April 2014 involving several brands of shoes due to contamination with Chromium 6 (Hexavalent Chromium known to cause chronic allergies through skin contact and described by the US Environmental Protection Agency as “a known human carcinogen when inhaled and has been shown to cause tumours in mice and rats when ingested in drinking water”).
Zalando is a successful on-line retailer which was formed in Germany in 2008. It initially focused on selling shoes but quickly expanded to include a broad range of clothing articles. Although its head office remains in Berlin it now also operates outside of Germany in Austria, Switzerland, France, Belgium, the Netherlands, Italy, Spain, Poland, Sweden, Denmark, Finland, Norway and the UK. In 2013 its turnover increased by over 50% to 1.8 billion euro over half of which was from its business outside of Germany. The company has over 5000 German employees and increased its number of active customers in 2013 from 9 to 13 million (Figures taken from a German report in the Handelsblatt: 29th March 2014).
On the 5th April 2014 the German Business Magazine Wirtschafts Woche reported that shoes from Zalando had been the subject of an official investigation by the Berlin-Brandenburg State Laboratory. Samples were found to contain unacceptably high levels of hexavalent chromium (Chromium 6) – in some cases these were 13 times over the maximum permitted limits.
The magazine reported that Zalondo’s in-house brands “Zign“, “Pier One“, “Taupage” and the “Zalando Collection” were involved. These were produced by manufacturers in Italy, Spain and Taiwan. The responsible veterinary and foodstuffs office in Teltow-Fläming had already instructed Zalando in writing on March 24th that the items concerned should not be sold. It was estimated in the business magazine that the company had already sold about 1500 pairs of these shoes. These where the subject of the product recall action by the company.
The samples for the official investigation were taken from a Zalando outlet in Berlin half a year ago. Normally when samples are taken for official investigations the retailers/ manufacturers involved immediately arrange for private testing to be done in parallel in order to swiftly identify any issues, take action and inform customers as appropriate. This is good practice because the results from the official analysis can take some time to be formally reported.
However, it would appear that the staff in the Zalando Berlin outlet and those involved with storage and logistics failed to inform the Berlin central office about the investigation. As a result the company did not carry out its own internal investigation and take appropriate action to mitigate customer hardship.
Product Quality Failures Can Be Symptomatic Of Poor Risk Management
All of the shoes involved in this recall were from Zalando’s own in-house brands. Retailers like to introduce their own brands because this gives them access to a greater proportion of the profits compared to simply selling other people’s branded products. Branded product manufacturers’ higher prices are justified, in part, by the rigorous and comprehensive quality assurance processes needed to control their products throughout the supply chain. This starts with the raw materials used in manufacture, and includes the processes, staff and employment conditions used in production, logistics, storage and sales.
It is normal business practice to reduce costs in the supply chain to either keep more of the sales price for the supplier or for passing onto the consumer in return for increased market share. Considerable judgement is needed to ensure the appropriate balance between cutting costs through increased efficiency and cutting cost through excessive reductions in product or service quality. Here good risk management and robust quality assurance processes play a key roll.
This is not the first time that the company has been the subject of controversy in the press. In July 2012 a German TV Report for the programme ZDF-Zoom used a hidden camera to investigate conditions in the storage operations used by Zalando in Germany.
ZDF quoted an expert who described some of the conditions in the facilities as ‘in-humane‘ (“Zum Teil nicht menschenwürdig“).
The TV company sent one of their staff to enrol with a service company providing contract staff to the Zalando storage facility in Großbeeren near Berlin. This reporter was then able to enter the facility and interview some of the staff. Due to the low salary levels most of the workers drove in every day from Poland – a 200 km round trip.
The undercover reporter described that workers in the storage facility had to work a 7.5 hour shift without being allowed to sit (“Sitzen ist verboten“) and several hundred workers had to share a single container toilet in the middle of the storage hall which was in a very ‘unsanitary’ condition (“verschmutzt“). This site was operated on behalf of Zalando by a Dutch service-provider Company.
Taking these stories together an external observer might start to get a picture of the culture within this on-line retailer. The company needs to pay close attention to the risks arising from its choice of, and control over, service providers and suppliers. Key risk control processes appear to have been disregarded (like not reporting to the centre when the authorities carry out a formal investigation).
Poor risk management can quickly impact the profitability and value of a company. The problems described above could not have come at a worse time for Zalando – the company is in the process of reorganising its European corporate structure and there are reports that they are considering a public share issue. Clearly bad publicity and any loss of customer confidence could impact the potential value of a company if it does decide to go public. A demonstrably effective, robust, and comprehensive risk management system may be just what is needed to help to restore the confidence of potential investors.
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