Dive Brief:

• After failing to fix problems with its Galaxy Note 7, Samsung Electronics announced this week it would cease production of the device altogether, less than two months after the device's launch, various news outlets reported.
• The company had announced a recall of the device last month, blaming a battery supplier for incidents of the telephone spontaneously combusting, and installing software updates to the device to prevent the suspected cause. Yet, continued incidents forced the company to cease production altogether. 
• Investors punished Samsung with a $20 billion drop in shares, or an 8% decrease following the announcement, Reuters reports. The company also updated its quarterly guidance this morning, lowering its consolidated operating profit estimates by $2.3 billion. 

Dive Insight:

Recalls are costly both in the short-term and in the long-term, but the manner in which the failure was handled only aggravated the losses in sales and consumer loyalty for the company.

Samsung's original claim the problem was caused by a battery fault and subsequent recall was disappointing for investors, but the company's promise to correct the problem was well received. That is, until the issue continued revealing Samsung in fact had little clue about the problem, and had instead made a scapegoat of its supplier. 

Companies are known to do this, but at the end of the day the vendor is the one responsible for quality control of its components. As a result, when customers experience this "double deviation," they are likely to punish the company with more force.

"Most customers are okay with getting a lemon" as long as the problem is corrected, Jason Dea, director of product marketing at Intelex told Supply Chain Dive. But, when double deviation occurs, consumer loyalty may be hurt to a point of no return. 

"I probably went back and forth between AT&T's corporate and retail stores half a dozen times," early adopter John Blair said about attempting to exchange his Galaxy Note 7.

"By the time I'd get to corporate after being turned away from retail, Samsung had changed its policy, so it was back to retail," he told Supply Chain Dive. "They promised no waiting, and of course there was waiting. I was first in line, but even I had to wait because there was so little clarity on what exactly the stores were supposed to do. Frankly, for the most expensive cell phone available, they did a remarkably poor job of handling the recall. Which I went through twice, by the way."

The Note 7 debacle should stand as a warning of exactly what not to do in a similar situation.

First, it was a rush for just-in-time production to beat its competitors to the market with a new model. Then, it was double deviation in blaming its supplier without full clarity of the situation. As a result, the company has lost and projects to lose significant not just in sales, but in its operating profit due to reverse logistics costs.