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UNSAFE FOR CHILDREN Mattels Toy Recalls and Supply Chain Management
Case Write Up

Calderon Ojeda, J. Umberto

GLOBAL MBA II Global Supply Chain Management

16/11/2009

UNSAFE FOR CHILDREN Mattels Toy Recalls and Supply Chain Management Executive Summary This case is about designing and managing supply chains. It is also about organizing global production: vertical integration versus outsourcing and about the accountability for recalls due to manufacturing and designing problems. Finally it shows us, that it cannot be recommended to outsource completely QC neither QA in a company products. The recall of an estimated 20 million Chinese-made toys by Mattel on August 14, 2007 shocked the world. Coming in the wake of reports about defective products made in China such as pet food, toothpaste, and tires, the latest recall generated severe reactions. The recalls were for excessive lead (15% of cases) and for magnets that could become loose. All of the recalled toys had been made in China. It teaches us about how a very simple process can lead to a tremendous disaster and can have severe consequences. It could be worst and more complicated if we project this to human use products or advanced manufacturing technology. In this case, supply chain defects, such as the use of lead paint by vendors, can have severe consequences. The supply chain must be designed and aware to prevent similar defects. Companies must take the most comprehensive care about the products that have their name on even they are not directly involved in the production process. It is also important the appropriate use of inspection and testing. Another main takeaway is the importance for companies to accept a problem when it appears, never hide or deny it, even though they think they are not accountable for it. The case also provides the opportunity to examine response to a crisis situation, and the relationship between companies and governments.

Study Questions Why do companies outsource? Companies outsource because they can find many advantages from using it. We can point them as:

No capital investment required (avoid over heading) Normally reduced the costs for the brand owner Expertise of seasoned processing professionals Let companies to focus on core competencies and high-value projects Variety of equipment let them to increase their product lines. Ability to change production quantities to meet market requirements Meet required industry standards when certified suppliers are addressed

The main disadvantages from using it could be mentioned as: No total control over production with possible quality failures if exhaustive control is not taken to prevent those defects. Could involve tradeoffs between price and quality Sharing industrial company secrets. Entail loss of control over timely supply. A very well structured contract is required Never use only one supplier Never use it for core main competences.

What were the primary causes of Mattels recall problems? Were these the result of outsourcing? The primary cause of the Mattels recall was the design of the toys (magnets that could become loose) and not a manufacturing problem (excessive lead in toys paint). Recalls was necessary because products were faulty (Mattel performed bad designs and manufacturers did not comply Mattels standards -and Mattel did not realize about that-). The distinction between design and manufacturing is important particularly in the context of the toy industry because the design of toys is performed by toy companies such as Mattel whereas

manufacturing is done by overseas manufacturers. Therefore, efforts to improve product safety and prevent recalls should be targeted at where the problem lies1. As far as I can see, the due to design problems recall could not be attributed in any way to the manufacturer as it only follows the indications of Mattel. About the manufacturing problems, in a first step Mattel tried to blame to Chinese manufacturers but at the end the company had to accept that they were also guilty because of not following an adequate control of the quality of the products outsourced. We cannot affirm in any way that the problems were caused because of outsourcing. In any case, it was because Mattel did lose the control over production and over quality failures as they did not take an exhaustive control to prevent those defects (mainly considering similar problems happened in past with Chinese contractors). Mattel's precautions to avoid problems were not sufficient to shield it from health hazards in the toys it made in China.

What actions were taken by the principals in the case to address the recall problems? Were these the right actions? Why, or why not? We create and produce some of the world's most beloved toys and brands for children, and we know that with this comes the responsibility to ensure quality and safety. We strive to sustain the trust of consumers by employing strict standards that extend from product design to manufacturing and through distribution.2 Mattel must weigh legal, ethical, and business considerations in determining how to best react. In my point of view, they react in a right way but too late. They try to blame their Chinese suppliers for the defects in order to accept they were also the problem. They must understand since the problem started that the best way to solve it was to accept the problem immediately and involve the Chinese suppliers, and the Chinese and USA authorities.

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Bapuji, 2008 www.mattel.com

The recalls led not only to a sharp reduction in Mattel's sales but also to public hearings in the US Congress and Chinese authorities, which significantly affected Mattel's reputation. They lost the possibility of take the leadership in order to solve a big old problem. A good example they must follow was how McDonalds corporation faced the Soya rain forest devastation problem.

What should Mattel do now? What should governments do? In spite, Mattel is the expert outsourcing from China, they needs to develop capabilities and systems to engage more directly and closely with China and other countries where they manufacture their products. They need to develop robust systems for quality control and testing of the toys manufactured at their suppliers factories. Unless they learn to manage these complexities, it is difficult to ensure product quality and safety. I think the difference between the country standards was one of the source of the problem. The U.S government must push to Chinese authorities (using international lobbies and public opinion if needed) to meet global standards on their products; they (CPSC) must work together with Chinese people (AQSIC) in developing new policies and laws that avoid similar problems in future. They must also encourage Chinese authorities to stop companies do not meet the needed levels to keep on exporting their products. They must be forced to watch that the Chinese authorities fulfill the stipulated points. The Chinese government and related industry groups need to keep on working in order to ensure that Chinese exporters can meet the American standards. The difference in standards is a main issue. They must be forced to watch that the Chinese companies fulfill the stipulated points. These measures will improve the commercial trade between both countries and will benefit the global consumer. Therefore, all those involved in the supply chain must make extra effort to ensure product quality and safety, but Mattel has to leader it. Adhering to importing country standards and

developing global standards are tasks which the governments, Mattel, industry associations, and consumers need to address.

How can accountability be better managed in long, global supply chains? It is important to point that is very difficult to handle the complexity of long, global supply chains. As we can saw in the case, the vendors normally subcontract other suppliers who might contract in addition with other suppliers for parts of materials. It is more complex if we talk about a country like China, with non strict government control over factories. In addition, is normal they subcontract with other overseas companies (Hong Kong, Singapore and others). Having this scenario, I think the company must have presence in the country where they contracted the outsourcing. One of the main problems for Mattel was that they have the right persons doing the wrong work. I feel they were a model of how to operate in China but they relaxed their controls (they were working in Hong Kong and not at the production facilities!). So companies cannot rely on their agents (or intermediaries) based in another place different of the contractor facility to ensure quality (in that case is very difficult to rely accountability only in supplier). They have many other policies but they did not check if their outsourcing companies fulfill them regularly. They have not either, (at least the case do not mention it) agreements about accountability for such recall cases due to manufacturing problems. In my opinion both the company and the vendor are accountable for the manufacturing problems while only Mattel is accountable for the designing problems. Accountability has been normally defined as a good contract and when got it, then we have only to monitor the vendor to fulfill it. Yes, of course, I think a good contract is important but now, accountability must be redefined and must be built through all the points in the supply chain. For instance measure compliance, common metrics (drives to common behaviors), mutual success and

holding customers accountable (f.e. not managing inadequate customer planning) are key factors to build an accountability open and clear relationship3. All those involved in the supply chain must be jointly accountable, so they must work together to ensure products quality and safety. The relationship between all of those companies must be planned as strategic, thinking in the long term run.

What did we learn? We must internalize the supply chain concept as a continuous and unique unit with many links, overall in global business. Only one weak link means a weak chain. Outsourcing is a manufacture strategy, a key point for new and mature companies but we must avoid considering it only as a short term transaction business, so it is very important to evaluate and choose the right partner to outsource. It is really important a proactive participation of the company -in situ- in the quality control process. Adhering to importing country standards and developing global standards is a task which the governments, corporations, industry associations, and consumers need to address. It is important to understand that, as the result of differences in the standards of exporting and importing countries, we can find unsuspected problems in our products if we relax our quality control systems. These could be avoided through legislation and education4. Supply chain cost cutting by itself do not provide any added value to the companies. It only serves to the company if it is joined with an optimization and transformation for the long term growth and profitability, reducing the risks about losing of control over quality and timely supply. All the participants must be jointly accountable, and the relationship between all the companies involved must be planned as strategic, thinking as mentioned, for the long term run. A good contract and mainly, carefully consideration to the CSR, quality, flexibility, planning, visibility, risk

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EYGM Limited, 2009 Bapuji, 2008

management and controls and accountability functions may provide sustainable performance improvement in the supply chain management. Problems never must be underestimated, deny or solved delay by companies, mainly if they are many other stakeholders involved.