Global Operations and Logistics, Group Assignment 10/12/13

By Carolina Carvalho, Denis Solovev, Joo Pinto, Lus Calado, Ricardo S & Sani Sarendo

UNSAFE FOR CHILDREN: MATTELS TOY RECALLS AND SUPPLY CHAIN MANAGEMENT CASE STUDY
"We apologize to everyone affected by this recall, especially those who bought the toys in question. We realize that parents trust us with what is most precious to themtheir children. And we also recognize that trust is earned. Robert Eckert, CEO of Mattel.

Company Origins
Mattel was formed in 1945. Its founders were Ruth and Elliott Handler and Harold Matt Matson. The company started out in wood products and soon branched out into toys. Their very first toy was dollhouse furniture created from wood scraps left over from frame making. The Handlers bought out Matson long before Barbie was createdi. The Handlers were brilliant marketers, and used television advertising on children's television shows to expertly market Barbie and a host of their other products directly to children. Barbie's popularity declined at the end of the 1960s, and so did Mattels fortunes and Mattel nearly go bankrupt. Through constant re-invention of Barbie and the rising popularity of lines including Hot Wheels, the company thrives todayii.

Case Study
Between 2006 and 2007, Mattel made a series of product recalls, totaling almost 20 millions of toys. The recalls were for excessive lead paint and for magnets that could become
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loose and be ingested by children. All of the recalled toys had been made in China. The Mattel recalls followed on the heels of a number of high profile safety problems with Chinese imports, including contaminated pet food and toothpaste, defective tires, and lead-painted toys as well as country governments and reputation issues. The recalls sparked intense criticism of Mattel and its Chinese supply chain, despite the fact that more than 85% of the recalled toys were due to design problems, not the result of improper manufacturing.

In this case, we aim to analyze outsourcing issues in the SCM. The basic toy manufacturing process is fairly simple, providing a forum for discussing these issues without the complication of advanced manufacturing technology or an involved supply chain. In this case, supply chain defects, such as the use of lead paint by vendors, had severe consequences. Our group has considered Viswanadhams approachiii to Mattels SCM. See below Mattels ecosystem and relationships with the delivery service infrastructure, institutions, resources and service chain. Its most important to the case how Mattel was subject to Chinese and US government, quality standards and affected by big retailers. Its also critical to consider in detail the raw materials provenience. As for Mattels service chain, it is divided in Design and Prototyping, Manufacturing, Quality Control and Distribution and Retail.

Problems
Outsourcing, why? Todays economy offers companies a chance to increase profits through strategic outsourcing of certain supply chain management processes. As per Mohammed Abdur Razzaqueiv, outsourcing of logistics functions can have major consequences for a companys customer relationships. This is the case for Mattel. The full benefits of outsourcing is manifested in partnerships and these partnerships require commitment of third parties on a continuing longterm basis. Scholars have recognized the importance of such relationships in making outsourcing decisions. However, the transition from transactional purchasing arrangements to something approaching true partnerships in a third-party logistics relationship proves more an ideal than a reality. For Mattel, outsourcing didnt work mainly because during the process it lacked a formal
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system for measuring the partners performance and there was no feedback system in place, i.e., a two way communication system was not implemented between Mattel and the suppliers.

Managing a supply chain

Managing a supply chain that is built to be both cost-effective and quality-driven can be relentlessly unfair to all of the involved. In the case of Mattel, many variables are applicable. In strictu sensu, costs are the main variable of the equation hence the need to establish a cost driven supply chain with a second variable that is the quality control. Mattel had a very linear supply chain:

Two types of products. Production. Inspection of the materials. Inspection of the production. Control of the manpower conditions of work in the Chinese vendors.

Recalling

As stated in the case study, Mattel did not initiate the recall of products, having been anticipated in 2007 by other companies selling toys, toothpastes, tires, etc. However, despite all the problems Mattel had in controlling the final product quality, the toys subject to the recall were not recalled only because of a manufacturing problem. In fact, only about 15% of the Mattel recall was due to Chinese manufacturing problems connected to lead paint; the other 85% of the recalled toys were subject to such due to a design fault. As we know, the design was not of Chinese origin. The design issues were due to the use of small and powerful magnets, not traditionally used in toys that could easily become dislodged and be swallowed by children. If the child would ingest both magnets they could obstruct the intestinal folds causing serious injuries to her or even death.

Theoretical Framework of Supply Chain Quality Management

Concept

To analyze and solve the problems mentioned before, our group has considered Gyaneshwar Singh Kushwaha and Deepak Barmans theoretical frameworkv. With this in mind, we analyzed the supply chain management (SQM) and quality management (QM) processes separately and together. Based on both, they defined the concept of supply chain quality management (SCQM) which we will consider. Heres how the concept is defined: Supply chain quality management is a set of approaches utilized to efficiently and responsively integrate all channel partners through applying quality management practices across the whole supply chain, in order to enhance trust between channel partners and deliver maximum value to customers.

To evaluate the competitive advantage of Mattel, we will check the price/cost, quality, delivery dependability, product innovation and time to market. On the other hand, organizational performance will be evaluated based on marketing, operational and financials. If we look individually at the SCM construct, we will consider the strategic supplier partnership, customer relationship, level of information sharing, quality of information sharing, postponement and internal lean practices.

In terms of strategic supplier partnership, Mattel has committed considerable resources to advise and assist its vendors in order to improve their level of compliance. Still, Mattel understands the difficult competitive manufacturing and procurement environment in China and recognizes the challenges that lie ahead in bringing all vendors into full compliance. This means Mattel is willing to work with suppliers on the long-term to design and implement a plan of action to correct any deficienciesvi.

Relevance The importance of quality management is well recognized. Regarding Mattels case, the problem started with materials quality, inspection and testing failures. When faced with the challenges of cost reduction, competition and retailers pressure, they failed to escalate the supply chain process and improve their performance and competitive advantage. The main purpose of developing the SCQM is to provide Mattel with a powerful insight regarding the different categories and divisions of its supply chain. We believe that the use of this concept would enable
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Mattel to understand their competitive advantage and organizational performance better and avoid this from happening again. Customer Relationship is very important in Mattels practices because it allows them to manage the complaints during the recalls period, build long-term relationships with customers and improve customer satisfaction. Successful customer relationships will increase retention. When faced with the issue regarding the lead paint and loose magnets, Mattel stopped the production and communicated it immediately through his CEO, apologized, tried to support and manage the recalls the best way possible with short-notice.

Mattel had various suppliers and very strict policies regarding the subcontractors their suppliers could make business with. If they had a higher level of information and quality of information sharing between each other, strategic to tactical in nature and from information about logistics activities to general market and customer information, perhaps the quality issue with certain suppliers could have been avoided. Furthermore, supply chain partners who exchange information regularly are able to work as a single entity. By working together, they are able to understand the customer needs better and so, improve their market response.

Regarding the QM practices, the seven constructs used by the authors are: top management leadership, supplier quality management, process management, customer focus, quality data & reporting, product and service design, employee training and human relation. Just like the authors argue, SCQM possesses greater potential than simply SCM or QM in isolation in improving the performance and competitive advantage of Mattel.

Supply Chain Risk Management

Managing risk to avoid supply chain breakdown

Supply chain breakdowns and the associated risk are primary topics in theoretical research, as well as in practice, since risk in the context of supply chains may be associated with the production and procurement processes, the transportation and shipment of the goods, plus the
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demand markets. Supply chain breakdowns and the associated operational and financial risks are the most pressing issue faced by firms in todays competing global environmentvii. The goal of supply chain risk management is to reduce the consequences of breakdowns and risks. By understanding the variety and interrelation of supply chain risks, managers can adapt balanced, effective risk-mitigation strategies that neutralize possibly negative effects for their companiesviii.

Risk may have unfortunate consequences like financial consequences, negative health and safety impacts, and companies reputation damage. The sources of risk in supply chain can be environmental, network related, which arise from interactions between organizations involved in the supply chain and organizational. Risk mitigating strategies on the other hand are those vital moves that organizations purposely undertake to mitigate the uncertainties identified from the various risk sourcesix.

In order to decrease the unavoidable costs in case of a crisis situation and to minimize the effect on the brand, companies should plan ahead in a dual logic, first and above to take all necessary steps to lower risk in the supply chain, and second, to have contingency plans in case of a break down in the supply chain. This should be performed with the purpose of:

Safekeeping the clients from bodily harm and property damage. To take the products from stock, manufacturing sites, wholesale and retailers. To abide with all applicable legislations and industry rules. To defend the company stockholders.

To achieve these objectives, one should manage the risk in the supply chain following a set of key principlesx: Calmness and self-control, Crisis Planning, Due Diligence and Control Measures, Product Traceability, Liability and Answerability, Defect Detecting, Swift and Adequate Response, Crisis Team & Reach Out and Connect. In this case, it is our belief that Mattel, in spite of being a company with a long standing tradition in toy manufacturing, with the highest concern for client satisfaction and safety, has failed to follow in an extensive and adequate way, the principles above stated. The major flaws can be detected in the areas of Defect Detection, Product Traceability, Control Measures and Communication policy.
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Solutions
Outsourcing and excessive levels of subcontracting It helps lower the firms breakeven point and improve its return on investment by reducing fixed investment in in-house manufacturing facilities, thus making the company less susceptible to recessionary sales declines. There is an optimal level of outsourcing for all companies, however it differs from on firm to another and overtime. As a result of the initial advantages of outsourcing companies tend to overdo it. As increased outsourcing demands more managerial attention and sometimes constrains managerial resources, it may lead to inadequate oversight of the outsourcing activities. Managers have direct involvement in outsourcing decisions and integrate information between the different functions of the companyxi.

For Mattel, the multilayers subcontracting practice has been considered as one of the major reasons for poor safety performance. The subcontractors often lack safety commitments because of limited budget, time and human resources. Subcontractors quality and performance are difficult to control; they give an enormous amount of value to their own culture, structure, and management style and business strategies. If the standards would be listed in subcontract documents, companies would be able to assure quality and performance. As well as if a strategy of restricting the subcontracting practice was adopted, the companies would have an effective and reliable method of controlling if work was being sublet. Companies should strengthen the control of subcontractors keeping special regard for caution when it comes to the lowest bidder.

Recall System

Once a product is in widespread use, unforeseen problems can sometimes lead to a recall. When a product is either defective or potentially harmful, recalling that product removing it from the market or correcting the problem is the most effective means for protecting the public. Most of countries have special organization to monitor products and goods quality and their compliance with local law regulations. For example, US Food and Drug administration.

According to Consumer Reports Newsxii, all the recalls were voluntary. However, voluntary recall is just government-speak for a deal that a manufacturer or retailer of a hazardous product has negotiated with the federal agency in charge of overseeing the safety of that product category. Voluntary recall would also seem to indicate that there are mandatory recalls that can be issued by the government should manufacturers or retailers refuse to cooperate. As reported by US Consumer Product Safety Commissionxiii in research dated April 2013, in 2012 number of products recalled in US is 5095.

While the process behind a recall can vary depending on local laws, there are some general steps that occur. For example, if a pet food manufacturer releases a batch of product that may poison animals, the company will publicly announce the dangers of the food and request that its customers return the product to the firm, or simply discard it. Customers will usually be given a full refund or replacement. A public relations campaign is often created to handle the publicity surrounding the event. Its known that recalls may negatively affect a company's stockxiv. Concerns grow over the company's capabilities when a dangerous product is released, and customers may turn away from purchasing its goods, leading to a decrease in sales. No company likes to recall one of its products. Still, when a safety problem makes a product recall necessary to prevent injuries and save lives, it benefits everyone to move quickly and effectively. With accordance to Recall Handbookxv a product recall usually involves the following steps, which may differ according to local laws:

Maker or dealer notifies the authorities responsible of their intention to recall a product. In some cases the government can also request a recall of a product. Consumer hotlines or other communication channels are established. The scope of the recall, that is, which serial numbers or batch numbers etc. are recalled, is often specified.

Product recall announcements are released on the respective government agency's website (if applicable), as well as in paid notices in the metropolitan daily newspapers. In some

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circumstances, heightened publicity will also result in news television reports advising of the recall. When a consumer group learns of a recall it will also notify the public by various means. Typically, the consumer is advised to return the goods, regardless of condition, to the seller for a full refund or modification (possible consumer compensation too).

Mattel Recall

As discussed before, from March 2006 to October 2007, Mattel recalled million Chinesemade toys in the U.S. and Canada alone, for the same two serious problems. Moreover, some were recalled in foreign markets as well. These two problems were indeed significant in that there were legal, health, trust, reputation and certainly financial implications not only for Mattel, but also for its distributors, retailers, Chinese suppliers, government and finally the families around the world buying and playing with Mattel toys. Over two million of the recalled toys had either been sprayed with high lead-content paint or contained potentially hazardous levels of lead within the materials, while the remaining toys contained small harmful powerful magnets.

Following the third quarter 2007 recalls, Mattel slowed down the shipments coming out of Asia to conduct product testing and safety reviews. Similarly, Mattels shipments of finished products to global markets were curtailed while various regulatory authorities reviewed Mattels safety procedures. Ultimately, Mattel was able to prevent more than two-thirds of the recalled toys from reaching consumers by contacting and warning distribution centers and retailersxvi.

On September 5, 2007, Mattel representatives told an American congressional committee that the problem with toys containing small loose magnets was the result of Mattels own flawed toy designs, and not due to any lack of adherence to manufacturing requirements in China. Following the apology of Mattels Mr. Debrowski on September 21 in Beijing, Mr. Li, the Chinese quality official, told reporters that the Chinese government had shut down operations and revoked the business license of Lee Der Industrial, one of the subcontractors producing the lead-tainted Mattel toys. With regard to the unsafe magnet problem, Mattel made several manufacturing changes to better retain magnets in its toys, including longer cure times for

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adhesives, the use of additional adhesive, and the use of injection molding to better encapsulate magnets inside the toys.

Most of the recalled toy issues were resolved by the end of 2007. Mattel decided to continue using the Early Light, since they had been a trusted supplier for more than 15 years. As a result of the recalls, Mattel created a Corporate Responsibility division, which had accountability internally and externally for adherence to company safety and compliance proceduresxvii. New policies were instituted requiring all direct suppliers to conduct quality tests on all of their incoming materials as well as finished toys made by any of their subcontractors.

Proposed Recall and Information Sharing Systems for Mattel

Recall Steps Notify the authorities as soon

Justification as FDA requiresxviii notification within 24 hours of learning that a good has a reasonable probability of causing serious adverse health consequences or death to humans or animalsxix.

dangerous effect is confirmed.

Open a hotline, a website with detailed Harvard Business School professor John Quelch information about the specific product, calls Mattel's recall Web site a model of recall procedure with clear and simple excellencexx clear and open information may steps of how to return the product and reduce reputational damages, caused by recall. compensation. Compensation should be appropriate and directly

Open a service-center and storage facility correlate with the inconvenience caused to to accept returned products. consumers. A quick reaction makes it easier for companies to cope with and take control of the situation. Reacting quickly helps companies score bonus points with the public, slightly reducing the negative impact that the recall has on the companys reputation. Find a way of utilizing the recalled If defect cannot be corrected, recalled products
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products if possible.

should be utilized properly.

Identify a particular consumer group Mattel has effectively got the word out about the targeted for the product that is to be recall. Among other methods, the company has recalled, identify specific channels to used bold red ads on high-traffic Internet sites reach that audience (e.g., social networks, such as Yahoo.com to find owners of the affected radio channels, databases). products and drive them to the Mattel Web site for more recall information. Conduct official mass media campaign: All the reviewers appreciated how the CEO of take the responsibility, apologize, Mattel took the responsibility for the issuexxi. Its never more important than in a time of crisis to communicate and reassure the public that things will be ok. It is suggested giving weekly updates and using the power of social media to communicate to consumers about the progress company makes as it works toward a solution. Once the collection is over run Ultimately, the success of the recall will be utilization process and report publicly. determined by the percentage of affected products that are returned. Tight regulations and inspections. To prevent any future lead paint issues, Mattel adopted a new test procedure where every production batch of every toy had to be tested before it could be released to go on sale. It also named publicly the contractors in China that had been involved in producing the toys with lead paint, severed many supply relationships and installed more Mattel people in contract manufacturers facilities. During this period Mattel also created a post of senior vice-president of corporate responsibility to oversee audits of all subcontractorsxxii.
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communicate and react. Report the progress.

Debrowskis appology Mattel takes full responsibility for these recalls and apologises personally to you, the Chinese people and all of our customers who received the toys, says Thomas Debrowski, Head of Worlwide Operations for Mattel to Li Changjiang, Chinese General of Administration of Quality Supervisor Inspection and Quarantine (AQSIC). Mr. Debrowski did not intend for the conversation to happen in front of journalists but Chinese officials made it a condition for the meeting to happen. Mattel has a China problem and a supply-chain problem, says Jean-Pierre Lehmann, an Asia expert at IMD, a business school in Lausanne.xxiii Almost 40% of British consumers are less likely to buy Chinese-made toys because of Mattel's recall crisis, according to a YouGov survey commissioned by Marketing Week, a trade publication. So China should now deviate its focus from the high-volume/low-cost manufacturing and turn to quality, brand development, governance and transparency, otherwise they will risk turning made in China into a warning label.

The news agency report about the apology that was caught up in translation sounded as if Mattel was apologizing for any blame that had been set on Chinese factories. The majority of Mattel's recalls, 17.4 million units, were associated with the firm's long-standing problem of strong magnets falling out of toys and endangering children who could swallow them, Mattel said in a statement. The rest, 2.2 million, Mattel blamed on Chinese firms that used lead-based paint, which is prohibited in the United States.xxiv

What Mattel has to keep in mind is that the company is simply incapable of being profitable without China, and they have to partake in the responsibility. Not only regarding the design malfunctions but also the amount of control of the outsourcing facilities and the pressure that is put upon these factories to reduce the price at all cost. Currently, China is increasing its manufacturing capacity by deploying it to satisfy the demand from Chinese consumers rather than serve the export market. Furthermore, the interest of companies in manufacturing their products in China is decreasing (see the below graphxxv with reasons).

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China will likely remain a dominant player in global manufacturing for the foreseeable future, and will likely continue to be the leading production option for many companies, especially those serving markets in China and other parts of Asia. However, it is no longer the only option. Manufacturers are already starting to look further afield, and may increasingly consider alternative locations both within and outside the Asia-Pacific region. When choosing a location, more companies may take a holistic, long-term view that examines operating costs, business conditions, and risks, and then make decisions based on their own specific business requirements.

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References
i

http://en.wikipedia.org/wiki/Mattel http://corporate.mattel.com/about-us/history/mattel_history.pdf http://nptel.iitm.ac.in/courses/110108056/module3/Lecture12.pdf

ii

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v

http://www.sjm06.com/SJM%20ISSN1452-4864/5_1_2010_May_1-188/5_1_127-142.pdf http://www.prnewswire.com/news-releases/independent-monitor-completes-audit-of-mattel-

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http://supernet.isenberg.umass.edu/articles/QiangNagurneyDongSupplyChainRobustnessRand

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http://supernet.isenberg.umass.edu/articles/QiangNagurneyDongSupplyChainRobustnessRand

omDemands.pdf
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Control/Documents/Product%20Recall%20Risk%20Management.pdf
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http://www.worldfinancialreview.com/?p=2715 http://www.consumerreports.org/cro/news/2010/02/unsafe-by-definition-voluntary-

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http://www.statisticbrain.com/product-recall-statistics

Thomsen, M. R. and McKenzie, A. M. (2001) Market Incentives for Safe Foods: An

Examination of Shareholder Losses from Meat and Poultry Recalls. American Journal of Agricultural Economics, 82, 52638.
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http://www.cpsc.gov/PageFiles/106141/8002.pdf Schuman, J., The Morning Brief: Lead Paint + Elmo = Bad News for China, Wall Street

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Mattel, Inc. Annual Report, 2007 http://www.cpsc.gov/en/Recalls/

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http://www.fda.gov/downloads/AboutFDA/Transparency/Basics/UCM313152.pdf
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xx

Quelch, J., Mattel: Getting a Toy Recall Right, Working Knowledge, Harvard Business Gerard, J., October 27, 2010, 5 Lessons Learned From Mattels Lead Paint Crisis, http://iHurley, R., How Mattel regained trust,

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xxv

http://dupress.com/articles/manufacturing-beyond-china/

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