Mattel 2007s Toy recallsOperations Management analysis for Mattels Chinese Supply Chain

Stanford case GS-63 analysis Gerencia de Logstica MBA-TCProfessor. Marcus Thiell. Dr. rer. pol., Diplom-Kaufmann

Mauricio Alejandro Corts Granados2005-104711. What are the main reasons for Mattel to source in China?At first hand it will seem that the Walmart effect[footnoteRef:1] had a direct implication for Mattel sourcing in China, nevertheless, not only low-cost production may influence sourcing decisions of a high-end toy manufacturer as Mattel. [1: The retail market for toys had consolidated, and the negotiating power of large retailers such as Walmart increased These companies negotiated relentlessly with their suppliers to drive down costs (Hoyt. et. Al. ,2008)]

As stated on the case, and the New York Times (July 26, 2007), About 50 percent of Mattels toy revenue comes from core products made these in company-run plants, a high proportion in the industry and a more costly method than using the lowest-bidding local manufacturer Initially, overseas production was handled by outside vendors. But in the 1980s executives became concerned that outsourcing toy-making put trademarks at risk Mattel aggressively expanded the number of plants it owned in Asia. Noncore products could be outsourced. But Barbie dolls and Hot Wheels would be kept in tightly controlled factories.

Park, H.Y., (2000) in a study where examined the factors affecting the country for global sourcing, concluded, US multinational firms seem to consider direct cost and transaction costs[footnoteRef:2] in their sourcing decisions Firms in the US frequently obtain their supplies from high-income countries, which have a high direct cost, but relatively low transaction cost due to high quality and on-time delivery. Managers in global firms appear to select the firms of a country whose transactions cost are lower. [2: Costs of global sourcing are comprised of procurement costs and transaction costs. Since global sourcing involves dealing with suppliers worldwide, transactions costs involved in global sourcing may differ from one country to another. Park .H.Y. (2000)]

According with the facts and Parks conclusions, Mattels prime decision for manufacturing was not only for low direct cost, but to maintain direct control on the quality of its most valued trademarks, which demonstrates that Mattels priority was not sourcing but locating its production of core products, relegating its priority towards non-core products sourcing them to Asian contractors.

Walmart effect on Chinese manufacturers may be an important driver to sourcing low quality materials and losing control on suppliers, nevertheless Mattel applied a strategy for its core products to maintain quality with low prices by controlling abroad factories.

2. What were the primary (root) causes of Mattels recall problems? Were these the result of outsourcing?

Mattel did not have serious manufacturing problems until 2007 when the lead paint issue occurred with Lee Der Industrial and Early Light Industrial, vendors of Mattel. As seen on Exhibit 3, of the case and Table 1, from 2000 to 2007 only a 21.40% of the total of recall number of items were from lead paint issues, all of them from China. Particularly, only in 2007, 53.10% of the recall items, were cause by lead paint, 46.90% were by design issues.

Table 1. Number of recalls by year, source and reason. ChinaMexicoN/A

YearDesignOtherLead PaintTotalDesignTotalDesignTotalTOTAL

20004.139.000,004.139.000,004.139.000,00

200120.000,0021.800,0041.800,00624.000,00624.000,00665.800,00

200284.000,0084.000,0084.000,00

2003115.000,00115.000,0067.000,0067.000,00182.000,00

2004314.000,00314.000,00314.000,00

2005188.000,00188.000,0054.000,0054.000,00242.000,00

2006614,00614,00614,00

20071.640.000,002.031.900,003.671.900,00155.000,00155.000,003.826.900,00

Total 2.162.614,00136.800,002.031.900,004.331.314,00209.000,00209.000,004.914.000,004.914.000,009.454.314,00

Source. Unsafe For Children: Mattels Toy Recalls and Supply Chain Management. Exhibit 3. Mattel Recalls in the U.S and Canada, 2000 to 2007.

Analyzing the numbers, the first conclusion is that Mattels recall problems between 2000-2007 where normally caused by design, until 2007, when the lead paint inconvenience came to surface, specifically with vendors, and not owned facilities.

At first hand, the primary cause of recalls is from design and product misuse, which for some reason Mattel do not recognize once production has finished and not before. It is odd that recalls from this nature happens, when there should be prototypes studies and testing before ordering procurement from vendors. Secondly, another root of recalls is quality problems with vendors manufacturing, specifically because of unapproved suppliers and falsified certification documents, most probably caused by low-cost requirements by the buyer summed with unethical practices by the vendor or its suppliers.

Outsourcing cannot be a direct cause of the recalls from manufacturing problem, is not the model for sourcing the products but the model of the supply chain management that caused Mattels problems. Mattels control on its outsourced vendors was post-production, on an inspection basis, which according to W. Edwards Deming an equivalent to planning for defects; it comes too late and is ineffective and costly (Garvin; March, 1986). Mattel should instead require to its vendors a continuous improvement as part of total quality management (TQM) in the manufacturing process.

3. What should Mattel do in the future to avoid such problems described in the case? (34%).

As found before, 2007 toys recalls sources were 50-50, from lack of supply chain management and supervision of vendors suppliers, and failure on pre-production testing of toys design and customer misuse. Which means that both issues should be address with the same priority. There is no doubt that core-products are highly controlled by Mattel, but non-core products, which are the most likeable recalled items and the ones produced by local vendors with a low life cycle due to its nature as licensed products, despite of the adhesion of vendors to corporate safety standards were most probable relegated on its design and quality control.

Mattels total recall financial cost was about $110 million, being only 1.78% of total net sales, nevertheless this sum can be accounted as external and internal failures costs, the most expensive costs of quality (COQ) according to Juran (Garvin; March, 1986). Jurans COQ theory states that external and internal failures will decrease by quality improvement approached with breakthrough projects, control sequence, and annual quality programs. (Garvin; March, 1986).

To apply quality improvement for Mattels manufacturing processes it is required to address at first hand the control over the procurement of suppliers. As mentioned in the case, only 200 employees are responsible for training and supervising Chinese contractors. If 65% of Mattels production is base in China, and is 2007 costs of sales (cost of inventory produced or bought and sold) were $ 3.192 million, therefore China Mattels supervision department is responsible for $ 2.075 million of cost of sales, a considerable sum supervised by only 200 people.

The cause of the recall is not only the number of people in charge of supervising the quality of products, but also its management. In order to control procurement of vendors and its suppliers, Mattel should not only train and supervised; they should also support and research the local market for materials that fulfill corporate quality standards as low prices demand for suppliers.

If $ 100 million were lost from COQ and really did not have a considerable negative impact on Net Income, a less sum can be used to create a Supplier Relation Management Department, supporting procurements and quality improvement for all supplier network. For example, Giant Manufacturing Co. Ltd. A Taiwanese bicycle manufacturer outsources the production of high-end aluminum frames to an undisclosed Chinese at a factory in Tianjin, Giant buys directly the aluminum and delivers it to the factory, which has the obligation to use it only for Giant frames models[footnoteRef:3]. [3: Information recollected at facilities on April 2013. ]

At other hand, design and product misuse recalls requires a continuous improvement applying a Plan-Do-Check-Act PDCA proposed by Deming (Heizer, J.; Render, B. , 2014), ought to be executed in a pre-production phase, a budget for test laboratories that may be less than $ 100 million.

BibliographyPark, H.Y., (2000). Foreign direct investment and global sourcing choices of firms in the US. Managerial and Decision Economics 21 (6), pp 211221

Heizer, J.; Render, B. (2014), Operations Management, 11th Ed., Upper Saddle River, NJ, Pearson Prentice Hall, 2014.

Hoyt, D.; Lee, H.; Tseng, M.M (2008). Unsafe for Children: Mattels Toy Recalls and Supply Chain Management, Stanford Graduate School of Business, GS-63.

Garvin; March (1986): A Note on Quality The Views of Deming, Juran, and Crosby. Harvard Business School Note 687-011.

Quintens et al. (2006). Global purchasing State of the art and research directions: Journal of Purchasing & Supply Management, Vol. 12 (2006), No. 4, pp. 170-181.

Barboza, D.; Story, L. (July, 2007), Toymaking in China, Mattels Way. The New York Times. 26 July 2007. [http://www.nytimes.com/2007/07/26/business/26toy.html?_r=0&pagewanted=print]