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Mattel 2007s Toy recalls

Operations Management analysis for Mattels Chinese


Supply Chain
Stanford case GS-63 analysis
Gerencia de Logstica MBA-TC
Professor. Marcus Thiell.
Dr. rer. pol., Diplom-Kaufmann
Mauricio Alejandro Corts Granados
2005-10471

1. What are the main reasons for Mattel to source in China?


At first hand it will seem that the Walmart effect1 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.
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 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.
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
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)

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)

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 .
China
Yea
r
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
Tot
al

Design

20.000,00

Other

Mexico
Lead
Paint

21.800,0
0

Total

314.000,0
0
188.000,0
0

115.000,0
0
314.000,0
0
188.000,0
0

614,00

614,00

136.800
,00

Total

41.800,00

115.000,
00

1.640.000,
00
2.162.614
,00

Design

2.031.900,
00
2.031.900
,00

3.671.900,
00
4.331.314
,00

54.000,0
0

N/A
Design

Total

TOTAL

4.139.000,
00
624.000,0
0

4.139.000,
00
624.000,0
0

4.139.000,
00
665.800,0
0

84.000,00

84.000,00

84.000,00

67.000,00

67.000,00

54.000,0
0

182.000,0
0
314.000,0
0
242.000,0
0
614,00

155.000,
00
209.000
,00

155.000,
00
209.000
,00

4.914.000
,00

4.914.000
,00

3.826.900,
00
9.454.314
,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 models3.
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.

Bibliography
Park, 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.
3 Information recollected at facilities on April 2013.

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]

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