Case Study: Mattel Toy Recall

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Mattel Recall

Mattel competes in the toy industry, where it is the largest company globally. Mattel owns many of famous brands, both ones developed in-house and licensed properties from major entertainment firms. The company had followed through with an industry-wide trend towards outsourcing production in recent years. One of its factories, based in China, was a third-party supplier of toys to Mattel, Lee Der Industrial Company, was supplying products that contained excessive amounts of lead. Lead is known as a poison and lead exposure affects all systems within the human body. Furthermore, there is the risk that lead exposure in children could have lifelong effects. Mattel at this point needed to consider a recall.

Recalls of products are complex and costly. They cost a lot of money to implement, and they can damage a firm's reputation. Further, there are tremendous logistics involved in a product recall as well. These are expensive and difficult, and can often involve channel partners at the retail level. However, there are tradeoffs to all of this difficulty. If the company knows about a problem and does nothing, then it runs significant risk with respect to reputation, both with customers and with key channel partners. It should be noted that reputation as to how the company treats children's safety is critical to survival in the toy industry. It is also worth noting that the retail side of the toy business is concentrated, where the top five retailers are worth 60% of the market. To an extent, even a major company like Mattel can find its business at risk if it acts counter to the interests of its major channel partners. Recall decisions are not simply made in a vacuum anymore, and that is something that needs to be taken into account.

Among the other factors that go into the decision with respect to the recall are what the costs are of either the recall or not performing a recall. The logistics of the recall would also need to be factored in -- if the company pursues a recall how it will pursue the recall. Overarching all of these different factors is the company's own philosophy and standards of ethics. There are likely some guiding principles at work that can help Mattel to make this decision, based on underlying business and ethical principles.

Conclusion

The value chain consists of the different business activities from which the business derives value. Porter explained the value chain as each element delivering a source of competitive advantage, which is an ideal. The elements of the value chain are inbound logistics, operations, outbound logistics, marketing & sales and service. The part of the value chain that was affected in the Mattel recall situation was the inbound logistics. The problem originated at a supplier, or more specifically it was traced to a supplier of a supplier -- a company that might not really exist. There is some confusion there.

The key for Mattel is that as it turns increasingly to outsourcing, specifically from third-party sources, is that it needs to be able to maintain standards of quality throughout the supply chain. Quality is typically defined in this context in terms of deviation from the norm -- a more specific word would be consistency. There are quality standards in place for things like lead content, and as a result it should not be difficult to detect when lead content of toys is too high.

The tests are obviously easy to perform, since in this case both a distributor and a customer performed the tests. Testing is the usual way that a company would find out about a defect such a lead content. Mattel therefore can improve its quality at this stage of the value chain by increasing the frequency of its testing, rather than finding out about defects from distributors and customers. Also important, the company needs to react to the feedback that it gets from testing. Remember that learning something is only useful if that knowledge is applied -- Mattel not only needs to discover the defect but it needs to act on that. In this situation, Mattel moved relatively slowly from the point where it first learned there might be excess lead in the toys.

The testing principle can be applied throughout the value chain. To eliminate defects, the company must ensure that standards are developed, especially for defects that are relatively common or expected. Lead is one of those, because of the prevalence of lead-based paints in the developing world. When the company is doing its own manufacturing, it would normally test inputs like paint. When the company has contracted out the manufacturing, it still needs to duplicate those same tests, but on completed products.

There are also lessons that Mattel can take with respect to utilizing other areas of the value chain. It relies on distributors and retailers to get its products to consumers. The value of these in the testing process is evident in this case, as is the importance of having retailer/distributor cooperation in the recall process. When these other areas of the value chain are contributing to quality control, this is something of reversing the quest for quality at the different steps of the value chain. While normally, Mattel would manage its partners through contractual arrangements to ensure that they are selling the products as Mattel sees fit, there is an opportunity for two-way dialogue that Mattel should recognize.

In this situation, Mattel also needs to confront its relationship with its Chinese suppliers. The company's relationship with these suppliers is obviously not going to be good at the present. However, there are a few different approaches that it can take here. One of the good things about outsourcing is that the company can switch manufacturers fairly easily. The technical skill needed to produce these toys is minimal, and this work can be completed by potentially hundreds of factories. It is worth considering that the company has the ability to manage its supply chain without Lee Der entirely. This might be for the best for both companies, since Lee Der will clearly have been humiliated by the experience and may at this point either not be a continuing entity or might at the least be a company that is unwilling to do further business in toys.

The objective for Mattel with respect to its suppliers -- in China or elsewhere -- is not to manage their feelings, but to get toys delivered on time and to spec. The relationship is strictly pragmatic. Thus, what Mattel needs to do with respect to its Chinese suppliers is to understand what went wrong with the lead paint problem and take steps to ensure that such things do not happen (or are less likely to happen) anywhere in the supply chain.

There is little doubt that Mattel would have had specs with regards to lead paint. The problem is that there was a violation of the contract on the part of the Chinese supplier. Mattel needs to understand how this happened. While all of the necessary facts of the case remain unclear, Mattel knows that the company ran out of its usual supply of paint and perhaps then used another supplier to ensure that the toys were produced on time. From Mattel's perspective, the key here is not where Lee Der gets its paint, but the fact that Lee Der either failed to test the paint or it ignored the test results. This is where Mattel needs to get involved in an investigation to uncover such critical facts, as the facts will guide the response.

In terms of ensuring that suppliers test key inputs like paint, Mattel must dictate that in the contract, and even work with suppliers to understand best practices. However, it is also worth considering that the suppliers might… [END OF PREVIEW]

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