Mattel Case

#07 – Teaching Case Study Hazardous Toy Recalls at Mattel, Inc. Key words: Chinese manufacturing, outsourcing, product recalls, global supply chain risk Type of submission: teaching case study Hazardous Toy Recalls at Mattel, Inc. [? ] Abstract In 2006 and 2007 Mattel, Inc. was faced with massive recalls of Chinese-made toys due to potentially dangerous levels of lead in various toy model surface paints and small magnets in toys which could fall off and be swallowed.This case describes the events leading up to the recalls, the response by Mattel, the legal, health, reputation and financial implications of the recalls, and the impacts of the recalls on Mattel’s global supply chain. Readers are asked to assess the situation and to decide what should have been done differently, if anything. The case is appropriate for undergraduate and graduate business students analyzing various purchasing, risk, and supply chain design issues. The 2006/2007 Mattel Toy RecallsIn some resp ects, the period from March 2006 to October 2007 was a very troublesome time for Mattel and their Chinese toy suppliers. On a number of occasions during this period, Mattel recalled a total of about 14 million Chinese-made toys in the U. S. and Canada for the same two serious problems. Millions more were recalled in other foreign markets. These two problems were indeed significant; not only for Mattel, but for their distributors, retailers, Chinese suppliers and finally the families around the world buying their toys.Over 2 million of the recalled toys had either been sprayed with lead-tainted paint or contained potentially hazardous levels of lead within the materials, while the remaining toys contained small magnets which could come off and be swallowed. Table I summarizes these recalls. Table IMattel’s Chinese-Made Toy Recalls in the US and Canada, 2006 – 2007* |Date |Toy and Problem Description |No.Units Recalled | |03/30/2006 |American Girl jewelry containing high levels of lead | 180,000 | |11/21/2006 |Polly Pocket toys with small loose magnets | 2,400,000 | |08/02/2007 |Various Fisher Price toys with lead in surface paint | 1,000,000 | |08/14/2007 |Batman, One Piece, Barbie, Tanner, Doggie Day Care, and Polly Pocket toy | 9,350,000 | | |sets with small loose magnets | | |08/14/2007 |Sarge toy cars with lead in surface paint | 250,000 | |09/04/2007 |Geo Trax, Barbie, and Fisher-Price Bongo Band toys with lead in surface | 750,000 | | |paint | | |10/25/2007 |Fisher Price Go Diego Go toy with lead in surface paint | 40,000 | | Total | 13,970,000 | *Source – U. S. Consumer Product Safety Commission, www. cpsc. gov On March 30, 2006 approximately 180,000 of Mattel’s American Girl jewelry pieces in the U. S. were recalled because the Chinese-made jewelry contained high levels of lead. On November 21, 2006, following 170 reports of loose magnets on Polly PocketTM play sets, Mattel recalled over 2. 4 million Polly Pocket play sets in the U. S. and Canada and another 2 million worldwide.In at least three of the cases, children who had swallowed magnets suffered serious intestinal perforations requiring surgery and hospitalization. Then nine months later on August 2, 2007, Mattel recalled almost 1 million Fisher-Price toys for using paint exceeding the lead content limit set by the U. S. Consumer Product Safety Commission (CPSC). Two weeks later, the CPSC announced five separate recalls of hundreds of thousands of Mattel die cast toy cars for potentially hazardous levels of lead paint and over 9 million play sets in the U. S. and Canada, following hundreds of reports of small magnets falling out of the toys. In early September, Mattel announced another major recall—over 700,000 units of 11 different toy models for having paint containing excess lead.Finally, on October 25, 2007, another recall was announced by the CPSC for yet more Chinese-manufactured toys containing paint with lead. In late August 2007, Mattel announced that some of the lead-tainted toys had been painted by a third-party subcontractor working for one of Mattel’s primary Asian toy suppliers, Hong Kong-based Early Light Industrial Co. , a toy maker for many of the world’s biggest toy companies. Hong Li Da, the Chinese subcontractor used by Early Light, was supposed to use Mattel-approved paint, however it instead used less costly paint from an unapproved supplier. Today, Mattel continues to use the Early Light Co. , a trusted supplier of theirs for more than 15 years.Another Chinese subcontractor, Lee Der Industrial Co. , also used an unauthorized paint supplier when making many of the toys included in the August 2 recall. [? ] Mattel typically performs monthly audits of manufacturers’ toys, which sometimes includes testing random units and other times involves reviewing manufacturers’ testing records. Mr. Jim Walter, Mattel’s senior vice president of worldwide quality assurance exp lained, â€Å"They didn’t perform the testing they should have, and the audit we performed didn’t catch it. †[? ] Mattel’s Response In late August 2007, Mattel CEO Robert Eckert filmed a video apology to parents which was placed on the company’s website and on Yahoo’s website. I can’t change what has happened in the past, but I can change how we work in the future,† he said, adding that he had four children of his own. Mattel also pledged to increase the frequency of its paint inspections, testing every batch delivered to every supplier. The firm also purchased full-page ads in the New York Times and Wall Street Journal. [? ] Following the third quarter 2007 recalls, Mattel slowed down the shipments coming out of Asia to conduct product testing and safety reviews. Similarly, Mattel’s shipments to global markets were curtailed while various regulatory authorities reviewed Mattel’s safety procedures. Ultimately, Matt el was able to prevent more than two-thirds of the recalled toys from reaching consumers by contacting distribution centers and retailers. [? Most of the export/import issues were resolved by the end of 2007. Today, Mattel’s first-tier suppliers must conduct quality tests on all incoming materials as well as finished toys made by subcontractors. Also as a result of the recalls, Mattel created a Corporate Responsibility organization, which has accountability internally and externally for adherence to company safety and compliance procedures. [? ] On September 5, 2007, Mattel representatives told an American congressional committee that the problem with toys containing unsafe magnets was the result of a flawed toy design, and not due to poor adherence to manufacturing requirements in China.According to Chairman and CEO Robert Ekert, more than 50,000 hours had been spent investigating the issues surrounding the toy recalls. â€Å"We apologise again to everyone affected and prom ise that we will continue to focus on ensuring the safety and quality of our toys,† he said. [? ] Finally, on September 21 in a meeting in Beijing with Mr. Li Changjiang, the chief Chinese quality official along with a group of reporters, Mr. Thomas Debrowski, a senior Mattel executive, offered an apology to the Chinese people—â€Å"Mattel takes full responsibility for these recalls and apologizes personally to you, the Chinese people, and all of our customers who received the toys†. [? Li also told reporters that the Chinese government shut down operations and revoked the business license of Lee Der Industrial, one of the subcontractors producing the defective Mattel toys (a co-owner of Lee Der Industrial committed suicide shortly after the August recall announcement). [? ] With regard to the unsafe magnet problem, Mattel made several manufacturing changes to better retain magnets in their toys, including longer cure times for adhesives, the use of additional ad hesive, and the use of injection molding to better encapsulate magnets inside toys. The Chinese Manufacturing and Regulatory Environments Companies operating in China are subjected to very few regulations, and have little legal recourse.Foreign firms operating in China try to cover themselves by securing guarantees from their Chinese suppliers that they will follow specific procedures, but they are almost impossible to enforce. In September 2007 Mr. Yan Jiangying of the Chinese State Food and Drug Association admitted that â€Å"†¦supervisory foundations are still very weak†. The oversight of food safety for instance, is split between five ministries resulting in unclear responsibilities. There also tends to be no history of regulatory compliance for Chinese businesses, causing many safety and quality shortcuts to be taken when suppliers are pressured by their customers to reduce prices. With regards to lead paint use, China has laws banning lead paint from consumer prod ucts, but lax regulatory enforcement means these laws are routinely ignored.In a test conducted by the University of Cincinnati from 2004-2007 for example, 38 paint samples from China representing 11 brands were tested and more than 25 percent were found to contain lead levels exceeding the U. S. safe limit of 0. 06 percent. McDonald’s, one of the world’s largest toy buyers, says the problem of lead paint in China is so widespread that their company must monitor paint quality all the way back to the original paint suppliers. Their toy makers must agree to use only McDonald’s approved paint. [? ] Ironically, Chinese cultural norms are often at odds with the way companies are managed, as described earlier with regards to the suicide of Lee Der Industrial’s co-owner.For a number of years, Mattel has used the International Center for Corporate Accountability (ICCA), a non-profit research organization, to conduct audits of its company-managed and third-party C hinese manufacturers to insure compliance with Mattel’s Global Manufacturing Principles (GMP). Mattel’s GMP is shown in Table II. Chinese plant managers are required to complete compliance reports prior to actual field audits. Audits consist of the firm’s accounting practices, confidential one-on-one interviews with employees, an examination of the plant’s policies, procedures and practices with regard to environment, health and safety issues, and inspections of the general maintenance of the manufacturing facilities, storage, treatment and disposal of hazardous waste materials, hygiene issues, and dormitories and recreational facilities.The ICCA provides the audit reports to Mattel, whereby corrective actions are determined in response to the findings. [? ] Mattel’s Ethical and Legal Considerations The Consumer Product Safety Commission (CPSC) can exclude from the U. S. market, products failing to comply with applicable regulations or that otherwi se create a substantial risk of injury, including articles containing excessive amounts of hazardous substances. The CPSC may also require the recall, repurchase, replacement, or repair of articles. [? ] Additionally, U. S. Customs & Border Protection (CBP) ensures that goods entering the U. S. are safe for consumers. The CBP has authority detain and exclude any products based on instructions from the CPSC.On August 20, 2007, a class-action lawsuit was filed in Los Angeles County Superior Court against Mattel with regards to the toys with excessive lead paint. This lawsuit sought to have Mattel establish a fund so that parents could be reimbursed for testing their children for lead poisoning (the cost to test for lead poisoning is about $50 per person). A second class-action lawsuit was filed against Mattel on September 27, 2007 in California seeking damages for injuries suffered from swallowing magnets improperly attached to Mattel toy sets. On September 4, 2007, the CPSC began inv estigating whether Mattel knowingly withheld information regarding any safety risks posed by the millions of toys recalled in August.Mattel could be substantially fined if they are found in violation of the Consumer Product Safety Act of 1972, which stipulates that companies must inform the CPSC within 24 hours when they obtain product defect information which could create a health hazard. [? ] The Chinese Toy Industry Today By the end of 2007, the Chinese toy industry was struggling. In Foshan, a major Chinese toy manufacturing hub in Guangdong province, some companies were tightening standards and increasing testing to reassure Western buyers. Others were closing down or looking for less regulated markets. â€Å"It’s very difficult to do business now,† says Ms. Deng Xiling, sales manager at a factory making plastic components for toys.Her company closed its painted-toy division following the Mattel toy recalls and laid-off almost one-third of its workforce, because t hey couldn’t afford the types of product testing Western buyers started requiring. Table IIMattel’s Global Manufacturing Principles[? ] Mattel’s Global Manufacturing Principles (GMP) apply to all parties that manufacture, assemble, license or distribute any product or package bearing any of the Mattel logos. GMP provides guidance and minimum standards for all manufacturing plants, assembly operations and distribution centers that manufacture or distribute Mattel products. GMP requires safe and fair treatment of employees and that facilities protect the environment while respecting the cultural, ethnic and philosophical differences of the countries where Mattel operates.GMP also requires internal and periodic independent monitoring of our performance and our partners performance to the standards. Mattel is committed to executing GMP in all areas of its business and will only engage business partners who share our commitment to GMP. Mattel expects all its business partners to adhere to GMP, and will assist them in meeting GMP requirements. However, Mattel is prepared to end partnerships with those who do not comply. Mattel and its partners will operate their facilities in compliance with applicable laws and regulations. Mattel has defined the following overarching principles to which all facilities and partners are required to comply.These principles are dynamic and evolving to continually improve our efforts to ensure on-going protection of employees and the environment. In addition, Mattel has developed a comprehensive and detailed set of underlying procedures and standards that enable us to apply and administer our GMP in the countries where we operate. The procedures and standards are updated and refined on an ongoing basis. 1. Management Systems — Facilities must have systems in place to address labor, social, environmental, health and safety issues. 2. Wages and Working Hours — Employees must be paid for all hours worked. Wages for regular and overtime work must be compensated at the legally mandated rates. Wages must be paid in legal tender and at least monthly.Working hours must be in compliance with country and Mattel requirements. Regular and overtime working hours must be documented, verifiable and accurately reflect all hours worked by employees. Overtime work must be voluntary. Employees must be provided with rest days in compliance with country and Mattel Requirements. Payroll deductions must comply with applicable country and Mattel requirements. 3. Age Requirements — All employees must meet the minimum age for employment as specified by country and Mattel requirements. 4. Forced Labor – Employees must be employed of their own free will. Forced or prison labor must not be used to manufacture, assemble or distribute any Mattel products. 5.Discrimination – The facility must have policies on hiring, promotion, employee rights and disciplinary practices that address discrim ination. 6. Freedom of Expression and Association — The facility must recognize all employees’ rights to choose to engage in, or refrain from, lawful union activity and lawful collective bargaining through representatives selected according to applicable law. Management must create formal channels to encourage communications among all levels of management and employees on issues that impact their working and living conditions. 7. Living Conditions — Dormitories must be separated from production and warehouse buildings.Dormitories and canteens must be safe, sanitary and meet the basic needs of employees. 8. Workplace Safety — The facility must have programs in place to address health and safety issues that exist in the workplace. 9. Health — First aid and medical treatment must be available to all employees. Monitoring programs must be in place to ensure employees are not exposed to harmful working conditions. 10. Emergency Planning — The fac ility must have programs and systems in place for dealing with emergencies such as fires, spills and natural disasters. Emergency exit doors must be kept unlocked at all times when the building is occupied. Emergency exits must be clearly marked and free of obstructions. 11.Environmental Protection — Facilities must have environmental programs in place to minimize their impact on the environment. Discussion Questions 1. Was Mattel’s response to the toy recalls appropriate? Why or why not? How could the company have responded differently? 2. What should Mattel’s responsibility be to their Chinese supplier-partners? 3. Read Mattel’s Global Manufacturing Principles (GMP) shown in Table II. Should anything else be added to their GMP? 4. What are the ethical, legal and reputation issues that need to be addressed by Mattel? Was Mattel acting correctly to publicly apologize and take responsibility for the design errors and lack of oversight? 1] This case was pre pared solely to provide material for student discussion and does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other information to protect confidentiality. [i] Zamiska, N. and N. Casey, â€Å"Toy Makers Face Dilemma Over Supplier,† Wall Street Journal, August 17, 2007, p. A10. [ii] Spencer, J. and N. Casey, â€Å"Toy Recall Shows Challenge China Poses to Partners,† Wall Street Journal, August 3, 2007, p. A1. [iii] Casey, N. and N. Zamiska, â€Å"Mattel Does Damage Control After New Recall,† Wall Street Journal, August 15, 2007, p. B1. [iv] Schuman, J. , â€Å"The Morning Brief: Lead Paint + Elmo = Bad News for China,† Wall Street Journal Online, August 3, 2007. [v] 2007 Mattel, Inc. Annual Report. [vi] Steverman, B. â€Å"Mattel: More Tribulations in Toyland,† Business Week Online, September 6, 2007, p. 12. [vii] â€Å"Business: Plenty of Blame to Go Ar ound; Chinese Manufacturing,† The Economist, V. 382, No. 8548, 2007, pp. 78. [viii] Lindner, M. , â€Å"Mattel Takes Its Lumps for toxic Toys,† Forbes. com, September 21, 2007. [ix] Spencer, J. and N. Casey. [x] 2007 Mattel, Inc. website www. mattel. com/about us/corporate responsibility. [xi] 2007 Mattel, Inc. Annual Report. [xii] Luk, S. and E. Wong, â€Å"Risks Faced by China-based Toy Manufacturers,† China Law & Practice, November 2007, p. 1. [xiii] 2007 Mattel, Inc. website www. mattel. com/about us/corporate responsibility.