Analysis of Mattel’s Global Operations

The main objective of this study is to do a strategic analysis of the global operations of supply chain within Mattel Toys Inc. Here its supply chain will be evaluated along with the risks/ security threats it faced and a framework will be presented to manage these risks.

With growing product/service complexity, supply networks are also becoming increasingly complex in the wake of outsourcing and globalization. This has affected risk, changing it continuously. Risk can generally be termed as a probability of injury, hazard, damage or any other unwanted outcomes.” The Royal Society (1992) defined a more systematic explanation of risk: ”the probability that a particular adverse event occurs during a stated period of time, or results from a particular challenge.”

In this study, we will suggest a framework for future supply chain risk management in the view of Mattel’s recall in 2007. This recall left a trail of media reports, public critique, investigations and huge lessons learnt.

1.1 Mattel Toys Inc.

Mattel Toys Inc. is a global leader in the design, manufacture and marketing of toys and family products. It comprises of top-selling brands such as Barbie, Fisher-Price brands etc. Mattel is recognized as the 100 Most Trustworthy U.S. Companies by Forbes Magazine. (Source: Wikipedia).

In 2007, it experienced a sequence of continuous alarming product recalls in which around twenty one million toys were pulled out from sale. Whether the toys were defective in design to lose small magnets, which if consumed could harm kids, or they were toys contaminated with lead paint coming from unethical Chinese vendors was irrelevant as the case was subjected to high media critique and got highlighted for quality mismanagement and varied logistic practices in outsourced vendors. (Biggemann 2008)

The table (figure 1) below shows the toys recalled from Mattel’s respective vendors and their sub-vendors:

Industry experts suggest that Mattel is locked in a relationship with China having five factories and manufacturing there for nearly 25 years. It outsources its production up to 50 percent to third-party manufacturers and almost 65 percent of its toys are produced in China.

“In spite of quality control efforts, Mattel has had 36 recalls since 1998 and two formal Consumer Product Safety Commission (CPSC) admonishments. It’s most controversial recall, up until 2007, involved 10 million Power Wheels toy vehicles.” (Biggemann 2008)

Below is a timeline depicting the key events that took place during the course of this recall,

Figure 2: Mattel’s product recall timeline

The result of this recall was catastrophic for Mattel and it lost more than 45% of shares in market value(figure-3)

Fig.3 Mattel Stock Prices 2007 Source: Woo 2008

Mattel was fined $2.3 million by Consumer product safety commission (CPSC) in civil penalties for violating a federal lead paint ban that resulted in the recall of millions of toys(Source: CNNMoney). Although sales at international markets helped it gain some profit for that interval (Casey, 2008), yet these had very little impact on their annual figures as compared to its loss.

The response of Mattel can be studied at the following two levels

External Communication: Mattel with CPSC, implemented the CPSC’s “fast track” program to communicate with parents and retailers using a mix of print, electronic and new media.(Fig.4)

Fig.4 Fast track recall tactics Source: Woo 2008

Internal Organization: After the recall Mattel internal environment of the organisation was changed in following ways:

Creation of Corporate Responsibility division

Announcement of product integrity policy and audit by senior management.

Three-point safety check system was also instituted.

The question now raised was “How did Mattel end up in such a tricky situation?” Is it a case of heavy neglect or something worse? It is argued that this was the result of Mattel’s flawed sourcing strategy.

Literature Review

Toy industry is one of the oldest industries for creativity and extremely volatile in nature. In the United States alone there are approximately 3 billion toys sold per year (Source: Toy Asoociation). Toy sales estimate are nearly 22 billion USD (Richtel et al,2008). Figure 5 estimates the annual toy sales from July 06 – June 07 which marked a rise up to 22.5 billion USD.

Figure 5: State of Toy Industry

Erratic and changing demands in this industry create a layer of volatility due to undersized and customized selling-openings and rapid product lifecycles. Toy demand and toy retailers’ needs are very volatile and expect toy manufactures to be very market responsive; but most toy manufacturers respond with conventional mass-production strategy which is very minimal in response and very mismatched to their strategy. Supply networks of such industries are growing into complex and dynamic mesh of varying relationships (Harland et al., 1999). Risk is escalating and its focal point is ever changing within the dynamism of supply networks all due to outsourcing of supply operations overseas and also due to growing complexity of product/service life-cycle.

Of late research has explored strategies to minimize risk in toy supply chains and networks. One of the main assets of toy manufacturers is their network position and the relationships and policies that come with these (Turnbull et al., 1996). To asses and manage risks, network positioning plays an important role especially in resource sharing, reputation management and terms of contract (Henders, 1992).

To begin the research, a literature search was undertaken with the intention of locating articles related to supply chain security and risk. The search included all journals known to publish articles related to security, risk, and/or supply chain management. Examination of the literature reveals four core premises that are consistently mentioned as vital for firms seeking to maintain effective levels of security and in minimizing and/or managing supply chain risk.

(1) Preparation and planning initiatives.

Business and supply chain continuity planning has been the focal point of the supply chain security/risk literature. A four-step business continuity plan, which comprise of creation of awareness, prevention, remediation, and information management is needed to protect from external risks (Zsidisin et al.,2005a).

(2) Security-related partnerships.

Formation and maintenance of security related partnership is strongly advocated in the security literature. Sheffi (2001) conceives that maintaining relationships with suppliers and governmental authorities is mandatory to facilitate supply chain continuity, thus ensuring against asset and product damage.

(3) Organizational adaptation.

Recent research presents an emergent focus dealing with organizational adaptability to manage response to probable or recognized supply chain risks and crises. The literature advocates the adoption of steps towards securing supply chain assets and curtailing risk exposure.

(4) Security-dedicated communications and technology.

There is a increased demand towards implementation and usage of communications channels dedicated to security/ risk-dedicated. According to Zsidisin et al. (2005a, b) it is necessary for the firm to manage information and knowledge system, and to continuously upgrade them to effectively mitigate supply chain risk.

In case of Mattel Toys Inc, risk came from the fact that about half of its toys are made in Mattel plants and about half are outsourced to vendor plants. Some of the problems came in when these vendor plants also outsourced to other vendor plants and again these other vendor plants outsourced, thus, making the supply chain very long – or ‘deep’.

The longer the supply chain, the harder it is for the foreign firms to keep track of who did what, when and the final quality of the parts or product (Lyles, 2008).

The next section provides a security framework to deal with the past and unforeseen future risks in the complex supply network of Mattel Toys. They are suggested guidelines for identifying, assessing and managing risk.

3.0 Theoretical Framework

This section of the essay contains the overarching methodology for dealing with Mattel’s situation. For this purpose, the Supply Network Risk Tool put forward by Harland et al., 2002 has been used(fig-6). A diagram illustrating the entire methodology has been given below. This is followed by a justification for selection, and identification of shortcomings.

(Fig6. Supply Network Risk Tool, Source: Harland et al., 2002)

3.1 Justification of the Theoretical Framework

The framework is built on earlier research and consists of individual frameworks for each section, thus evaluating the problem in detail. It provides a holistic view to assess the situation/incident and follows a definite sequence for mapping and implementing risk strategy. For disruption like that of Mattel’s recall in 2007 it provides a resilient approach for managing the risks involved in an efficient manner.

3.2 Testing/ Expansion of the theoretical Framework

The Supply network risk framework consists of six sections which evaluate the overall situation of the organization in a comprehensive manner, and suggests solution accordingly. During the course of this expansion, Mattel’s situation is analyzed and simultaneously the framework is examined and later critiqued.

Step -1Map Supply Network: The supply chain of Mattel Toys from beginning to end that existed before the recall in 2007 can be represented as follows.

(Fig7. Mattel’s Global Supply Chain, Source: Barad, 2002)

The conceptual supply chain of Mattel Inc.(fig.7 )is mapped focusing however, on the Chinese unit. Based on secondary research and the supply chain map given above, the following statements can be inferred about Mattel toy Supply chain:

The upstream supply chain comprises of the Suppliers, Subcontractors and the vendors. This forms the structure of actors in the supply chain.

The ownership of Mattel in China is restricted to its Mattel China Group which comprises of the Hong-Kong based company, Mattel Die Cast Limited, Hwa-tai Precision moulds and TC SZ Ltd.

The quality control system is managed by external auditors using Mattel’s guideline. The auditors are authorized to certify vendors who follow Mattel’s regulations strictly and these vendors then are not held for normal rigorous inspection. The vendors are encouraged to buy from Mattel certified suppliers.

Step-2 Identifying Risks:

Risks (table 1) within Mattel’s complex supply network have been identified.

Then these have been categorized into various types which have been used as a guideline to examine the risk (table 2) and consequences faced during their great product recall in 2007.

Step-3 Assessing Risk

In this section a probability-impact matrix has been created to assess the impact of risk (mentioned in figure 3) on the supply network of Mattel Toys based on its probability of occurrence.

The matrix clearly shows that most of the major risks associated with its supply network lies in High Impact – Low Probability and High Impact – High Probability region. This matrix has been used as a reference to create another matrix (below) for a specific risk that Mattel suffered i.e., the great recall of 2007.

During this period, all risks had very high impact on Mattel’s supply network and caused setbacks and disruption which were hard to recover from.

Step -4 Managing Risk:

There are a few ways in which Mattel can increase their capabilities of supply chain risk management using the framework by incorporating the following ways(Source: Kinaxis);

Visibility – Visibility across the supply chain network is needed for assessing supply chain risk and effectively counter any events/disruptions. This supply chain risk management tool must be integrated with ERP systems and must be able to include systems required to support the distribution and supply nodes.

Event detection and alerting – System should be incorporated for early detection of supply chain disruption so that the response time can be reduced.

Analytics – Analytics tools should be used to effectively assess the impact of potential supply chain event. Analytics is used to replicate the event and determine the impact from it.

Simulation – simulation is done to model different risk scenarios. This is used to model alternative mitigation approach and to ensure that these approaches are effective. In Mattel case it could be used to respond to an unanticipated supply chain event such as the crisis in 2007and compare various response alternatives.

Scenario comparison – Teams should develop multiple approaches to the resolve the problem. The team then should evaluate all the approaches and decide on the approach that meets the goals of the organization.

Step -5 Form collaborative supply network risk strategy

To be successful in today’s aggressive toy market, retailers and manufacturers should drive lean and closely controlled supply chains. As the rate of promotional marketing and innovative product launch continues to grow, companies are mostly caught between dynamic customer demands and comparatively fixed manufacturing and logistics parameters and limitations. Collaborative planning helps in dealing with supply chain issues. To improve supply chain responsiveness in Mattel, it requires shared visibility with suppliers and retailers into events happening now and in the future, while working jointly to resolve issues and problems surrounding delivery constraints.

Step-6 Implementation:

To keep up with dynamism of market demand and unseen risks, Mattel needs to implement its strategies for risk management in clear structured, and/or procedural way. According to Freedman (2003), strategy implementation should encompass order, commitment, ingenuity, management control and advanced execution skills. In Mattel, the Corporate Responsibility division should use this as a guideline for their advisory and research. Freedman (2003) also observed that moderating complexity is one of the core steps in strategy implementation. This is in regard to Mattel’s supply chain network which was complex and vendor mismanagement lead to one of their biggest recalls.

It is recommended for Mattel, to train and educated their workforce to handle unanticipated risks in supply networks (Harland et al, 2002). Their workforce needs to be made more aware of the total inherent risks faced after the great recall and learn to identify such risks in early stages. They need to focus on current practices of risk management and evaluate if these are apt after the recall. Mattel needs to handle complexities within their supply chain network by increasing visibility in it. This can be achieved by examining risk at the level of the network rather than restricted view to just immediate vendors (Harland et al, 2002).. They need to increase access to and control of sub-vendors throughout the supply network. This in turn will help them to expose risks throughout their supply chain. Also they need to develop/upgrade their existing supply network risk strategy and bring it in-line with their organizational practices and the framework suggested here.

The key to successful risk management implementation is by identifying two situations to respond to supply chain events (Source: Kinaxis);

An unanticipated supply disruption1

And, an anticipated supply disruption by executing a mitigation strategy

In both cases, the main task is to alert on time that an event has occurred. It’s difficult to respond to an event if you lack information on it. The supply chain needs to be monitored continuously. The practice of risk management – from spotting risks, through choosing suitable risk management strategies, and then altering the structure of the supply chain – is an information-demanding procedure (Source: Husdal). This means it is very dependent on information sharing. The key activity then is to identify vital information signalling risk while filtering data.

Conclusion

In the wake of Mattel’s great recall in 2007, it is seen that their strategy for outsourcing brought about one of their biggest losses and led to brand tarnishing and major fall in their market value. Their response to this crisis was well-handled but this raised questions on how they foresee their risks and avert them?

The suggested security framework draws a bird’s eye view of their supply network and asses risk at every level of their supply chain. It provides 6 key tools to asses risk and some effective steps to implement them. Later this framework is also subjected to self-critique but from a broader picture it can provide some key modification to the shortcomings in Mattel’s current strategy.

Limitations & Further Research

The model is critiqued to identify the shortcoming of the framework:

The model is build upon existing model and does not provide any new technique to provide a total security solution.

The model is subjective in nature as the author Harland et al, 2002, themselves pointed out that on categorization and identification of risk, the view of assessors assessing may be different.

It may not always be possible for organizations to continuously examine risks and have strategic frameworks in position

The setting up of collaborative arrangements in supply network and identification of risks and implementation of this in existing system may prove costly

As the model is subjective in nature, there might be difference in opinion of the assessors on the rating of particular risk in the organization.

More research is required for improved integration of manufacturers and supplier outlooks from developed to developing countries. Even though both these views may appear similar as both are network based but their deep-rooted fundamentals may be different. Further research is required to understand failing of outsourcing/ offshoring projects and how lack of communication and control disrupts the supply or results in sub-standard products/services.

Recommendations for Mattel-

1. Increase visibility of supply network

2. Visible control of sub-vendors and their sub-contracting

3. Stricter quality control norms throughout supply chain and checkpoints at every level

4. Risk assessment should be done more thoroughly and should be ingrained in the culture of the company.

Appendix 1:

Strategic risk

New technologies can render their products obsolete

Sudden shifts in customer tastes

kids are getting older younger (KGOY)

toy retailers are consolidating

retail price is falling

Operations risk

Failed/ out-dated technology

Labour strike

Disasters and Natural Calamities

Supply risk

increasing customization

outsourcing of operations

disruption to the supplier

quality problems, materials and parts shortages etc

bankruptcy of supplier

Customer risk

Shift in customer buying pattern

Shift in customer preferences

More competitive products during demand

Reputation risk

Recall history

Financial risk

Drop in market share

Devaluation of company share price

Fall in credit rating

Legal & Regulatory risk

Changes in regulation and government policies

Lawsuits

Supplier country legalities