Question

For the following case study address the questions in details (paragraphs, No bullets)

What values did Mattel exhibit during the recall? How did they affect Mattel? How did it affect the global supply chain?

Mattel's Product Recalls (B): Managing the Crisis

'Mattel lnc.'s public apology to China for damage to the country's reputation stemming from a spate of toy recalls is an extraordinary attempt to placate theworid's largest toy maker's most important supplier."'

The "111Street Journal

'The recent outcry over poisonous pet food and the recall of lead-tainted toys sourced by Mattelin China proves one thing:We have a China problem. It is not,however, a China problem in the way most people think. Itis not a problemwith safety standards that threaten ourchildren and ourpets.It is a problemwith the very fact of China as an emerging force on the- global economic stage,and it underscores a profound and worrying trend in American politicaland economic IWe. For half a century we fought for the creation of a globalcapitalist system.Now that we haveone, we seemto haveforgottenone littlething:Capitalism means competition,and we are acting like we can't handle it."'

The "111Street Journal

With a flashback of product llablllty accusations,Mattelfinally decided to recall all Its defective toys. Thereby,Ina perlcd of 4 months from August-November 2007,Mattelrecalled several toys from Its different brands like Fisher Price,Barbie,PONer Wheels,Polly Pocket,etc. InaddlUon,Its chairmanand CEO,Robert Eckert (Eckert)and executive vice president for worldwide operations,Thomas A. Debrowskl,publicly apologised saying that Mattel takes full responslblllty for the crisis.

Mattel's Spate of Recalls in 2007

A23-year veteran of Kraft Foods Inc.',Eckert became Mattel's chairman and CEO InMay 2000 and successfully led the company throughtheyearsto winback customer confidence,amid a slew of product recalls. With the same commitment, In response to the scores of complaints/reports received from customers and public opinion cops, Mattel - Incooperationwith Consumer Product Safety Commission (CPSC) - announced three voluntary recallsof Its China-made toys between August-September 2007.

Firstly,onAugust 1• 2007,Mattelwithdrew 1.5 million Fisher Price unit toys that Included various products like SesameStreet's Big Birdand Elmoand Nlckelcdeon'sDora,the Explorer,etc.,due toexcess lead Inthe surface paint of thetoys. TherecallIncluded those prcducts thatwere manufactured betweenAprll 19"2007 and July 6"2007,and were sold at different retailstores between May-August 2007.

The second recall was onAugust 14"' 2007,when Mattel pulled back more than 18 million toys,which Included Do;igle Daycare,Polly Pocket,Batman Magna,Barbieand Tanner sets and One Piece toys. This was because of the presence of small magnets In dolls and accessories that may come loose and If swallowed may cause Intestinal perforation or blockage. And also Its 'Sarge' dlecast Plxar fllm cars were recalled due to lead contamination In its surface paint.While 436,000 toy carswere recalled due toleadcontamination,18.2 milIIontoyswerewithdrawnowing to loose magnets.' Earlier In November 2006,Mattelcollected neany 170 repats of loose magnetsonItsPolly Pocket toys and recalled over 2 millionunits (Exhibit Ill of theCase Study (A)).The samewas expanded InAugust 2007 after collecting additional400 reports. It Included those that are manufactured betweenJanuary 2002 and January 2007, and sold at retail stores between January 2003 and August 2007.

Again,on September 4'2007, Mattel recalled 848,000 toys due to lead contamination In the surface paint. It Included (I) 675,000 Barbie accessory toys manufactured between September 30" 2006 and August 20" 2007 and sdd from October 2006 throughAugust 2007 (II) 8,900 units of Big Big Wond 6 n-1Bongo Bandtoys of Fisher Price sddbetweenJuly-August 2007and (Ill) 90,000 Geo Trax Locomotive toys manufactured betweenJuly 31" 2006 and August 20•2007,and sold betweenSeptember 2006 throughAugust 2007.

Publicopinioncops raised Issueswith continuous recalls andonSeptember 12'2007,Mattelwas asked totestify before a Senate subcommittee seeking explanation for a senes of high-profile product recalls. Eckert apologised, "Like many of you,Iam a parent. I,like you, care deeply about the safety of children.And I,like you,am deeply disturbed and disappointed by recent events. As to lead paint on ourproducts,our systems were circumvented,and our standards were violated. We were let down,and so we let you down. On behalf of Matteland Its nearly 30,000 employees, Iapologise slncerely....We are doing everything we canto prevent this from happening again."'

The Fingerpointing - Mattel vs Chinese Manufacturers

WhileMattelblamedChinese manufacturers,the Chinesegovernmentaccused Mattel.Already China-madeprcducts were underIncreasing fire,with recalls onevery thing from toys and tyres to seafood and pet food; It was brandedas a country of shoddy production.Though China Is emerglng as a powerful economic force,by serving as the wond's factory,safety concerns over Chinese products tarnished Its Image. Actually,Mattel's main supplierof car prcducts, Early Light lndustnalsubcontracted painting toanothercompanycalled Hong LIDa. Insteadof using the paint supplied by Eany Light,Hong LI Da used lead-contaminated paint and thiswas the nubof the problem.

This made many headlines In American newspapers and other media about unsafe products from China, and caused considerable damage to the 'Made in China' label. Mattel blamed Its Chinese manufacturers for breaking safety rules andstandards. As a resul some Chinese factories Involved Inthe recallswere shut down. Cheung Shu-hung,ownerof Hong Kong-based Lee Der IndustrialCo. -one of Mattel's suppliers who produced faulty toys - committed suicide. The Chineseofficials enraged atAmencancntlcism,defended domestic manufacturers,saying that most recalled products had designflaws (Exhibit I).Americanscapegoating of China hurt It so muchthat It Insisted Mattelapologise for unfalny blaming Its manufacturers for Mattel's design flaws.

OnSeptember 21''2007,ThomasA.Debrowskl,Mattel'sexecutivevicepresident forworldwideoperations,delivered a public apology,saying that Mattelhas a deep commitment In continuing Its business relationship with the Chinese government. In his words,'Mattel takes full responslblllty for these recalls and apolcglses personally to you, the Chinesepeople,and all of ourcustomerswhoreceivedthetoys. It's Important foreveryoneto understand that thevast majority of thoseproductsthatwe recalledwere theresultof adesignflaw InMattel's design,not throughamanufacturing flaw In Chinese manufacturers."' Eckerttoo pied,'We apolcglse again toeveryoneaffected and promise thatwewill continue to focus on ensuring the safety and quality of our toys.'" Many analysts andexperts lauded Mattel's apology as aneffective strategic action Inhandling the cnsls. Andrew Krulwich,a former generalcounselfor the US Consumer Product Safety Commission(CPSC), says,·1 can't think of any other Instancewhere"a major toy company' has actually come outwith sucha public announcementof defect."'While Eric Johnson,professor at Dartmouth'sTuck Schoolof Business called Mattel's public apology asa'novelpolicy

move' toavoid 'potentialfriction'.'After all,companies,and notcountries, areliable for what they sellunderthe label.

Mattel's Way of Handling the Toy Crisis

After a series of recalls Involving over 21 million toys In just 2 months,Mattelwas In trouble.There were recall costs,new monitoring systemsandquality controls,potentiallawsuits anddamage to Its Imageduring holiday shopping season.This shook up MattelIndealing public relations Issues across the world. Thereby,Mattel focused on advertising and PR campaigns for the holiday season. Michele Sturdivant,a spokeswomanat Mattel,says,·weare a marketing drivencompany,soItwould be safeto assume that weabsolutely need to address this during the holiday season."'0 It published print ads Innationalnewspapers like The New Yori<nmes to reassure parents about the safety of Mattel toys and Its revival efforts after the crisis. A new webpage (www.mattel.c011/safety) was created and featured a video about Eckert's explanation.In his words,"As a parent of four children myself Iknow that nothing Is more Important than the safety of our children. Iwantto ensure that every parent hears about these Issues and returns these products to us. Ican't change what's happened In the past, but I canchange how we work Inthe future.'"' He told reporters thathe was not Insisting for any federalsafety standards -"Idon'trely onanyoneelse to ensure the safety of ourproducts. This Is ourconcern.'' With a hope that hisads and website will ease parentalconcerns,he stressed,"Ithink It's Important to establish a dialog with parents. Iwant to make sure they hear from me.'"' Affected consumers were asked to fill out anonllne form or provide Informationonphone,to receive refund or replacement. He Initiated and Implemented a three-stage safety checksystemfor preventing lead contaminationintoy paints: (I) To use paint only fromcertified suppliers andto test every single batchof paint at fNery singlevendor;abandoning it, Ifa batchdoes notpass the test (ii) To increase testing andunannounced Inspections atevery stage of the production process and(Ill) To test finished toys fromevery productlonrun for lead content,before delivering tothestore shelves.

MattelIs keenonconducting anIn-depth Investigationof allIts products,to Identify anydefects andrecallthem,no matter how minor the defect may be. Eckert Is upbeat,'We have hundreds of people 01the ground [now] In China,doing safety checks. We'vebeenprcduclng toys InChina formany years. What'sImportant here isnot that something happened...but how we respond.'" In October 2007, Eckert flew to China and met vendors and safety experts there -to ensure Implementationof the revised safety monitoring system.Regarding costs associated with safety monitoring system,he assures that It would be below 1% of Its totalcost of sales."

As part of these Initiatives,Mattelannounced additionalrecalls of some of its toys due to lead contamination In paint (Exhibit 11).

Exhibit II Mattel's Product Recalls during October-November 2007
Period of time	Name of the product	Potential/Existing Hazard	Recall details
October 25" 2007	Fisher Price unit's Go Diego GoAnimalRescue Boats	ln1permlsslble amountof lead In surface paint of toys. No reports orcomplaints of Injuries were received	Recalled 38,000 units
November 6"' 2007	Fisher Price unit's Laugh & Learn Leaming Kitchen Toys	Received 48 reports of small parts separating from the toys,Including reports of childrenchoking after putting pieces In their mouths.	Recalled 155,000 units
Compledby  Ille author fromhtlp:/h1WW.cpsc.govlcpscpublprerelfprerel.hlmV

The Impact and the Future Outlook

Though Mattelswiftly responded to the toy crisis,Its performance was stillaffected. Its net Income for the third quarterended September30"2007was $237 million,as against $239 millionfor the same period In 2006. Netsales of$1.84 billionrecorded a 3% rise,butmissed analysts' estimatesof$1.91billion." It faced charges of$40 milliondue to product recalls,as sales declined by $30-$50 millioncaused bydisruptions to Its supply chainand revoked Import licenses." Eckert announced that Mattel's overall growth was primarily driven by Its Internationalsales with Its core brands - Fisher Price and Dlsney/Plxar Cars -stillgoing strong. However,sales In the US were a bit sluggish.In an August 13"report, Gerrlck Johnson,analyst at BMO CapitalMarkets estimated that Mattel's revenues would come downby $25 million In 2007 and by $40 mllllai In 2008."

The 'Cars'line toys,to;iether with thenew Radlca gamesandpuzzles,oonstltuted 29% Increase Insales for Mattel's entertainment toys unit,while a 9% surge In global sales of Wheels unit were driven by demand for Hct Wheels and Matchbox brands. However,during the samequarter,FisherPrice sales fellby 34% In the US as against 21% globally. Similarly,domestic sales for Barbie fell by 19% asagainst lntematlaialsales by 4%."Froma year-to-date high,Mattel's stock price fell by 25% and under performed thanrivals like Hasbroand JAKKS Pacific .

"While product recallsclouded this quarter's results,thecompany's domestic business continuesto underperform, a factor that we belleve will continue to weigh on the stock,"'9 says Felicia Hendrix, analyst at Lehman Brothers. Further,Increased prcduct testing resulted In delayed shlpments and banon Mattel's Imports Incountries like Brazil had a significant Impact on Its performance.Thereby, analysts opine that Mattel's sales In the fourth quarter - that account fornearly half of year-on profits,during the holiday shopping seain - may significantly get affected. But Eckert was satisfied with the company's third quarter performance - 'Despite the challenges the company faced during the third quarter,the business has performed falny well,even with some supply chain disruptions that Impactedsales.'"" Outof the million toys that Mattel produceseach year,Eckert feels that the recalled units In 2007 are small. Christopher Byrne,an Independent toy lndustiy consultan asserts that the Impact of recalls on Mattel- both financially as well as In public opinion - is negligible. He says,"Mattel's systems are so strong that they were able to containtwo-thirds of the product from evergetting Into the maiketplace. That's good news and should make peoplevery confident about Mattel.""

Eckert was also optimistic about company's future performance. In his words,'There will be a Christmas and Mattel,Flsher-Pnce,Radlca andAmerican Girltoyswill beunder the tree. I'mconfident that this year's toyswillbe the safest ever."' Such positive outlook came from 2006's top-selling Matteltoys like the T.M.X. Elmo doll. Additionally,to recoopfromdecliningdcrnesHcsales for Barbiebrand for thethirdconsecutiveyear,MattelIntroduced new multimedia products. Its site (www.barbleglrls.com) allowsgirls to play and Interact oollne,and 'Barbie of the Island' Is a direct-to-home DVD. Both these supposedly boost Mattel's sales In the holiday season. In Fisher Price uni Mattel Introduced new Smart Cycle,a 'physical learning arcade system'.Through this,It expects that video game-related toys would beccrne morepopular and even parents would like It for its educationalfeatures.

Sean McGowan,analyst at Wedbush Morgan Securities,who rated Mattel's Investments as 'buy',expected It to show strong sales and earnings growth In2008,with recall-related disruptions limited to 2007. In a research note he wrote,"Exdudlng the effect of these costs and disruptions,results would have met or exceeded our estimate.'"' Analyst estimateson earnings of major toycompaniesshow that Matteloutperforms Its rivals like Hasbro and JAKKS Pacific (Exhibit IV).

Mattel's sales andprofits areexpected togrow ata higher ratethanits top Mattel          4.5%          9%          1.7%          8% Hasbro       ·2.5%             -2%          1.5%         6% JAKKS         2.5%          5%    -5.7%       -10%

Mattel Is not alone Inthis keen locus onquality controland safety monltonng systems.Severaltoy llcensors and tradeassociations raised safety measures and Initiated third party testing. Major toy companies likeWalt Disney Co., Toys"R"Us Inc., Viacom Inc., KB Toys Inc.,Nlckelodaon and Sesame Workshop Increased their product Inspection plans. Evena US trade group,Toy Industry Associationwas insisting Congress to make toy testingmandatory.

Onthe other end,absence of comprehensiverulesgoverning recalls and Inability to track reportsonlnjunes from defective products made Chinese manufacturersandsuppliers resellthe recalled productsthroughthebackdoor.This was partlculany the case with those recalled for manufactunng flaws,with foreign companies not ready to pay the domestic manufacturers for the defective toys. So,goods banned In the West are still sold spuriously to Chinese consumers. Soonhong Min,professor of marketing and supply chain management at Price College of Business, Oklahoma University,says,"After a recall,the (factory that made the toy for the foreign company will) try Its best to recover money by distributing the defective products Inthe localmarket. That Is nothing new."'

Many analysts were scepticalabout howwell toy companies like Mattelwithdrew all their recalled products from markets across theglobe. The Wall Street Journal notes,'It raises questions about the responsibility of multinational companies tokeep dangerous toys off the shelves Inpartsof thewondwhereconsumer-protectionlaws areweakand the threat of legalllablllty Is relatively low - butalso about theirability to do so.""

In October,The wanStreet Journal bought Mattel's four recalled toys Including Barbie kitchensetwith lead pain Polly Pocket play setcontaining potentially loose magnets,anda Fisher Price Infant swing (that wasrecalledworldwide because infants suffered Injuries, cuts and bruises for getting trapped between the swing seat and Its frame) from sellers on Taobao.com,China's leading onllne consumer auction site. In the same month, this site listed many toys from Mattel's recalled products andthe sellers also claimed that theyhad as many as 100of eachtoy forsale.'" Mattel was allegedly unaware of this,a monthafter the newspaper reported It.

However,Mattelwas not the only suchtoy company.Montreal-based Mega brands lnc.'s Magnetlx buildingsets wererecalled InApril 2007 due to hazards from loose magnets. AnAmerican child even died after swallowing a tiny magnet that fellout loose from thebuilding set. Butthe samecolourfulsets are frund InChinese retail outletslike New China Children's Store,one of the Beijing's popular toy stores. Similarly,RC2 Corp.'s Thomas and Friends wocden trains were recalled In June 2007 for Impermissible levels of lead In surface paint but were still found in Tian Hao Mcdels toy store. Both got these recalled toys from authorised distributors,sub-distributors and even Individual wholesalers whogot the supplies from the toy factories In southern China.

Thereby,Matteland Mega Brands Inc. hired third-party companies to destroy all the recalled toys either at the factory or after they are collected from distributors and retailers. But,Frederick Felman,chief marketing officer for a US-based brand protection company,Markmonltor,says,"Unless you're very diligent about destroying the toys, the toys could re-enter the market.''27Thereby,Matteland Mega Brands strictly monitored destruction of all recalled toys - whether they are sent abroad or sold In the Chinese market. While Mattel enforced video documentation for all cases of toy destruction in the absence of Mattel's staff,Mega Brands made the company destroying Its toys certify the same.

In spite of efforts to communicate recall information to consumers - either by sending a statement,publishing onllne or translating the documents Into Chinese - Mattel extensively relied on Its Chinese dlstnbutors to transmit recall Informationacross thesupplychaln. Moreover,few sellers of Matteltoys ccrnplalnedthat they received lnccrnplete lnformatlai about the recalls. Gao Yunyun,a Taobao toy seller from Shenzhen,asserts,'We still get peoplewhowant to buy recalled products. Ifind It very strange that nobody kno.vs about these things.•,.

Addressing these Issues,Lisa Marie Bongiovanni,a Mattel'sspokeswoman,says,"Mattel's primaryresponslblllty Is to go through proper channels to notify the retailer butthat the company Isn't responsible for dangerous toys after theyhave reachedthe retailer.Once we sellthe product to the Wal-Marts of theworld or a smalltoyshop InChina,we don't have control over It.""To counter scandals on sub-standard Chinese exports,China Initiated measures - like organising cabinet-level safety conference, setting up product safety working group and a nation-wide 'rectification campaign'.A four-month product-safety Initiative,Included new regulations particularly with food and toy recalls,was launched InAugust 2007. It Is also planning toestablish a comprehensiveproduct safety legislation thatwould Include settingup a database for recalled products and, a system for tracing products and their components through the supply chain. However, Implementation remains complicated due to the Involvement of multiple government bureaucracies. Liu Zhaobln,an officialatAQSIQ",says that the agency functions are restricted only to Issuing recallnotices and stopping manufacture andsaleof recalled prcducts;actually theAdministration of Industry and Commerce monitors retail sales channels.As a result,>Mth worldwide outcry about their safety,China-made productswere cast out.

Fall of 'Made in China and Renaissance of 'Made in USA'

Recall of China made prcducts Including those of Mattel reduced their demand. For Instance,a YouGov survey commissioned by a trade publication Marketing Week, stated that nearly 40% of British consumers are less likely to buy China-made toys because of Mattel's recall crisis. Further,some retailers are thinking about sourcing their toys from Europe rather thanChina."As a resul toymakersand retailers Inthe USwere cashingon people's aversion towards China-made products- by mounting ad campaigns highlighting 'Made In USA' tags. It Included things like appearance of American flags on corporate websites,toy package with patriotic colours,usage of 'Made In USA' labels,etc. It Includes many major domestictoymakers - likeK'Nex Industries Inc. (a family-ownedcompany that produces construction sets In Hatfield,Pennsylvania),Step2 Co. (that makes outdoor playsets and plastic kiddie furniture,based In Streetsboro, Ohio),Michigan-based Walled Lake company,etc. Even retailers like FAO Schwarz are giving prominent shelf space for 'Made in USA' products. John Gessert,president of American Plastic Toys Inc., says,"Suddenly,It's becoming a realselling factor as they look at the package.'"'

As cited In Case Study (A),with 80% of the world's toys made In China,analysts opine that the smart move of homemade markeHng during holiday shoppingseason,may not work out In the long run. It Is more so for Mattelthat makes 65% of Itstoys InChina. The Wall Street Joumal notes,"But since thedawnof the Americanrepublic,we have never faced the kindof economic challenge that China presents. It Is playing the game of globalcapitalism almost as adepHyasweare,and our response for nowseems to be a mixture of fear and disbelief. Ratherthan seeing China as addingto anexpandingglobaleconomic pie,we treat Its ascendance as a zero-sum proposlHon for our workers,our companies, our currency and nowevenour health.While the evdutlon of China and the US Is anything but certain, and while each face Internal Issues that could derail the steady move forward,one thing should be fairly clear: Our China problem Is goingto harnl us more than Itwill derail China.'"' Moreover,notaily for Mattel,trading with China Is appealing to any other global player - due to Its low-coot manufacturing base,reliable Infrastructure and ability to produce at lower costs.

Answer 1

Case Brief:

• Mattel Inc. is a US-based toy manufacturing company
• Mattel has manufacturing sites in China as a part of their supply chain
• Mattel had to recall certain toys from the market during the peak holiday season due to faulty and life-threatening lead on the surface paint of toys and small magnets in dolls
• From Oct 2007 to November 2007, few products that were recalled from the market were Fisher Price unit's, Go Diego Go, AnimalRescue Boats, Laugh & Learn, Learning Kitchen toys (Source: fromhtlp:/h1WW.cpsc.govlcpscpublprerelfprerel.hlmV)
• Recalled 38,000 units on October 25, 2007, due to the unpermissible amount of lead In surface paint of toys.
• Recalled 155,000 units on November 6, 2007, due to reports of children choking after putting pieces In their mouths.
• The case study is a classic example of mitigating risks in supply chain and using the product recall strategy while following an ethical approach using corporate social responsibility as a tool to combat the losses.

Question 1. What value did Mattel exhibit during the recall?

Mattel exhibited the value of ethics by recalling the faulty products from the market and also while apologising to the stakeholders, Chinese manufacturers and the buyers of the toys, taking all the responsibility on itself showed a highly professional attribute of International trade.

Question 2. How did they affect Mattel?

After a series of recalls Involving over 21 million toys In just 2 months, Mattel was though in serious trouble.

Such big crisis not only incurred losses but also involved huge costs, listed below

1. Recall costs

2. Costs of installing new monitoring systems

3. Quality control costs

4. Costs involved in resolving potential lawsuits and

5. Damage to Its Image during holiday shopping season (Biggest of all)

Though Mattel handled the crisis decently by adopting a series of strategic approaches as appended below:

1. Published print ads In national newspapers like The New York times to reassure parents about the safety of Mattel toys and Its revival efforts after the crisis.

2. Created a new webpage (www.mattel.c011/safety) and featured a video about Eckert's explanation.In his words,"As a parent of four children myself, I know that nothing Is more Important than the safety of our children. I want to ensure that every parent hears about these Issues and returns these products to us. I can't change what's happened In the past, but I can change how we work In the future.'

When he told reporters that he was not Insisting on any federal safety standards -"I don't rely on anyone else to ensure the safety of our products. This Is our concern.'' this depicted an ethical behaviour understanding the Corporate social responsibility and a brave approach to mitigate risk.

3. To create a dialogue with parents i.e the affected consumers they were asked to fill out an online form or provide Information on the phone, to receive refund or replacement.

4.Implementation of a three-stage safety check for preventing contamination in toy paints:

• To use paint only from certified suppliers and to test every single batch of paint at every single vendor; abandoning it, If a batch does not pass the test.
• To increase testing and unannounced Inspections at every stage of the production process and,
• To test finished toys from every production run for lead content, before delivering to the store shelves.

All of the above majorly impacted Mattel in costs, time and increased vulnerability above all the brand image of the company.

Question 3. How did it affect Global Supply Chain?

Since there were allegations on the faulty design on Mattel by Chinese manufacturers, some of the Chinese factories were shut. Initiation of sample checks more frequently increased the travel costs and consumed the total production time of supply chain as a part of increased product inspection plans.

While already Mattel was struggling with the potential loss to image and declining sales, the Chinese market backdoor entry of faulty recalled toys could again raise fingers on Novel policy strategy of Mattel and delay down the production of new product batches.

Hiring third-party companies to destroy the recalled toys either at the factory or after they are collected from distributors and retailers that led to the Involvement of multiple government bureaucracies delaying the finished goods reaching the market.

Thanks.