Discussion Question
1. Why do companies outsource?
2. What were the primary causes of Mattel’s recall problems? Were these the result of
outsourcing?
3. What actions were taken by the principals in the case to address the recall problems?
Were these the right actions? Why, or why not?
4. What should Mattel do now? What should China do?
5. How can accountability be better managed in long, global supply chains?
Question One: Why do companies outsource.
Companies outsource for many reasons, including:
– manufacturing isn’t their core competence
o they want to get expertise from suppliers o they want to focus on what they do best
– cost savings
o outsourcing creates competition to get the business
o in-house manufacturing doesn’t feel competitive pressure (it is more like a
monopoly)
– lack of scale—supplier can aggregate production of lots of clients
– flexibility—suppliers can ramp up quickly (more quickly than the company can add its
own capacity)
– improve ROI
o reduce capital expenses—don’t need to invest in capital intensive facilities
o efficient use of in-house labor
o requires less working capital
– reduces risk (everybody is doing things they are good at—you don’t have to try to be
good at everything)
– faster time-to-market
– access to technology possessed by contract manufacturer
– local content requirements
Question Two: What were the primary causes of Mattel’s recall problems? Were these
the
result of outsourcing?
Based on the number of units recalled, the primary cause was defective design, in which
small magnets could come loose. This is the result of Mattel’s product development
process, which the company needs to address, and not related to manufacturing—the
recalls of these toys would have occurred regardless of where they had been made. The
problems that relate to Mattel’s supply chain are in the use of lead paint. Despite the low
percentage of toys that were recalled due to lead paint, the paint generated the greatest
publicity.
The lead paint in the recalled Mattel toys was the result of contaminated paint from
suppliers.
Mattel only allowed paint from certified suppliers. However, in some cases, vendors used
paint from other suppliers. In some cases, paint suppliers used faked certification
documents.
An argument might be made that Mattel should bring production in-house, where it would
have
more control. However, this would prevent the company from achieving the benefits of
outsourcing described in the response to Question One. It would also not provide any
guarantee
that only lead-free paint was used. Mattel’s employees would be no better suited to
preventing supplier problems than a properly trained and incented vendor would be.
An important contributing problem is price pressure. The entire supply chain is stressed to
reduce prices to meet the demands of major customers such as Wal-Mart. This is also a
problem that will not be solved by bringing more production in-house. To do so, Mattel
would have to increase capacity to address peak demand, in which case it would have
excess capacity for much of the year. The use of outsourcing enables the supply chain to
rapidly adapt to fluctuation in demand, without adding excessive capacity and the
associated cost.
The price pressure also limits the supply alternatives that are available to Mattel.
Manufacturing
in China produces substantial cost savings (30-40 percent, according to Business Week). In
addition, China produces most of the world’s toys. This combination of pricing and volume
means that retailers and brand owners make it difficult to rapidly move production out of
China.
However, some brand owners were moving to even lower cost countries such as Vietnam.
For the Chinese suppliers, the extreme pressure on prices provided little financial ability
for them
to invest in equipment or expertise for additional quality control, such as that which would
be required for monitoring lead levels in paint. This pressure also provided incentives to
suppliers (particularly small, remote suppliers) to take risks, such as substituting low cost
lead paint.
Question Three: What actions were taken by the principals in the case to address the
problems? Were these the right actions? Why or why not?
Mattel
From a public relations perspective, it announced the recalls quickly after the problems
became known. It apologized to its customers, and implemented a program to tighten
controls and increase testing.
Mattel initially lumped all the problems together (or at least failed to separate the issues
when the
media combined them), so that the public perception was that the serial recalls were all the
result of production problems with Chinese vendors. This unleashed a firestorm of
criticism of China, particularly since the public was already skeptical of Chinese product
safety after the problems earlier in the year with toys, pet food, tires, and other products.
However, less that 15 percent of the problem was due to this cause. In lumping leaving the
public to believe that the problems were primarily due to production in China, Mattel
risked harming relations with China. A good working relationship with China was
important to Mattel, as was later seen in the public apology.
China
China had a large governmental infrastructure and workforce that it could apply to
addressing
quality control issues. AQSIC had a staff of 30,000. Guangdong province had 10,000
people that it could use for enforcing quality standards. Contrast this with the low staffing
level U.S. Consumer Products Safety Commission, with a total of 401 employees, only
one of whom was dedicated to testing toys.
