Carla Da Silva
Professor Sampson
MGMT 392
Case Analysis: Mattel and the Toy Recalls
February 3rd, 2014
Issue/Decision
In the case Mattel and the Toy Recalls by Hari Bapuji and Paul Beamish the major issue
being presented is how the renowned toy company Mattel experiences the recalls of several of its
products and the circumstances that may have attributed to them. These products included their
Sarge Cars and over 967,000 children’s character toys due to excess amounts of lead in their
surface paint. These recalls are the result of inconsistencies within a complex supply chain made
up of several primary and secondary vendors in China who Mattel may or may have not had
complete control over. The decision problem being solved is whether to recall the Sarge Cars and
other unsafe products, finding where the recall problem originated within a complex supply
chain in China, and how to minimize the negative consequences of the recall and make sure they
do not occur again.
The case also briefly describes the state of toy production in China and its supplier/
vendor relationship to major toy companies in the U.S. during the year of 2007, outlining the
safety of the products made by Chinese manufacturers in particular. Several products made by
manufacturers overseas, especially in China, were produced using materials that compromised
product safety due to immense “pressure on the physical, technical, and human resource
infrastructures” (Bapuji, Beamish, 2008, p. 2). This was U.S. consumers wary of purchasing all
Chinese-made goods. Specific to the case, a large quantity of these products included Mattel’s
toys which were made by Chinese manufacturers and did not meet the safety requirements of the
Consumer Product Safety Commission (CPSC). This leads into an analysis on Mattel’s internal
strengths and weaknesses as well as its external opportunities and threats that may lead to product recalls and other issues such as stakeholder management, company values, and external
forces that influence supply and demand.
Strategic Framework
The marketing tools that will be used in this analysis include a description of the external
market environment of the global toy market, Mattel’s internal environment, and how the recall
will influence Mattel’s reputation. Recommendations on different scenarios Mattel could
exercise are also included based on the analyses.
Mattel was formed in 1944 and from selling a mass-produced, inexpensive music box
they became an extremely successful company following the introduction of popular products
such as Barbie and Hot Wheels. Mattel, alongside Hasbro, was an industry leader and the third
largest company in the industry. It became a powerful player because of its sales and its
corporate social responsibility accomplishments which included being named one of the top 100
Best Corporate Citizens by CRO Magazine in 2006 and being the recipient of the highest global
rating of 10 by Governance Metrics Internation (GMI).
In 2007 the global toy market was a booming business worth $71 billion with 36 per cent
of the market concentrated in North America. The markets in Asia were growing rapidly and
were expected to increase by 25 per cent during the year for a 37 percent market share. There
were several toy companies competing within the toy industry in the U.S. and it was dominated
by companies Mattel and Hasbro. Their combined sales exceeded the usual sales of other toy
companies which usually made under a billion dollars. The entry of large retailers such as WalMart and Target resulted in increased competition and they eventually became major players in the U.S. toy market, selling over 60 per cent of all toys sold in the U.S. Specialty toy retailers
began to lose market share due to this phenomenon.
The trend in the industry was for U.S. toy companies to outsource their production
overseas to Asian countries, which led to a decline in overall employment within the industry.
Domestic operations were solely focused on “product design, marketing, R&D, and other highvalue functions” (Bapuji, Beamish, 2008, p. 2). This meant that the majority of demand for toys
in the U.S. market was mainly met through Chinese imports, with only 10 percent from domestic
production. Exhibit 3 shows the relationship between the total U.S. toy imports and U.S. imports
from China. This reveals that the majority of toy-related products that were purchased by
consumers in the U.S. were made in China. Major markets for toys was in the U.S. and Europe
but their production took place in Asia, specifically China. There were several toy-making
companies in China at the time and 60 per cent of all toys sold globally were made in China.
They made up a complex web of supply chains that tended to outsource their own production of
product components to other companies. They usually had contacts with large Western toy
companies and were themselves involved in a complex web of supply chains.
Mattels’ main manufacturing facilities were in various Asian countries and Mexico. In
2002 it closed its last toy factory in the U.S. and it began to produce its core brands in companyowned facilities but used third-party manufacturers for the production of its non-core brands.
Over 800 million products were manufactured by Mattel and its vendors annually, with half of
the toys made in Mattel’s own plants. The company’s outsourcing and manufacturing strategy
took five decades to develop and it was able to manage the associated risks by “employing a mix
of company-owned and vendor-owned manufacturing facilities across Asia” (Bapuji, Beamish,
2008, p. 6). This would soon be disproved by the vast number of product recalls Mattel was to
face in a short period of time.
Mattel had contracts with 37 main vendors who were responsible for producing its toys;
the main vendors themselves used smaller companies for either full or partial production.
Because of this trend, Mattel’s supply chains in China were both “long and complex” and it is
stated in the case that over 3,000 different Chinese companies made Mattel products. However,
an underlying issue with its supply chain was that Mattel only had contact with the main vendors
so they could not have full control over how and where their products were sourced from. This
reveals an important issue that Mattel faces when dealing with the recall situation concerning its
Sarge Cars and other unsafe products: The company has no idea which manufacturer in the
supply chain had used surface paint with illegal amounts of lead for their products. It could have
been a principal vendor or a smaller company that produced for them.
On June 2007 two test were conducted by Intertek, an independent lab, which revealed
that the toys made by the Chinese vendor Lee Der Industrial Company contained an excess
amount of lead. Another case occurred when a consumer reported that their home test kit found
an excessive amount of lead in Mattel’s toys, those also being produced by Lee Der. Soon after,
all products made by Der Lee were unaccepted since a large percentage of its toys contained
excessive amounts of lead in the surface paint. Mattel management also ordered a suspension of
all shipments of products made by Lee Der. It was later found out that normally Lee Der had
purchased its paint from Dongxing New Energy Co. but when they had ran out they had to
source it from another company, the Dongguan Zhongxin Toner Powder Factory. It turns out that
Dongguan was a fake company and its owners were not able to be traced.
On July 26th, 2007 Mattel decided to issue a recall on all products made by Lee Der on
April 19th, 2007 from when they received the delivery of the lead-tainted paint until all products
made by Lee Der ceased to be accepted on July 6th, 2007. While preparations for the recall were
underway it was discovered that the paint on Mattel’s Sarge Cars contained lead. It was another
case of a main Chinese vendor that outsourced its paint from an uncertified supplier. Lead was
not the only issue with product safety that Mattel experienced. There were reports of loose
magnets in Mattel’s Polly Pocket play sets that were all manufactured in China. There were also
approximately a few hundred reports of loose magnets from other types of play sets all sold
before November 2006. This created another issue that Mattel had to address immediately: what
products were to be recalled and how to do go about the process.
Analysis
Although Mattel is one of the most successful companies in the U.S. toy industry the way
in which it handles this recall situation will influence the consequences that may tarnish its
overall reputation and future success. As aforementioned, the company needs to figure out what
products need to be recalled, how to reduce the recall’s negative consequences, and how to
prevent any other recalls from recurring in the future.
It was 2007 during the time of the recalls and the global toy market was prosperous. Most
of the market was concentrated in the U.S. and in Europe but production was mainly centered in
Asia, especially China. There were many toy companies in China and this provided Mattel with a
great deal of vendors to choose from since. The sheer number of vendors, over 3,000 companies,
meant that they formed extremely long and complex supply chains, not very efficient for a
product that requires different components to be made with certain requirements. This made it so
that if recalls were to happen it would be a challenge to identify where in the supply chain any
manufacturing incident occurred and how to handle it.
Mattel chose to do business with Chinese vendors due to China’s position in the global
toy industry and the lower cost business environment in China. While outsourcing toy production
to these vendors may have guaranteed reduced costs and allowed the company more flexibility in
its domestic operations, product design and development it did increase the risk of incidents in
the supply chain. Recalls for products that were made with unsafe materials was common at the
time since the surge in economic growth in China led to pressures on the countries labor force.
Ultimately, product safety was sacrificed for production efficiency and Mattel’s product recalls
were inevitable. Exhibit 4 presents the number of toy recalls made by the CPSC since 1988 and
reveals that in 2006, 33 out of 41 recalled toys were manufactured in China. In other words, over
80 per cent of toys that were recalled were made in China in 2006. This should motivate Mattel
to revisit their outsourcing strategy in China.
SWOT Analysis
Internal Strengths & Weaknesses
Mattel’s internal strengths equip the company with certain advantages over other
companies within the toy industry and allow it to be an industry leader. Rather than relying on
point-of-sale (POS) data to forecast demand for toys Mattel relied on “variety as being the key
driver of sales” (Bapuji, Beamish, 2008, p. 8). Following this realization they introduced a
rolling-mix strategy through their Hot Wheels brand, changing the physical mix of car
assortments “by seven to eight percent every two weeks” (Bapuji, Beamish, 2008, p. 8).
Additionally, the company partnered with ABC Television and sponsored a 15-minute segment
of Walt Disney’s Mickey Mouse Club for a full year which gave them a connection with kids,
their primary consumer, which allowed them to influence consumers’ buying habits.
One of Mattel’s internal weaknesses are its overseas principal vendors and highly
complex supply chain. The company’s business groups may have provided its revenue
beforehand but consumer demand as a result of the trend known as “kids getting older younger
(KGOY)” is shifting especially for video games and electronics they need to change in order to
keep up with the demand.
Opportunities
The company has outsourced the majority of its manufacturing overseas so that its
domestic operations can focus on higher-value tasks such as product design and marketing. This
allows it to minimize the time and costs of domestic production and focus on product design and
function. This includes the development and design of Mattel’s products which was done in its
corporate headquarters. The company also produced its core brands in company-owned facilities
but used third-party manufacturers for the production of its non-core brands. Additionally, the
company made significant acquisitions in the 1990’s that have aided in its success in the toy
industry including Fisher-Price, Kransco, Tyco, Pleasant Company, and Bluebird Toys. Mattel
also sold through Wal-Mart, Toys’R’Us, and Target, three major retailers that allowed the
company to experience high sales.
Exhibit 2 shows U.S. toy sales organized according to product category and it highlights
the top product segments in the U.S. toy market: the infant/preschool toys, outdoor and sport
toys, and dolls. These segments had been stagnant but it also shows that although the total
amount of sales in the traditional toy industry were the highest, total sales for video games were
growing rapidly. This is a threat since the business groups offered by Mattel does not include
many products within this segment. This can also be an opportunity for Mattel to expand their
product line into the video game and electronics industries.
Being in the toy market Mattel’s target market would be children who could enjoy the
character-based toys, play sets, and toy cars. Nevertheless, they have the opportunity to reach
consumers of that are older children if they begin to produce toys and other products geared
towards an older audience. This may include products such as portable electronics, books, and
video games.
Mattel could expand its horizons and find opportunities for new partnerships and license
agreements. They benefitted greatly from making licensing agreements to make toys of
characters that were owned by companies including Disney, Warner Brothers, Viacom, Origin
Products, and Sesame Workshop. This allowed them to expand their product line while making
sure they were making products that were in popular at the time, and thus taking advantage of
consumer demand. Mattel also licensed some of its core brands to companies in different
industries so they could design a variety of additional products named after the core brand. This
expanded the reach of Mattel’s products to more consumers and ultimately, more market
segments.
Threats
The recall of its Sarge cars and other products may hurt the reputation the company has
worked to build over the course of its life as an industry leader. This could result in Mattel losing
sales to Hasbro, one of its major competitors and fellow industry leader. Another major threat is
the reoccurrence of product recalls due to the environment of Chinese manufacturers that
compromise product safety. This can hurt Mattel’s reputation as a key player in the global toy
market, reduce sales, and hurt its stock price. If Mattel does not produce products from different
segments, such as those in the video game and electronics segment, it may fall behind
competitors that are expanding to this segment and not be able to meet the demands of KGOY
which coincid with a growth in youth electronics, products that are outside of the traditional toy
industry.
Recommendations
All of the products made by Lee Der between April 19, 2007 and July 6th, 2007 should
be recalled because of the lead-tainted paint used in their manufacture. Further testing should be
conducted for the lead-tainted Sarge cars as well as the various play sets made in China in order
to identify exactly where in the supply chain the incident began. Mattel should conduct
additional testing on all other products whose components did not come from verified vendors
and suppliers, especially on vendors with previous cases of excessive lead use. Mattel should
also advise their principal vendors to run tests on all of their existing products to see if their
components include any lead or other hazardous materials.
Reducing the negative consequences will be a challenge for the company but there are
certain actions that can reduce their effect on its reputation. Firstly, Mattel must establish an
efficient set-up to handle the different product recalls. Hiring individuals who are experienced in
recall situations, product safety, China’s toy industry and supply chain management, or toy
manufacturing in general may help expedite the process for the company. Additional employees
may also be in charge of ensuring that the unsafe products already sold to consumers are
delivered back to the company. Since Mattel has a strong reputation when it came to its corporate
social responsibility accomplishments, the company’s reputation may be saved and the recalls
could be considered as an incident out of the company’s control since the products were
originally manufactured in China. Reducing costs, losing sales, and having the stock price
decline may be inevitable consequences for the company but if Mattel decides to shift their
product offerings to match the demand for video games and electronics they could profit.
During 2007 there was already an increased suspicion of Chinese-made goods not only in
the U.S. toy industry but several others as well. The exponential growth that China’s economy
experienced did mean low cost business but it also meant strained resource infrastructures which
may have resulted in Chinese manufacturers disregarding product safety. As in the case where
several of Mattel’s toys were recalled due to excessive levels of lead in their paint, it is no
surprise that many of the recalled products were all manufactured in China and were the result of
unclarity in its complex supply chain. Exhibit 5 portrays a list of the toys recalled in the U.S.
since the beginning of 2007 and all of them were made in China, with only one exception. This
data should support the company’s decisions to ensure their supply chain in China was
functioning efficiently and according to regulations. Mattel should have expected accidents to
occur in their supply chain since so many of their principal vendors were located in China.
Stricter regulations on principle vendors and their outsourcing should be exercised in order to
help prevent any recalls from reoccurring in the future. The final list of principle vendors and
their own outsourcing should be reevaluated to ensure they are certified or non-certified.
Another strategy that could benefit Mattel’s financial position and save its reputation is to
increase its domestic manufacturing operations and reduce its overseas outsourcing. This will
minimize chances of any products being recalled due to excessive levels of lead or other
hazardous materials. This will also enable Mattel to regain people’s trust in the brand since they
will appreciate the company’s in-house, American-made products over those that are Chinesemade.
Limitations & Assumptions
The recall of Mattel’s Sarge cars as well as their other at-risk products may be a
considerably challenging process for Mattel to undertake. Since most outsourcing is managed by
Chinese manufacturers within a large supply chain it would be difficult for the company to
directly identify the problems and solutions associated with the recall process. The same
difficulties would be present for the additional product testing for increased levels of lead; the
more complex the supply chain the more difficult the process would be.
Hiring additional workers to aid in the recall process may not be an option if Mattel’s
sales decrease since there would be no way to fund these new workers. This would also require
additional employee training, development, and resources that the company may not have during
this period. Moreover, due to Mattel’s declining reputation because of the recalls there may be a
lower number of applicants interested in working for the company.
Stricter regulations on principle vendors and their outsourcing may be a difficult task to
accomplish since there are so many primary and secondary vendors and they are all located
overseas. Governmental and business regulations in China may also pose some challenges for
Mattel to overcome.
Mattel increasing its domestic manufacturing operations may be feasible if the number of
primary vendors decreased enough to allow this. The company could have company-owned
facilities produce its non-core brands rather than third-party facilities. However, just as it would
cost the company to hire more employees expanding domestic production would also translate
into increased expenses.
Works Cited
Bapuji, H., Beamish, P. (2014, Dec 15). Mattel and the Toy Recalls. Retrieved from:
https://cb.hbsp.harvard.edu/cbmp/import/ptos/33384089