EXECUTIVE SUMMARY

Globalization, comprehensive term for the emergence of a global society in which

economic, political, environmental, and cultural events in one part of the world quickly
come to have significance for people in other parts of the world. Globalization is the
result of advances in communication, transportation, and information technologies. It
describes the growing economic, political, technological, and cultural linkages that
connect individuals, communities, businesses, and governments around the world.
Globalization also involves the growth of multinational corporations (businesses that
have operations or investments in many countries) and transnational corporations
(businesses that see themselves functioning in a global marketplace). The international
institutions that oversee world trade and finance play an increasingly important role in
this era of globalization.
By the end of the 20th century a firms research, development, marketing, and financial
management no longer needed to occur in the same place, or even in the same country,
as its manufacturing operations. Increasingly, service activities dominated the
economies of wealthy countries, while manufacturing declined in relative importance. To
cut costs, companies relocated some kinds of manufacturing to developing countries,
where wages are lower. Such activities included garment production and the assembly
of simple parts.1
In August 2007, Mattel, America's largest toy manufacturer announced the first of what
would become five recalls involving 21 million toysmost of which were manufactured
in China. The movement of manufacturing to developing countries such as China,
where corruption is widespread and regulations are difficult to enforce, has arguably
contributed to recent recall crises. 2 The recalls were due to lead paint contamination.
Mattel, as the worlds largest toy company is known for its strict quality controls and
serves as a role model in toy industry for how it operates in China.
Mattel Inc., an El Segundo, California based company has been amusing children all
around the globe for its toys. The corporation went into public in 1960 and became one
of the top companies enlisted in Fortune 500 in 1965. It obtained lucrative licensing
rights from famous global brands like Disney and Nickelodeon. Mattel also ventured into
educational preschool toys, pet products, playground equipment, circus and film
dabbing.
Mattel reorganized as Mattel Inc. with seven subsidiaries. But after the big losses from
its non-toy lines, Mattel decided to close all its non-toy related subsidiaries and dedicate
itself to design and manufacture of childrens toys.
1 Tabb, William K. "Globalization." Microsoft Student 2009 [DVD]. Redmond, WA: Microsoft
Corporation, 2008.
2 Mattel Recalls 2007, Communication Implications for Quality Control, Outsourcing, and Consumer
Relations

Mattel currently manufactures more than 800 million toys annually,3 targeting four
audiences: infant/preschoolers (26 types of toys), girls (63 types), boys (36 types) and
grown-ups/parents (22 types). Brands for infants and preschoolers include Dora the
Explorer and Fisher-Price. Major brands for girls include Barbie (1959) and
American Girls. Boys' toys include Hotwheels and ESPN Toys.
For more than 20 years, Mattel has incorporated social responsibility into its business
practices. Mattel adopted Global Manufacturing Principles (GMP), a principle that
requires Mattel chain supply partners to uphold its stringent standards for safe working
conditions, employee health, fair wages, and environmental consciousness. Mattel lived
up to its code of conduct for product quality and safety. Mattels code states "Mattel's
reputation for product quality and safety is among its most valuable assets...Children's
health, safety and well-being are our primary concern. We could damage our
consumers' trust if we sell products that do not meet our standards. Our commitment to
product quality and safety is an integral part of the design, manufacturing, testing and
distribution processes. We will meet or exceed legal requirements and industry
standards for product quality and safety. We strive to meet or exceed the expectations
of our customers and consumers. Any compromise to product safety or quality must be
immediately reported to Worldwide Quality Assurance." 4
To meet this commitment, Mattel conducts periodic checks of toys pulled off production
lines; new supplies, such as paint, are tested upon arrival. 5 Mattel has also set up
testing laboratories for some of its contractors. Ironically, Mattel had built a lab for the
supplier culpable in the 2007 lead paint crisis, suggesting that, "Even with regular
inspections, breaches of codes of conduct in the supply chain become almost an
inevitability.6
Approximately 80 percent of toys bought in the UNITED STATES today 7 are
manufactured in factories scattered up and down China's east coast. Although American
companies may own several factories in China, writes Atlantic Monthly reporter James
Fallows in his article "China Makes, The World Takes, they mostly commission
manufacturing to local subcontractors.8

3 Media Statement, September 21, 2007, http://www.shareholder.com/mattel/downloads/09-2107%20China%20Meeting%20Media%20Statement.pdf

4 "Code of Conduct," http://www.mattel.com/about_us/Corp_Governance/ethics.asp
5 Barboza, David, "Toymaking in China, Mattel's Way," New York Times, July 26, 2007,
http://www.nytimes.com/2007/07/26/business/26toy.html, accessed on November 11, 2007
6 "The Stories Behind the Mattel Recall," CSR ASia Weekly, Vol.3 Week 32, August 8, 2007,
http://www.csrasia.com/upload/csrasiaweeklyvol3week32.pdf
7 "The Stories Behind the Mattel Recall," CSR Asia Weekly, Vol.3 Week 32, August 8, 2007,
http://www.csr-asia.com/upload/csrasiaweeklyvol3week32.pdf
8 Fallows, James, "China Makes, The World Takes," The Atlantic Monthly, July/Aug 2007, pg 48-72.

The region with the largest production capacity is Guangdong province in southeastern
China. In 2005, more than 5,000 manufacturers in Guangdong exported almost
USD$12 billion in plush, electronic, and plastic toys (see Table 1).
Table 1: Chinese Toy Exports 2005
Region
Guangdong

Total # of
Manufacturers
> 5,000

Main Export Category

Export Value
in 2005
$11.934 billion

Plush toys, electronic toys,

plastic toys
Jiangsu
> 700
Plush toys
$850 million
Zhejiang
> 1,000
Wooden toys, baby bicycles
$871 million
Shanghai
> 700
Baby bicycles, strollers
$549 million
Shandong
> 550
Plush toys
$367 million
Fujian
> 500
Electronic toys, plastic toys
$226 million
China Toy Association, http://www.toy-cta.org/en/Introduction_1.asp

For 25 years, China has manufactured toys for Mattel. The toy company owns five
factories and outsources 50 percent of production to third party manufacturers which
are subjected to quality control inspections. Collectively, 65 percent of Mattels toys are
manufactured in China.
Lee Der Industrial, a contract manufacturer based in Guangdong, was responsible for
producing the toys that contained excessive levels of lead paint in Mattels toy. In 1993,
Mr. Cheung a local businessman with his business partner Mr.Xie Lee established Der
Industrial with an initial capital of $4 million. Lee Der Industrial being managed by Mr.
Cheung Shuhung who is known for his simplicity in living and righteousness was among
the few factories in China with fair treatment and compensation for its workers.
At first, Lee Der Industrial received only small batch of orders of educational toys from
Mattel. Later on, as Mattel increased its orders, Lee Der Industrial dropped its other
clients and focus as a full time contractor for Mattels toys. Together with the worlds
largest toy maker, Lee Der Industrial expanded into 3 manufacturing plants, increasing
its workforce to about 2,500 workers with an annual sale of around $26 million. Since
the time Lee Der Industrial began its operation, it never encountered any problem
relating to quality and safety of toys being produced not until April 2007. Lee Der
Industrial hastens its production to deliver orders on time but lacks on supply of paint.
Similarly, Dongxing New Energy Co., Lee Der Industrials four year paint supplier also
ran short of yellow pigment powder. Dongxing purchased from fake supplier over the
internet and delivered the paint to Lee Der Industrial. Being under pressure to meet
deadline for orders, Lee Der Industrial became lax on quality control of paint being used
in manufacturing toys for Mattel. Early July 2007, Mattel become aware of the possible
recall due to lead contamination and sent out its people to visit Lee Der Industrials
production, instructing them on how to secure recalled toys. August 2007, Mattel
voluntarily recalled its toys, identified and revealed Lee Der Industrial as responsible for
the lead contamination. Following the recall, China Administration of Quality Supervision
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and Inspection and Quarantine revoked Lee Der Industrial exportation license. Mattels
recall resulted to Lee Der Industrials bankruptcy. The owner of Lee Der, Mr. Cheung
Shuhung, committed suicide by hanging himself in a factory warehouse.
Mattel Recall Timeline June-November 2007
Date
Event
June 8
Mattel is first alerted to possible lead paint contamination.
June 9
The CPSC deadline for Mattel to report the problem.
June 10
CPSC deadline passes; Mattel fails to act.
July 26
Mattel files full recall report with CPSC.
August 2
Mattel voluntarily recalls 1.5 million Fisher-Price toys that are
supposedly coated in paint containing dangerously high levels of lead.
August 7
Mattel identifies a Chinese factory as the source of the contamination
scandal.
August 14
Mattel voluntarily recalls a further 17.4 million products containing loose
magnets easy for children to swallow (Mattel Play Sets and Barbie Doll
& Tanner).
September 4
Mattel voluntarily recalls another 850,000 toys due to lead paint
contamination (Barbie Accessory Sets, It's a Big Big World and
GeoTrax Engines).
September 11
CEO Robert A. Eckert publishes an opinion statement in the Wall Street
Journal.
September 21
Mattel's Vice President Thomas Debrowski apologizes to China for
blaming Chinese suppliers for the Mattel recalls.
October 25
Mattel voluntary recalls Go Diego Go! Rescue Boats coated in paint
containing hazardous levels of lead.

PROBLEM STATEMENT

What are the challenges and implications of globalization in terms of product quality and
safety?
Cheung Lee Der Industrial Company
MANUFACTURING SYSTEM (Production Planning and Management)
Lacks in production planning and management particularly in its inventory system
for raw materials/ supplies acquisition.
Laxity on quality control and safety of supplies (paints) purchased from suppliers.
Does not perform routine testing on consistency of quality and safety of
purchased supplies for production.

Dependencies. Reliant to a single supplier for a particular supply or material for

production.

Mattels Recall

What are the challenges of outsourcing or offshore manufacturing in terms of:

Quality control - Lacks the processes and infrastructure to ensure highest
quality standards.
Product safety and standards - Breaches of code of conduct among its
suppliers - product safety inspection procedures. Toy safety testing and
inspection process had failed.
How should it handle outsourcing and manage its Chinese suppliers and
contractors?

Inadequacy of communications plan for a quality control/ product safety crisis.

Prioritizes business interests over customers interest and product quality.

Showed disproportionate amount of effort on preserving its reputation. Misled
public by shifting blame to its Chinese suppliers and manufacturers.

Failure to comply with the reporting requirements and regulations on product

safety standards.

What are the preventive measures to avoid future possible recalls?

Government agency for product quality and safety (the Consumer Product Safety
Commission)

Penalties for non-compliance and violations of regulations and guidelines are too
soft to deter large corporations from violating the laws.

It does not perform product testing before launching the product to market.

Competitors and Industry

Suffered profit loss due to high profile recalls.

Public/ Consumers
Assurance of product safety and quality.

DATA ANALYSIS
Cheung Lee Der Industrial Company

Cheung Lee Der Industrial Company is one the off shore manufacturers of Mattel
in China. Mr.Cheung and Mr. Xie established the company in 1993 with almost
$4 million as capital and a relatively small initial order from Mattel of educational
toys. Since then, Mattels orders increased thus the company decided to dropped
its other customers and concentrate on manufacturing for Mattel. The company
practices workplace fairness thus the owner, Mr. Cheung is admired and loved by
his workers. Under the management of Mr. Cheung who is kind hearted man,
the company prospered, expanding into three manufacturing plants with over
2,500 workers and having an annual sale of about $26 million. Since the
company began its operation, it never encountered any problems relating to
quality and safety of products. But not until 2007 when their four year paint
supplier, Dongxing New Energy Co. suffered shortage of yellow pigment powder.
Dongxing purchased from a fake manufacturer of toner, the Donnguan Zhongxin
Toner and supplied this to Cheung Lee Der Industrial Company. This brought
contamination of lead on its manufactured toys for Mattel.

Cheung Lee Der Industrial Company exhibits some production planning and
management problems particularly in its inventory system of supplies/materials
needed for production. They are unable to maintain the enough buffers of
supplies that will be needed for a certain production. In addition, Lee Der
Industrial is reliant to single supplier for a particular supply like paint. Also, they
are unable to perform checking of consistency in terms of quality and safety for
delivered supplies.
Mattels Recall
About 80% of toys produced worldwide are manufactured from China. The region
with the largest production capacity is Guangdong province in south-eastern
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China. Known for its cheap labor cost, China has become the chief manufacturer
of export products and center of manufacturing firms. Mattel has a long history in
China, where it has manufactured toys for 25 years. The company owns five
factories and outsources fifty percent of production to third-party manufacturers.
Toys tend to be short-term products that feature characters from movies and
television are outsourced for production but are subject to quality control
inspections. These factories produce sixty five percent of Mattel's toys. Mattel
often outsources batch testing to factories themselves. In addition, Mattel helps
contractors build inspection facilities.

Apparently, Mattel as the worlds leading and largest toy company in the world
prioritizes business interest and keeps reputation over product safety and public
interest. Mattel upon discovery of lead contaminated products took more than a
month to report this lead paint crisis and recall its products in the market. It also
misled the public by putting all the blame to its Chinese manufacturer.

Mattel violates a key regulation on product recall which states that a company
must report a defect/recall within 24 hours of discovery. Mattel delayed reporting
about the lead paint contamination for more than a month.

Despite of the rigorous standards for product quality and safety, Mattel
repeatedly suffered from product recalls which only proves that still there are
flaws and inconsistency in the of implementation of set standards for quality.

Government agency for product quality and safety (the Consumer Product Safety
Commission)

Large corporations like Mattel seem to neglect in complying on key regulation on

product recall primarily due to very low penalty and weak enforcement on the
part of the government agency responsible for product quality and safety.
Moreover, the government does not perform checking or testing of product before
introducing it into public consumption.

Competitors and Industry

Mattel as the leading toy maker in the world has influenced on total performance
of the toy industry. Mattels product recall result to industry wide loss due to
decrease in sales, thus competitors also suffer from profit loss.

Public/ Consumers

Due to lead contamination that leads to recalls, the public or simply

the consumers, the children and parents faced health and safety risk.

KEY DECISION CRITERIA

Adherence to companys objectives and standards.

Prioritizes consumers or customers safety, health and well-being.
Strict compliance of product safety and quality standards for offshore
manufacturing.

ALTERNATIVE ANALYSIS
Cheung Lee Der Industrial Company
Create and design the right manufacturing system that will ensure the right
supply of materials to be used for production. Redesign or reorganize production
planning and management. Its inventory system of supplies/materials for
purchases must be able to maintain buffer of materials needed for production.
An inventory system that will properly keep track of supplies use thus will guide
for easy and timely replenishment of supplies to be used for production.

Lee Der Industrial must consider at least three (3) suppliers for each of its
materials. It will avoid possible shortage of materials when one supplier suddenly
losses or encounter problems. Moreover, having list of suppliers, Lee Der
Industrial will be able to perform price comparison of supplies. Lee Der must
consider distributing its purchase order of supplies to various suppliers instead of
relying to a single supplier only.

Carefully select suppliers for raw materials. Consistently implement thorough

inspections and threaten to cease business with companies that fail to comply.

Perform regular checkings on consistency in terms of quality and safety of

purchased raw materials.

Fishbone analysis is a helpful tool in identifying several factors relating to the main
problem. It aids in properly addressing solution to the problem rather than dealing with
portions of it. Therefore, it is deemed necessary to perform Fishbone analysis to
discover the root cause of a problem, uncover bottlenecks in processes and identify
where and why a process isn't working. In the case of recall of Mattels products, the
root cause can be traced through its off shore manufacturer, the Lee Der Industrial.

Upon analyzing Lee Der Industrial manufacturing system, it revealed problems relating
to its production planning and management particularly with its inventory system.

MATTEL
TOY INDUSTRY
CONSUMERS / PUBLIC

Product safety

Product quality control Industry wide loss

Outsources Manufacturing

Health hazard

MATTEL Product Recall due to lead contamination

Unable to maintain buffer of raw materials for production
Laxity on implementation of policies on product safety and quality

Laxity on quality control and safety of raw materials

GOVERNMENT

Supplier dependency
LEE DER INDUSTRIAL

Inventory system of raw materials

Mattels recall

Select the most appropriate offshore manufacturing company capable of

producing and maintaining quality and safety products as specified by Mattels
product safety and quality standard. Develop criteria for selection of accredited
outsourcing manufacturing firm.

Strictly impose right quality standard by fully incorporating western quality control
standards with its offshore manufacturers.

Tighten inspection systems through unannounced checking and testing of

products before delivery. Mattel will increase unannounced testing and
inspections at every stage of the manufacturing process. Mattel will test finished
toys from ever single production run to ensure they meet accepted lead levels
before being shipped to stores.

If testing will be outsourced, create criteria to accredit testing or inspecting

organizations. Audit or inspection run by third party inspectors. Holding periodic
action evaluations

Creating new procedures for sampling and testing products as they come off the
production lines. Develop new regulations to require more rigorous and frequent
safety checks. Improved toy safety guidelines and checkings.

Also, develop the right relationships of trust and reliability and strengthen
communication. Corporate communicators must cultivate cross-cultural
relationships based on respect for equals. And because a company's reputation
may be affected by its suppliers' business practices, corporate directives should
be clearly communicated to suppliers at all times.

Mattel reorganized internal operations to emphasize commitment to product

safety. Monitor domestic and international vendor and manufacturer adherence
to Mattel's toy safety standards.

Mattel will only use paint from certified suppliers. Every single batch of paint at
every single vendor will be tested. Paint that doesnt pass will be discarded
without exception. All paint must be tested before it is used on toys, no
exceptions.

Focused on realistic quality control solutions. The company faces challenges

such as reassuring the public that outsourcing to China is not a high-risk
manufacturing move, and that Chinese suppliers and the Chinese government
are likewise willing to cooperate. Must face and deal with challenges of operating
a socially responsible business through emphasizing on ethics and
environmental awareness. Company's commitment to children by providing the
safest toy.

Government

Tighter import and export regulations. All toys must pass the test to ensure it
conforms to safety standards.
10

Inspections conducted by outside parties and higher penalties for those that fail
to comply. The need for stricter safety standards, as well as tougher penalties for
companies.

Support more stringent regulations enforced by an independent, international

regulatory body.

Competitors and Industry

Continuously strive for product excellence in terms of quality and safety to

provide the most superior and safest toy product for its consumers that will boost
sales leading to industry profitability.

Public/Consumers

Must be vigilant in product purchase like toys for children. The buying public must
be reminded that even the biggest and trusted name in toy industry may also
suffer from problem relating to quality and safety.

RECOMMENDATIONS

Lee Der Industrial manufacturing system particularly its inventory system on raw
materials and purchasing must be designed in a way that it will ensure the right
supply of materials for production thus preventing rush purchase orders of raw
materials.

Carefully select suppliers for paint through creating criteria that adheres with
standards of Mattels product safety and quality.

Lee Der Industrial should consider at least three (3) suppliers for each raw
material to be used in production. It must distribute its purchase order among
suppliers. This will avoid rush and possible shortage of raw materials. Moreover,
having more than one supplier for a certain raw material, it enables Lee Der
Industrial to perform price comparison, thus acquiring the most reasonably priced
raw materials with the best quality.

Mattel must carefully select offshore manufacturing company through specified

selection criteria. Offshore manufacturers must be able to strictly comply and
implement Mattels standard on product safety and quality.

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Significantly increased testing and unannounced inspections at every stage of

production. Testing every production run of finished toys to ensure compliance
before they reach consumers.

Requires strong corporate communicators who can delicately and deliberately

balance supplier, customer, governmental, media, and investor relationships to
regain consumer confidence and controlling the dissemination of product safety
information. Mattel regain the trust of consumers, investors, and regulators
through transparent corporate communication and commitment to real change,
but it must also regain the trust of the international community.

Try to shift more of their toy production into factories they own and operate
and away from Chinese contractors and sub-contractors. Reducing the amount
of toys it makes through contract factories.

LESSON LEARNED

Business activities are becoming increasingly global as numerous firms expand

their operations into overseas markets. Globalization through offshore
manufacturing must never sacrifice product quality and safety. In case of Mattels
recall, the toy maker must be strict in adhering with its commitment of providing
the buying public with the safest toys.

As a consumer, we should be cautious with the products available in the market.

We should be very watchful for products raw materials, checking labels whether
it passes through safety standards.

Prioritize public safety and health with products of superior quality and safest
standards.

EXHIBITS

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CASE 7 GLOBALIZATION
Table of Contents
EXECUTIVE SUMMARY1
PROBLEM STATEMENT............................................................................................................. 5
DATA ANALYSIS.......................................................................................................................... 6
KEY DECISION CRITERIA.......................................................................................................... 8
ALTERNATIVE ANALYSIS...........................................................................................................8
RECOMMENDATIONS..............................................................................................................11
LESSON LEARNED.................................................................................................................. 12
EXHIBITS.................................................................................................................................. 12

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