[Case 3 ‘Matt&l Toy Recalls Product Recalls at Mattel Inc. On August 2, 2007, NBC's John Yang reported on the Today show of a “global recall" from Fisher Price involving approximately one million toys. With initial reactions from stunned mothers, the report represented public anxiety over the risk to children’s safety. That recall would be only the first of three major recalls in that month for Mattel, the parent company of Fisher Price. There had been criti cal steps preceding these recalls; additional actions followed, This case describes the actions taken by key stakeholders during Matte!’s three major recalls in August 2007, ‘one of which was the largest recall initiated by the world’s largest toy company. ‘Where it Began According to Mattel executives, lead paint was discovered on some its toys by a European retailer. On July 6, 2007, Mattel halted the production of toys at the manufacturing plant that produced the toys while the company initiated an investigation. On July 18, Mattel gave a New York Times reporter a tour of the manufacturing facility in Guanyao, China, and its safety lab in Shenzhen, China. Mattel’s position during the investigation was that it was unaware of whether the issue was an isolated problem or if there was a larger scale impact. ‘On July 26, Mattel executives received data that confirmed there was a safety risk in 83 of their products. This prompted them to contact their retailers who were distributing the affected toys. The communication was made ‘to the public on August I, 2007. According to Mattel, the issue was self identified and the Consumer Product Safety Commission was made aware of the problem. David Allmark, general manager of Fisher Price, a division of Mattel, committed to vigorously investigate and learn from the problem through the following statement: “We are still concluding the investigation, how it happened. But there will be a dramatic investigation on how this happened. We will learn from ths.” Allmark also indicated that the recall was accelerated, which gave Fisher Price the opportunity to quarantine approximately two-thirds of the 967,000 toys before they were sold to the public. ‘On August 8, Mattel identified the vendor responsible for the recalled toys. Mattel's CEO, Robert Eckert, issued the following statement during an interview regarding the contract manufacturer that produced the toys: “This is a vendor plant with whom we've worked for 15 years; this isn't somebody that just started making toys for us,” In an interview, Eckert stated: “They understand our regulations, they understand our program, and something went wrong. That hurts.” Mattel further communicated that they were unaware of whether the ‘manufacturer had received materials from a certified supplier or if they had substituted materials from a non-cer- tified supplier. ‘On August 11, 2007 the lead executive of the manufacturing company linked to the Mattel recall of toys lead-based paint committed suicide. Zhang Shuhong, who led the Lee Der Industrial Co., was found More Bad News On August 14, 2007 Mattel issued two additional recalls related to toys developed by Chinese con- tract manufacturers. The ist action was a second instance of lead paint discovered ina diecast vehicle model marketed 28a character from the movie, Toys. This recall affected 436,000 toys, all of which were manufactured by a diferent company than Lee Der Industrial Co. According to Mattel, the products ware manufactured between May and july of 2007 and were discovered as part of a systemic review of its toy manufacturing following the initial finding of lead paint.EN PIP Ce ee eee ‘The second action was taken to expand the scope of an earlier recall to address 18.2 milion magnetic toys that had a “design flaw.” The recal included 63 types of toys that had been manufactured since 2002 and were confirmed by the Consumer Product Safety Commission as having been manufactured in China. This “design flaw” allowed small magnets to come apart from the toy with the risk of being swallowed by children. The first incident likely ‘ame from seven-year-old Paige Kostrzewsld in july, 2005. Kostrzewski had accidentally swallowed two magnets, ‘hich then gravitated to each other based on their magnetic pull while inside her intestines. Surgery revealed that the magnets had punctured holes in her intestines, and, according to her mother, “caused everything to just seep Into her body." Luckily, Kostraewski recovered after a two-week hospital stay and follow-up treatment to address ‘aninfection. As a result, in November 2005, Mattel voluntarily recalled 4.4 milion of the models, 2.5 million of which were in the United States. In terms of the August |4th recal, Nancy A. Nord of the Consumer Product Safety Commission indicated that ‘io recent injuries had been reported for the products being recalled and that the action was “intentionally broad to prevent injuries.” However, previous recalls in November 2005 of the magnetic “design flaw” in Polly Pocket toys did include injuries. Specifically, 19 children have required surgery and one child has died since 2003. According to a New York Times article, “Mattel Recalls 19 Million Toys Sent From China,” published on ‘August 15, 2007, Mattel executives had stated the previous day that “in the long run [We] are trying to shift more of four] toy production into factories [we] own and operate—and away from Chinese contractors and sub-contractors.” However, the same article clarified that the cause of thé recall was based on a design flaw, and that while the Chinese manufacturers were producing the toys, the design of the product was developed by Mattel—who is ultimately responsible for the specification. ‘What Took So Long? Following the recalls, public speculation grew as to whether Mattel could have warned the public of these safety risks any earlier. Gerrick Johnson, an analyst with BMO Capital Markets, indi- cated that Mattel could have alerted the public sooner through the following comments: “You have to alert the public right away. | think it’s a public relations nightmare more than anything else.” Other ans Iysts believe the company has been proactive and transparent. Sean McGowan, an analyst at Wedbush Mor- gan Securities Inc. felt Mattel would achieve a “long-term trust” as a result of Mattel “being honest about investigating any other problems.” ‘According to a Wall Street Journal article, “Safety Agency, Mattel Clash Over Disclosures,” the Consumer Product Safety Commission has a policy that requires manufacturers to report “all claims of potentially hazardous product defects within 24 hours, with few exceptions.” In the case of the recall of 18 million magnetic toys, Mattel took months to collect and analyze data and reports before notifying the agency. Companies that produce similar ‘toys as Mattel with magnetic components have worked with the Consumer Safety Commission since early 2006, Based on the company’s history, this non-compliance represents a systemic practice. The company has been fined twice for what was described as “knowingly withholding information regarding problems that “created an Unreasonable risk of serious injury or death.” The first incident was related to a fallure to report a fire hazard in a timely manner for its Power Wheels ‘motorized toys, which were intended to be ridden by children aged two years or older. According to Ann Brown, chair of the Consumer Products Safety Commission, Mattel knew of the risk to children’s safety, however “did nothing for years.” The penalty for not reporting the hazard to the agency was assessed in 2001 after a recall of 10 milion toys in 1998. According to the agency, there were approximately 150 reports of fires in the Power ‘Wheels cars as well as up to 10 times that number of complaints for overheating and other deficiencies prior to the company's issuing the recall. The Consumer Products Safety Commission remained skeptical of Mattel’s handling of the Power Wheels recall, and initiated at least nine different investigations into whether problems had occurred following the recall “The second fine was issued for a problem that occurred just a year after the Power Wheels penalty. in 2002, Mattel became aware of issues with its Little People Animal Sounds Farm. The complaints claimed that tiny screws used in the farm could become loose and pose the risk of a child accidentally swallowing them. In an investigation conducted by the U.S. government, it was determined that Mattel was made aware of 33 reports of this safety hazard—including one instance of a baby swallowing the screw, which required emergency surgery— before informing the Consumer Products Safety Commission. Mattel reached a settlement of 975,000 dollars, yet denied any wrongdoing. A recall of the product was initiated in April 2003,286 Business Ethics: Concepts and Cases, Mattel is also under scrutiny for the more recent recalls involving the 18 million units of toys containing magnetic components. Between the intial Polly Pocket recall in November 2006 and the expanded recall of August 2007 for the same issue, Mattel received an additional 400 reports of similar magnetic hazards with diferent toys. It is not currently known how long Mattel waited before notifying the agency of these reports. The Consumer Product Safety Commission is currently investigating Mattel on the timeliness of its reporting practices and has not made that information public. However, when Mattel CEO Robert Eckert was asked in September 2007 of the date of disclosure for the magnetic component recall, he responded that he “he couldn't remember when the company brought the complaints about the magnets to the attention of authorities.” While there have been specific cases of untimely disclosures from Mattel, there have also been comments issued from Eckert rationalizing Mattel’s untimely practice and justifying its position for waiting extend periods before notifying the agency and the public. Eckert has claimed that the company discloses problems on its own timetable due to a belief that the regulatory requirements are “unreasonable.” Furthermore, Eckert clalmed that Mattel should have the ability to evaluate any reports of safety hazards prior to reporting them to the agency or the public. The Consumer Product Safety Commission disagreed in a statement issued by the agency’s spokesperson, Julie Valese: “it's a statute; its clear.” In late 2007, the agency initiated a formal investigation into the timeliness of Mattel’ hazardous incidents reporting process to examine its more recent disclosures. The Aftermath Following the lead paint recall on August 1, 2007, Mattel commiinicated that it would evaluate methods of addressing the problem. Mattel CEO Robert Eckert indicated that this would include the possibility of reducing the amount of toys it produces through contract manufacturers. In what appeared to be an attempt at distancing itself from its Chinese contract manufacturers, Eckert issued the following statement: “I ike you, am. deeply disturbed and disappointed by recent events. We were let down, and so we let you down.” Despite comments that deflected a portion of the responsiblity, Eckert also made statements following the second cycle of recallsissuedon August 4 whichattemptedto appease consumers and regaintheir trust. Inafull-page advertisement taken out in major newspapers such as the New York Times, USA Today, and the Wall Street journal, Eckert stated: “Our long record of safety at Mattel is why we're one of the most trusted names with parents, and |fam confident that the actions we are taking now will maintain that trust.” Following the intial comments issued by Mattel, Chinese manufacturers defended themselves against infer- ‘ences that U.S. companies did not share the blame. The following statement was issued by China's General Administration of Quality Supervision, Inspection and Quarantine: “Chinese original equipment manufacturers ‘were doing the job just as importers requested, and the toys conformed with the U.S. regulations and standards at the time of the production.” Specific to Mattel, the organization stated: “Mattel should improve its product design and supervision over product quality.” In September 2007, Mattel seemed to agree with the Chinese position, and launched a public relations ‘campaign to issue a formal apology to those in China whose reputations were affected. Mattel’s executive vice president for Worldwide Operations, Thomas Debrowski, met with the head of Chinese Product Safety, Li Changiiang, to issue the following statement: “Mattel takes full responsibility for these recalls and apologizes personaly to you, the Chinese people, and all of our customers who received the toys.” Debrowski went on to specifically identify the design flaw as the root cause of the magnetic-component-based recall: “The vast majority cof those products that were recalled were the result ofa design flaw in Mattel’s design, not through a manufac- turing flaw in China's manufacturers.” In addition, the company issued a formal statement which referenced the lead paint recall s well. The statement called the scope of the recall “overly inclusive, including toys that ‘may not have had lead in paint in excess of the U.S. standards.” ‘The statement continued, “The follow-up inspections also confirmed that part of the recalled toys complied with the US. standards." ‘On September 12, 2007, a congressional hearing was held to attempt to identify what needed to be done to ensure that the types of recalls issued by Mattel do not continue. Congress assigned equal blame to all parties across the board, including the Chinese safety standards, Mattel, and the Consumer Products Safety ‘Commission.‘Appenenx A; Wases 207 Mattel recognized its level of responsibilty through a response from Eckert: “We are by no means perfect.” Mattel continued that it would rectify the situation by taking steps such as better oversight of quality controls for its contract manufacturers and instituting its own laboratories for testing of its products. ‘The Consumer Products Safety Commission has conceded that it is understaffed. From 1974 to 2007, the agency's employee number has been reduced from 800 to 400, What is even more alarming that there is only one. resource dedicated to the actual testing of toys. ‘The Chinese manufacturers were also identified by Congress. Republican Senator Sam Browmback of Kansas concluded that “Made in China’ has now become a warning label.” Brownback continued: “We're seeing this in the charts and we're seeing itn the products and it's got to stop. While the fallout from the 2007 toy recalls will continue for Mattel and all parties involved, the result will likely be stricter policy, stronger internal quality controls, and improved subcontractor oversight, all of which will ultimately benef consumer safety]