Mattel - Presentation of the case

SUPPLY CHAIN MANAGEMENT CESCM TEACHING CASE 2012/02

Mattel supply chain organization [A] PER J. AGRELL

2012

Mattel supply chain organization [A] Per Agrell, 2012

Introduction Mattel was formed in 1945 by Harold “Matt” Matson and Elliot Handler (the name is formed by the first names) wanting to sell picture frames. Slowly the firm began to make dollhouses, musical instruments, and toy guns. Over the past fifty years the company has grown to be the world’s largest designer, manufacturer, and marketer of toys. Mattel has built remarkable brand recognition and loyalty for the company and their major brands like Barbie (since 1959), Fisher-Price, Matchbox, Hot Wheels, Masters of the Universe, American Girl and Cabbage Patch Kids, see Figure 1. By using marketing research, Mattel plans to produce new toys for foreign markets rather than just adapting toys popular in the United States. The company also places emphasis on their marketing strategy to make sure the products reflect the company’s attempt to serve the needs and wants of their target market. Based on the demand for more realistic dolls, Mattel redesigned Barbie with a smaller chest, larger waist, and softer hairstyles.

Table 1 Selected data from Mattel P&L (Mattel, 2012).

k$ Sales US Sales Rest of the World Gross sales Net sales COGS Gross Profit Advertising & promotion Licensing fees Net income after tax

2009 3 176 009 2 758 315 5 934 324 5 430 846 2 716 149 2 714 697 609 753 188 500 528 704

2010 3 465 780 2 920 830 6 386 610 5 856 195 2 901 222 2 954 973 647 270 245 900 684 863

2011 3 580 670 3 260 417 6 841 087 6 266 037 3 120 211 3 145 826 699 247 262 400 768 508

In 1999, Mattel was experiencing reduced revenue levels because of the decrease in sales to Toys’R’Us, complications with the Learning Company, and heavy inventory writedowns at Christmas (produced 625 MUSD of StarWars toys, selling 500 MUSD). The experiences were the more painful as the company had suffered a 500 MUSD inventory loss in 1998, prompting for heavy investments in demand

2(7) forecasting tools. Jill Barad was stepping down after three years as the CEO, due to pressure from the board. Product recalls 2007 A highly mediatized event for the Mattel supply chain was the August 7, 2007 recall of about 1.5 million plastic toys of 83 models due to non-compliant levels of lead in the paint made at Tier-2 Chinese suppliers1. This recall was immediately followed August 14, 2007 by a recall of 18 million products due to inadequately strong magnets in toys, potentially leading to danger if swallowed by children. Two subsequent recalls on September 4 (848,00 Barbie accessories and toy trains) and on October 25, 2007 (55,500 toy boats) completed the picture of a very poor supply chain control. In all, Mattel has to recall 21 million toys with a retail value of 306 MUSD, corresponding to 5.6% of the annual revenue (2007). Consequently, the stock market reacted with a drop of 5.8% of the stock price for Mattel. The product recalls prompted Mattel to increase their quality assurance budget (QA) by 25% and to revisit the previously strong trend to completely subcontract the production of toys. Demand The demand for toys is highly seasonal, with up to 85% of the item sales during the fourth quarter. The final consumers do not accept backlogging and retailers are well aware of the fact that the visibility and availability of the product in the store is highly correlated to sales. Depending on the type of toy, the demand can be either induced or independent. Induced demand follows a coordinated investment across multiple industries, usually around a media event (games and/or film releases). The demand for such co-licensed toys (cf Figure 2) is highly punctual and often substancially higher than any other comparative product. From a profitability viewpoint, the savings on marketing expenses in spite of high impact coverage is very attractive. Independent products are marketed and sold under the Mattel brand with lower volumes and variability. A general reduction of the product life cycle has been noticable across all products. On average, the age of a typical Mattel is 6 month at replacement. Product development is very important in this business and Mattel launches around 300 new products per year for outsourced production and a similar number for insourced production.

The recall was taken seriously by the subcontractors. The co-owner Zhang Shuhon of the supplier Lee Der Toy Company in China, a Mattel Tier-1 supplier, commited suicide in one the plants oin August 11, 2007 (Hoyt and Lee, 2008). Lee Der Toy Company later bankrupted.

1

© 2012 Louvain School of Management, Université catholique de Louvain. (Excl. Figure 1 and 2).

mpetencies

American Girl Experience Creation

Infant/Toddler Product Development

Strategic Partnerships

Brand Management

Market 3(7) Intelligence

Company Company

d Portfolio Brand

Portfolios

Figure 1 Mattel brand portfolio. Source: Babich et al (2006). •Barbie •Hot Wheels •Magic 8 Ball •Rock‘em Sock’em Robots •UNO •Scene It? •Tyco R/C •Vidster •ello •My Scene •Polly Pocket •Disney Princesses •Max Steel

•Baby Playzone Kick & Whirl Carnival •Peek a Blocks •See ‘n Say •Little People •Learn through Music Plus •InteracTV DVD Based Learning System •Dress-up Adventure Dora •Brilliant Basics Snap-Lock Beads •Link-a-doos Take-Along Playquilt •ESPN Shot Block Basketball •Rescue Heroes •Pixter •View-Master

•Historical Characters •Jess: Girl of the Year •Just Like You Dolls •Bitty Baby •Bitty Twins •Home Party Kits •Bath and Body Care Products •Character Books

tel Strategic Plan | Babitch, Gili Fort, Kim, Nyberg & Wang

Figure 2 Example of licensed Mattel product (Source: unknown).

© 2012 Louvain School of Management, Université catholique de Louvain. (Excl. Figure 1 and 2).

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4(7)

EXHIBIT 2: Hot Wheels and Matchbox Products

Figure 3 Typical Matchbox and Hot Wheel die-cast products. Source: Johnson (2006) 24

Supply chain structure The current supply chain structure for Mattel is presented in Figure 4 below. The Tier-2 suppliers are almost exclusively located in China and usually provide competititors and local brands with similar items. The outsourced production is organized through Vendor Operations Asia (VOA), a fully integrated supply chain coordinator with over 400 employees and 1,400 MUSD turnover2. VOA selects new suppliers and contract manufacturers based on time to market, manufacturing competencies and price. VOA operates normally on price-relation contracts with their tier-1 suppliers, production is organized in seasonal or, exceptionally, in batch runs per product line. Production Mattel is the world’s largest manufacturer of toys with more than 30,000 direct employees and, including subcontractors, about 75,000 employees work with Mattel production in 150 different product lines. Mattel operates 13 factories of their own in China, Thailand, Malaysia, Indonesia and Mexico. The process is based on a flow-shop layout with the sequence die-cast molding, spraying, paint coloring, fine coloring, assembly, packaging and shipping. Sewing is outsourced to local suppliers delivering directly to the assembly stage. A typical plant in

2

Johnson (2008)

© 2012 Louvain School of Management, Université catholique de Louvain. (Excl. Figure 1 and 2).

5(7) China3 (Guanyao) produces two lines (metallic Hot Wheels cars, Figure 3, and Fisher-Price plastic toys), employing about 3,000 mostly young and female workers, working 10 hours per days for 6 days/week. The typical monthly salaries in China are 175 - 200 USD. The plant operates 20h per day for six days/week. For comparison, the productivity of the Chinese labor is about 14% of the US, leading to an overall productivity adjusted labor cost of about 18% of the US equivalent. Depending on currency exchange rates, the productivity adjusted labor costs for Malaysia, Thailand, Indonesia and Mexico are comparable4. Distribution and retail The distribution of Mattel products is made through independent retailers and wholesalers in 155 nations throughout the world. A network of 36 regional DCs servce the local retailers. Three large retailers, Wal-Mart, Toys R Us and Target correspond to about 40% of the total Mattel sales worldwide. For one brand (American Girl) Mattel also operates integrated retail outlets in the US, where the volume is particularly high. Since 2005 Mattel is also selling products and offering active promotion using a web interface operated from the US. However, the main distribution channels remain the traditional toy stores where clients (parents and children) buy from the shelf inventory. Backlogging is virtually nonexisting and product substitution is high for most product lines. After the prime sales period, obsolete products are salvaged through wholesale auctions in the market where they are sold. Competition Some competititors of Mattel are Hasbro (a traditional toy manufacturer of similar size), Leapfrog (educational toys), Jakks and Radica (electronic toys). The competitors use similar manufacturing processes and also license part of their products with the same license holders (Disney, Pixlar etc) as Mattel. The strongest competitive strength of Mattel has been the core brands.

Financial conditions Mattel pays direct costs FOB for subcontracting per item, to which a licensing fee is added for products using proprietary brands, components or technologies. The licensing fee is paid per product produced, not sold. Retailers place their orders at the Mattel order clearing central, serving the demand from (third-party) distribution centers. Retailers pay a wholesale price at delivery. At the retail stage, the retail price is valid during the selling period only, it can be assumed that all unsold items can be sold at salvage auctions at the estimated salvage value. 3 4

Guanyao plant, cf. Barboza and Story (2007) Johnson (2008)

Mattel © 2012 Louvain School of Management, Université catholique de Louvain. (Excl. Figure 1 and 2).

Current Value Web 6(7)

web illustrates y integrated only true for Wheels brands. er branded .) This level ually be g radically s challenging igned with in mind.

Raw Material Suppliers Raw Materials

$

$

Content Owners

is the money paid to censed content. duces a very nal content, a rea for them ificant financial

$ Toys

Licensed Content

$

Parts

$204M

Mattel

$646 million 5, they don’t direct contact onships with become as on?

s, Mattel relies Toys R’ Us, and distribution. have g power and nt control over old through cost of those

3rd Party Manufacturers

Raw Materials

$5B

Toys

Mattel Manufacturing

Toys

Toys and Retail experiences

Distributors $ $$

-product sites -small eCommerce -MyScene Clubs

3rd party Retailers

American Girl Place

Mattel Web Channel

eRetailers and Physical

Walmart $1.0B Toys R’Us $.8B Target $.5B

Toys and experiences

Toys and experiences

$ Attention & Loyalty

Advertising $646M

Toys

$$$

Toys

Customers Kids Parents

Figure 4 Mattel supply chain organization. Babitch et al. (2006)

Mattel Strategic Plan | Babitch, Gili Fort, Kim, Nyberg & Wang

© 2012 Louvain School of Management, Université catholique de Louvain. (Excl. Figure 1 and 2).

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7(7) Mission The new CEO of Mattel from 2011, Bryan Stockton, has given your department two projects to support the supply chain planning for next year. First, your task is to assign a number of new product lines to existing product facilities or to outsource, taking into account the capacity limitations of the current manufacturing resources. Outsourcing has no production constraints. To enable this decision, the manufacturing division has supplied you with manufacturing costs and resource usage per product and VOA has given the net cost per outsourced product, including QA and transport. Second, you must find coordination tools (contracts) to ensure the optimal availability of the new products for the coming Christmas period. For this analysis, you have access to demand forecasts and retail prices for all new products. Sources Babitch, S, E G Fort, A Kim, P Nyberg, and A Wang, (2006) The Future of Play: Mattel Strategic Plan. Working Paper, Stategic Design Planning Workshop, Illinois Institute of Technology. Biggemann, S (2008). The Mattel Affairs: Dealing in the Complexity of Extended Networks. Proceedings, 24th IMP conference. Hoyt, D and H L Lee (2008) Unsafe for Children: mattel’s Toy Recalls and Supply Chain Management. Case GS-63, Stanford Graduate School of Business. Johnson E M (2007) Dual Sourcing Strategies: Operational Hedging and Outsourcing to Reducing Risk in Low-Cost Countries. In Lee H L and Lee C-Y (Eds.) Building Supply Chain Excellence in Emerging Economies, Springer, Ch 5, pp. 113-136. Mattel (2012) Annual Report 2011. www.mattel.com Wisner, J D (2010) The Chinese-made Toy Recalls at Mattel, Inc. Teaching Case. College of Business, University of Nevada. Barboza, D and L Story (2007) Toymaking in China, Mattel’s Way. New York Times, July 26, 2007.

© 2012 Louvain School of Management, Université catholique de Louvain. (Excl. Figure 1 and 2).