Supply Chain Analysis of Mattel Assignment

Supply Chain Analysis of Mattel Assignment Words: 6927

Executive Summary Team 2 has researched and completed a comparative analysis of Mattel’s supply chain design and related costs with that of its major competitor Hasbro and the toy industry. What follows, is a brief background of Mattel’s traditional (non-electronic game) sector, its key competitors and Mattel’s use of supply chain management concepts in addressing the competitive landscape to gain a competitive advantage. The global toy and game market grew by 7. 2% in 2007 with a value of $106. 1 billion and by 2012, is forecasted to have a value of $126. billion, an increase of 18. 9% over 2007. The toy market is divided into three primary sectors, namely game consoles, game software and traditional toys and games. Traditional toys and games remain the largest segment, generating total revenues of $61. 8 billion, equivalent to 58. 2% of the market’s overall value. Mattel recorded revenues of $ 5. 65 billion in 2006 and $ 5. 97 billion in 2007. Mattel’s key competitors in the traditional toy industry include Hasbro, Bandai, Lego, The Middleton Doll Company, Atari, Electronic Arts, Blitz Games, Leapfrog Enterprises, Inc. nd several others (Datamonitor). Mattel is a designer, manufacturer, and marketer of traditional toy products. Mattel’s products are sold directly to retailers and wholesalers in 150 countries in North America, Europe, Asia and Latin America. The average age of a Mattel product is six months before it is replaced (ALLBUSINESS). Mattel manufactures toy products in both company-owned facilities and through independent contractors. Mattel also purchases products from third parties which design, develop and manufacture those products.

Mattel’s principal manufacturing facilities are located in China, Indonesia, Malaysia, Mexico and Thailand while the independent contractors manufacture products primarily in Southern China, and increasingly in the northern provinces of China. Mattel also has distribution centers in 32 countries. Its market segments are separately managed business units and are further divided into domestic and international business units. The U. S. domestic segment of Mattel is further sub-divided into Mattel Girls & Boys, Fisher- Price, and American Girl brands.

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The Mattel Girls & Boys division offers brands such as Barbie fashion dolls and accessories, My Scene, Barbie Collector and Polly Pocket. Mattel’s other product offerings include Hot Wheels, Matchbox, and Tyco R/C. The entertainment products include Nickelodeon, Harry Potter, Yu-Gi-Oh! , Mega-Man and Superman, Radica and Justice League products, as well as games and puzzles. The company’s Fisher-Price segment includes Fisher-Price, Power Wheels, Sesame Street, Little People, Winnie the Pooh, Rescue Heroes, See ‘N Say and Dora the Explorer (Datamonitor).

Mattel has balanced the need for a responsive supply chain with the ability to source its toys from low cost labor countries in Asia. While Mattel uses Point of Sale (POS) data, the long distances between manufacturer and consumer are quite large and transportation times can be upwards of three weeks. As a result, the cycle time between ordering and delivery can be quite long. In order to provide a buffer to prevent stock outs, Mattel uses distribution centers to hold some inventory. Holding inventory is not risk free as Mattel writes off approximately $50 million per year of inventory obsolescence.

However, the ability to produce toys cheaply in countries like China, Indonesia and Thailand provides cost benefits over and above the cost of inventory obsolescence. The clockspeed of the toy business has been accelerating as kids have been getting older younger (KGOY) (Garner). This has effectively shortened the product lifecycle as children move from one stage to another more quickly. In addition, many toys are tied to media launches such as movies and television shows, which are frequently one off production runs.

The faster clockspeed of the toy industry would, in theory, dictate that manufacturing be close to the POS to increase supply chain responsiveness. However, the practical issue of much lower labor costs in Asia have driven Mattel to source nearly all of its products from that region. Rather than having the most responsive supply chain possible, Mattel has attempted to design a leaner supply chain as evidenced by the use of POS data sharing and combining shipments. Mattel has successfully implemented inventory management concepts in leveraging its distribution assets, ensuring that product availability remains high.

It has implemented advanced technologies such as Radio Frequency Identification (RFID) and Electronic Data Interchange (EDI) to effectively collaborate with its largest customers. By continuing to optimize its supply chain through application of advanced supply chain concepts, technologies and policies, Mattel continues to lead the traditional toy industry. Mattel has strong financials and is on solid footing for the near future. Mattel is an industry leader in categories of inventory turnover and return on equity.

The high inventory turnover indicates that Mattel has an efficient supply chain and can replace inventory quickly without having stock outs. Mattel’s return on equity is very high at 21% compared with the industry average of 10%. While the quick and current ratios are a little low compared with the industry, they are still high enough to ensure sufficient cash flow. In summary, Mattel is on solid financial footing and is at or near the top of the industry on all key financial measures. Mattel’s Supply Chain Management The complexity of Mattel’s global supply chain footprint is shown in Figure 1.

Its products are innovative and come in a great variety requiring significant flexibility in order to manage the short product life cycle and demand volatility. Many of the concepts and factors identified in the article in the Harvard Business review on “Distance Still Matters: The Hard Reality of Global Expansion” by Pankaj Ghemawat impact Mattel. These include currency fluctuations, logistical challenges of international trade, customs clearances, quality assurance, legal and regulatory obstacles, reverse logistics challenges (product recalls and returns management), multiple languages, and information technology.

These challenges have forced Mattel into using sound supply chain management principles in areas such as demand planning, manufacturing execution, inventory management, supply management, strategic sourcing, supplier integration, contract manufacturing, vendor managed inventories, and evaluated receipt settlement. Team 2 selected inventory management approach, information technology and regulatory compliance as the three aspects of Mattel’s supply chain to explore in further detail, below.

Mattel participates in two toy fairs a year in June and October where they show their newest products to buyers. Mattel and its competitors not only sell to retailers, but also to mass market accounts such as McDonald’s, Taco Bell and others (represented in Figure 1 as “Major Customers” or “Consume Product Tie-Ins”), They show products in June for the spring of the following year and again in October for the fall of the following year (Mattel Analyst Meeting, June 2007. This ong lead-time product delivery schedule presents many downstream challenges – for example, this year, the challenges were around the economic downturn leading to order cancellations, significant increases in fuel and raw material costs, which could have potentially lead to reduced profitability and slimmer margins, however, Mattel expects to pass these double digit cost increases along to the consumer and maintain product profitability and overall profit margins (Mattel Analyst meeting, June 2007).

Table-1: Supply Chain Approach Traditional and Supply Chain Approaches Compared Element Traditional (internal focus, short term)Supply Chain (SC focus, longer term) Inventory Management Approach Several weeks of supply available, possible stock outs for high demand itemsPoint of Sale (POS) very important, JIT inventory management + pre-ordering. Rigorous processes of inventory management for stocks of raw materials, products in process and finished goods on-site and on transit to and from distribution centers. 2 distribution centers spread-out through the five continents segregating them into three categories: Large, Medium and Small. Total Cost Approach Software improvements have allowed Mattel to minimize LTL shipments Time Horizon Some forecasts have increased from monthly to weekly; market seasonality requires that significant amounts are committed up-front by large customers (toy shows). Cycle time has been reduced Amount of Information Sharing And Monitoring Primarily intra-company business data exchange and sharingHigh- POS data eadily available; fraud monitoring and patent infringement monitoring. Outsourced suppliers are tested against Mattel’s QA/QC requirements under a collaborative framework through the . Supplier Certification Program. Testing and quality management represents 1. 5% of COGS. Amount of Coordination of Multiple Levels in the Channel Owned manufacturing facilities in China, Malaysia, Indonesia, Thailand and Mexico. Outsourced manufacturing purely based in china. 32 distribution centers around the Globe. Raw material “co-buy” program in China. Joint Planning

Forecasts are collaborative as well as predictive, based on historical trends (for “generation” products (e. g. Barbie, matchbox and hot wheels); market research and Customer Orders Compatibility of Corporate Philosophies Traditionally focused on the company’s image onlyChildren’s safety and consumer image are paramount to most toy manufacturers Breadth of Supplier Base Trend is to reduce the number of suppliers while certifying those that stay in the channel, providing greater volumes and obtaining greater discounts while simultaneously ensuring sustainable supply base.

Supplier reduction program aimed at reducing supplier base from 1,949 suppliers to 82. Target to realize cost savings of 5-10% Channel Leadership Tie-ins with other consumer products companies (e. g. McDonald); Amount of Sharing of Risks and Rewards Sharing of costs for regulatory non-compliance Speed of Operations, Information and Inventory Flows Get rid of spareUsually focused on reducing manufacturing cycle timesKaizen (reduction of lead-time from design to manufacture); Inventory Policies Accounting for “sales samples” and consumer and retailer returns; product recalls Information Technology

ERP and other similarly internally focused or “intra-company” focused applicationsCollaborative Demand Planning, Forecasting and Replenishment systems (CPFR), Enterprise Resource Planning systems (ERP), EDI systems, Royalty Management Systems, Customs and Border Patrol Clearance Systems integration, Contract Management Systems, Sales and Rebate management systems; International Trade, Logistics and Transportation Management Systems; Web Site and product Catalog systems; E-Commerce upstream Some application of Electronic Data Exchange (EDI)RFID, EDI, On-line design collaboration, CPFR E-Commerce downstreamEDI, RFID,

ESI (early supplier involvement) ESI in product development and packaging is key in reducing import duties and Tariff Supplier Development Supplier Certification Program, Quality Assurance and In-process checks (lead-free product testing); Channel Relations Maintaining multiple channel relationships extending from customer’s customer (consumer) to suppliers’ suppliers (fabric manufacturer for clothing manufacturer for Barbie’s dresses); other consumer product companies, movie studios, book publishers, retailers, wholesaler’s, 3PLs and 4PLs, Customs Clearance Agencies, Outsourcing

Mattel owns its Chinese manufacturing plants representing about 65% of its products (NY Times 7. 26. 2007). More than 50% of manufacturing activities are outsourced for non-product short life cycle products. Sustainability Regulatory ComplianceSignificant levels of regulatory compliance due to the nature of the business (consumer and children focused), e. g. Consumer Product Safety Act, federal hazardous Substances Act, Flammable Fabrics Act, Food, Drug and Cosmetics Act, Federal Trade Commission Act, Children’s Television Act and Children’s On-line Privacy Protection Act, Customs Trade Partnership Against Terrorism Act (C-TPAT)

Figure-1: Mattel’s Supply Chain Inventory Management Approach: Mattel and the toy industry face challenges and risks around demand uncertainty that can result in stock outs of hot products during the critical fourth quarter selling season and leftover inventory of slow moving products at the end of the season. This is a result of a large percentage of new, short life cycle, products being introduced each year. The economic gain from reducing stock outs of high demand products versus the risk of excess inventory of slow moving products is so great that investment in improving supply chain responsiveness is warranted.

This requires early sales data in order to respond to changing demand and eliminate stockouts and is dependant on sophisticated information technology systems and collaboration across its entire eco-system. Mattel uses real-time sales data made available through the Point of Sales (POS) systems to accurately track, report and replenish fast moving products. Mattel has successfully employed distribution and inventory management concepts for rapid response.

They have 32 distribution centers spread out across five continents to better respond to demand from its largest customers such as Wal-Mart, Toys R Us and Target. Mattel has also adopted modern technologies such as radio frequency identification tags (RFID) to monitor, track and manage in-transit inventory throughout its supply chain. This technology enables Mattel to react to customer demand on short notice, allowing them to move more product more quickly through their distribution channels where it is needed to convert inventory into cash. We will discuss the RFID system in the Information Technology section in more detail). Mattel offers its customers a Vendor Managed Inventory (VMI) program to ensure that its largest customers’ shelves are always stocked without relying on the customer having to place orders for the replenishment. The retailers have also demanded Just-In-Time (JIT) inventory management and companies like Mattel have been quick to respond to these demands by implementing Point-of-Sale (POS) systems to help them understand demand.

This strategy has helped Mattel reduce lost sales opportunities. Lack of product not only can result in lost sales, but potentially in lost customer to a competing product or toy. Another toy industry supply chain strategy that is applicable in addressing uncertain market reaction to innovative products is soliciting “early orders” from your largest customers, which helps hedging against uncertainty.

Mattel has mastered this by participating in Toy Industry Fairs and holding their own fairs where buyers commit to advance orders from its largest and most predictable customers. In delivering the products from its distribution centers to its customers, Mattel leverages technology and software to identify ways in which to minimize less than truckload (LTL) shipments (Information Week), a further testament to its ability to leverage supply chain principles in improving its supply chain responsiveness while reducing costs.

Information Technology: Once Mattel secures licenses for innovative characters and products (action figures, cars, dolls, etc. ) and makes royalty payments to the Licensor using the Royalty Payment System which is also integrated with its collaborative planning and forecasting system (CPFR) and its enterprise resource planning (ERP) system (see description below), it creates demand forecasts. Mattel also creates demand forecasts for products its own designers and creative artists create in its studios.

These forecasts are based on historical trends, early customer orders from its largest customers (as we saw above) and market research, conducted by its marketing department, to predict the annualized demand for its multitude of products (Figure 1). These forecasts need to be quickly shared and communicated by the U. S. designers to its Asian manufacturing and planning staff. By leveraging collaborative planning, forecasting and replenishment (CPFR) concepts and information systems (as indicated in Table-1), Mattel is able to accurately convert the demand signals into production schedules and replenishment cycles to meet consumer demands.

As mentioned in Ravi Venkatesan’s article in the Harvard Business Review, “Strategic Sourcing: To make or Not To make”, Mattel leverages the concepts of strategic sourcing in deciding which components or sub-components will be indispensable to its competitive position over subsequent product generations and keeping a tight control over those, while outsourcing the less strategic, short-term, seasonal products and components to its suppliers and contract manufacturers.

Barbie dolls are a good example of their product design and offering. Mattel and its design and manufacturing engineers make key decisions based on supplier and market analysis tools and technologies to decide which product families could be outsourced and where. For example; a vast majority of Mattel’s doll clothing and fashion design clothing comes from Indonesia and Thailand where large volumes of fabric can be procured at a reasonable price and labor is cheap, especially when compared to the more advanced countries like the U.

S. and Europe. Mattel also purchases the majority of its resins, fabric, hair and other materials (see Figure-2) within the region or locally from many suppliers, collectively shown as “Suppliers” in Figure-1, These materials are then delivered to Mattel’s manufacturing facilities or to its sub-contractors, based on Mattel’s assignment and allocation of manufacturing capacity across its various plants, using enterprise resource planning (ERP) systems.

Once the design-for-manufacturability concepts are applied and Bills of Materials (BOM) are consolidated and product specifications are defined for the various products and communicated using the ERP system (see reference in Table-1), sourcing processes are used Mattel. They frequently select “local” preferred suppliers for placing large volume orders for high quality and prompt delivery of products designed to meet Mattel’s forecasts across planning horizons.

Recently, Mattel announced that it will start consolidating its supplier base, reducing it from 1,949 to 261 and eventually less than 100. (Datamonitor) This demonstrates that Mattel is seeking to optimize its supply base, develop key strategic supplier relationships, build trust by addressing quality issues improve reliability, all of which are rooted in the principles of supply chain management. Other systems that Mattel uses to effectively communicate with its retailers and customers (as indicated in Table-1) are the Electronic Data Interchange (EDI) system.

This allows for error-free order processing, which streamlines the order-to-cash process while simultaneously reducing the ordering cycle time and eliminating manual data entry. At the back-end of its foreign operations, Mattel leverages logistics, transportation and international trade management systems to help manage, track, report and monitor product throughout its supply chain as it leaves its overseas manufacturing locations and is distributed through cross-docking and customs clearance posts, eventually reaching its customers around the world.

Mattel’s annual spend is $1. 3 billion (Figure 2). They have been challenged by rising prices for commodities, energy, labor, logistics and currency. Materials represent 40% of the cost of goods sold (resins alone account for 10-12%), labor 15%, manufacturing overhead 15%, and indirect costs 30%. Mattel is currently focused on implementing lean manufacturing practices which are projected to save $30 million annually and is being expanded into their third tier suppliers. Figure-2: Mattel’s Annual Spend

Regulatory Compliance: Mattel produces a wide variety of products in its own plants in Asia and Mexico, and also purchases product from sub-contractors and contract manufacturers. Mattel owns its Chinese manufacturing plants which produce roughly 65% of its products (NY Times 7. 26. 2007). Managing the logistical challenges in getting finished products to the packaging plants and then to the shipping docks and then across borders is critical to Mattel. The Harmonized Tariff Code requires accurate and precise labeling on packaging where the product is produced (country of origin).

Failure to do so can result in significant fines and penalties, loss of inventory, reputational harm, and in extreme cases could result in the revocation of the license to import and operate the business. Mattel relies on third party logistics suppliers (3PLs) to expedite customs clearance and cycle time reduction, which they accomplish by leveraging advanced technologies such as RFID tags for faster, more accurate and real-time processing of shipping data, and advanced shipping notifications that are required for Customs Trade Partnership Against Terrorism (C-TPAT) certified shipments.

The C-TPAT certification has become an increasingly important program for companies to adopt, which Mattel has implemented and has helped to reduce the in-transit cycle time expediting delivery of products from its foreign manufacturing locations to its customers worldwide. Mattel creates demand for its products through advertising and promotions. A major undertaking for Mattel’s marketing organization is negotiating television advertising spots for its products on children’s programs. Timely introduction of products, action figures, and toys, often coinciding with the release of a major motion picture (Batman, Cars, etc. , is critical to sales. Advertising, promotion and rebate programs provide opportunities for automation and customer interaction. Customer satisfaction is paramount in the toy industry and returns as well as rejects are quite common. Mattel’s supply chain must have the ability to identify which products might be at issue (as it did in 2007 when products were recalled due to the use of lead-based paints) the locations where a product was sold, the range of dates during which the product was sold. The regulatory challenges now facing the toy industry and Mattel are tremendous.

A short list of regulatory compliance agencies governing Mattel’s products and supply chain would include (but may not be limited to) the following: Consumer Product Safety Act, Federal Hazardous Substances Act, Flammable Fabrics Act, Food, Drug and Cosmetics Act, Federal Trade Commission Act, Children’s Television Act and Children’s On-line Privacy Protection Act (Datamonitor) and the Customs Trade Partnership Against Terrorism Act (C-TPAT). Financial Evaluation Balance Sheet Inventory – Mattel’s business is highly seasonal.

A significant portion of sales occur in the 3rd and 4th quarters. As a result, Mattel spends the first 3 quarters building inventories with WIP and inventory in transit. Inventories have increased due to international expansion and the increased lead times for international shipments. As a result, inventory costs have increased by $45. 6 million from 2006 to 2007. With increased need for reduced inventories or the need for just-in-time (JIT) inventories by retailers, the risk increases for Mattel to determine the correct inventory levels and prevent over or under production/supply.

In addition, within the toy industry, orders from retailers are subject to cancellation or change at any time. The uncertainty in planning and forecasting adds to the cost of inventory. Mattel’s valuation of inventory is strongly impacted by changes in public and consumer preferences, demand for product, or changes in buying patterns of retailers, consumers and inventory management of customers. A net allowance for excess supply or obsolescence is stated at the lower of cost or market. Mattel sees this as a “critical accounting estimate”.

For Mattel a review is conducted once a quarter on and item-by-item basis to plan forecast for growth or contraction or even obsolescence. For 2007 Mattel had a $51. 7MM allowance for obsolescence. Since Mattel manufactures its products in many different countries Mattel is subject to exchange risk. In order to try to mitigate the risk with foreign exchange rates, Mattel utilizes foreign currency forward exchange contracts primarily to hedge it purchase and sale of inventory, and other inter-company transactions enominated in foreign currencies. Fixed Assets, include land, building, machinery and equipment; tools, dies, molds; Capital Leases and Leasehold improvements less total $1,820MM less deprecation of $1,301 netting $518MM. Depreciation calculated using straight line method. Useful lives used are 10-40 years for buildings, 3-10 years for machinery and equipment and 10 to 20 years for leasehold improvements. Tools, Dies, Molds are 3 years useful life. These items are periodically evaluated for change in use life.

Accounts Payable – 2007 Accounts Payable at $441MM includes raw materials as well as outsourced manufacturing. Fifty percent of supplier spend is sourced within China from 12 supplier manufacturing plants. Short Term Debt – Current Short Term Debt is $349MM. Mattel maintains a $1. 3 billion domestic unsecured revolving credit line with one of its commercial banks to manage its seasonal working capital requirements. There are “covenants” or guidelines to enable Mattel to use various rates ranging from market to commercial paper rates to the bank reference rate.

These “covenants” require certain levels of debt-to-capital (maximum . 5) and interest coverage ratios (minimum 3. 50) to comply. Long Term Debt – Mattel in normal business conditions enters into long term debt agreements in order to build manufacturing facilities, protect Mattel’s right to create and market certain products as well to ensure availability of materials and services in the future. Commitments include future inventory purchases, licensing agreements and expected future royalties to be paid. Some of these commitments/agreements contain guaranteed expenditures.

Mentioned in Mattel’s annual report Mattel has long term debt spanning beyond 2012. Medium term notes ($300MM as of Dec 31 2007) with fixed rates ranging between 6. 5% and 7. 49% Due between March 2008 and November 2013. They also have a 300MM Senior notes (200MM unsecured at 6. 125%) due between June 2009 and June 2011. Other Liabilities – Reduced profits due to 2007 product recalls were estimated at over $100MM. Mattel with its best estimation determines yearly reserves to accommodate for product recalls, returns, and damaged goods.

Predicting those reserves comes with increased difficulty when you have to predict what items are out with customers/consumers and the cost to manage the returns. This is in evidence with 2007 recall of products sourced from China. Equity – Major Shareholders are Janus Capital Management holds 6% stake in company and Franklin Mutual Advisors maintains a 5% interest Income Statement Mattel has the challenges of forecasting for planned reserves for Product Recalls. This responsibility is managed by the industry as a whole as well as the challenges for planning for reserves.

Cash Flow Statement With the seasonal implications of the toy industry and the dynamic changes in the sales and revenues due to some unpredictability in customer demand, Mattel still shows positive cash flows within the last 3 years under operating activities. In 2007 spent 285MM in investment activities. Major investments included tools, dies and molds as well as PPE (51%), Payments for acquisitions (36%) and (12%) towards long term investments. Mattel’s dividend payout for the last 3 years averaged 46% of income compared to Hasbro’s 32% average over that same period.

Mattel has been rewarding shareholders, while Hasbro is taking that income to reinvest and pay down debt. Financial Ratios Liquidity – While Mattel may pride itself on strong cash flows, as noted in Mattel’s annual report, its current ratio is far below industry average. It seems that while Mattel may still be on solid footing, it may not have the liquidity of its competitors. Looking at the liquidity ratios in the below Key Financial Ratios table. Mattel ability to pay off its current liabilities again falls behind the industry and its top competitor.

The inventory turnover ratio does show that Mattel is better then the industry and Hasbro in inventory turns. Leverage – Mattel’s debt to equity ratio is in line with the industry at about . 44. Its nearest competitor, Hasbro which has less then 40% the outstanding shares as Mattel is relying more on short-term and long-term debt to finance company inventories and operations. Mattel has agreements in place with its creditors to maintain certain levels of debt-to-capital(maximum . 5) and interest coverage ratios (minimum 3. 50) which to some degree control the amount of debt (at least short term) Mattel can take on.

Profitability – Currently Mattel is the largest toy manufacturer in the world. They rank number 413 on the Fortune 500 with revenues of $5. 97 Billion. Hasbro is next in line at 567 of the Fortune 1000 with revenues at $3. 84 Billion. Mattel’s current Gross/Net profit margins for Mattel are 46. 3%/8. 8% compared to the industry 52. 7%/3. 7%. Mattel’s nearest competitor Hasbro has a Gross/Net profit margin of 59. 10%/9. 2% respectively. As noted in the Key Financial Ratios table below Mattel is doing better then the industry in ROE, ROA and ROIC, but behind Hasbro. Other Financial Issues

Litigation – Outstanding litigations due to product recalls, accusations of employee aiding a competitor while employed with Mattel and other Product liability litigations. Significant events – Product Recalls in late 2007 for Chinese made products cost Mattel in upwards of $100MM in returns and related expenses. Mattel will have higher costs due to litigation and product testing due to recalls. Table-2: Key Financial Ratios NAMEMETHOD OF CALCULATIONMattelHasbroIndustrySTANDARD & SIGNIFICANCE LIQUIDITY Current Ratio Current Assets Current Liabilities 1. 65 2. 13 2. 5Industry average: Low – possible cash flow problems; High – may not be managing assets well. Quick Ratio Cash + Receivables Current Liabilities 1. 5 1. 83 1. 96At least . 8 if sells on credit; Low – cash flow problems; High – may mean poor asset management. Days Sales Outstanding (DSO) Receivables x 365 Net Sales 59 57 64Industry average or 45-50 if company sells on net 30; High hurts cash flow: Very low – too restrictive credit policies. Inventory Turnover Cost of Goods Sold Inventory 5. 1 4. 5 3. 4Industry average; Low – problems with slow inventory that may hurt cash flow; Very high – may run out of inventory.

LEVERAGE Debt to Equity Total Liabilities Equity .44 .79 .43Industry average; Over 3 is quite highly leveraged. Interest Coverage Pretax Inc + Interest Exp Interest Expense 10. 1 11. 87 8. 08Should be over 3; Higher is better; Low – may have difficulty paying lenders. PROFITABILITY Return on Equity Net Income Equity .21 .259 .104The higher the better; the return on the shareholders’ investment in the business. Return on Invested Capital Net Income Long Term Debt + Equity. 141. 149. 073Higher is better; return on funds company has use for over one year. Return on Assets

Net Income Total Assets .114 .121 .032Industry average; return company earns on everything it owns. Effective Supply Chain Management Clockspeed- Mattel’s supply chain responsiveness Mattel has balanced the need for a responsive supply chain with the ability to source its toys from low cost labor countries in Asia. While Mattel uses Point of Sale (POS) data, the long distances between manufacturer and consumer are quite large and transportation times can be upwards of three weeks. As a result, the cycle time between ordering and delivery can be quite long.

In order to provide a buffer to prevent stock outs, Mattel uses distribution centers to hold some inventory. Holding inventory is not risk free as Mattel writes off approximately $50 million per year of inventory obsolescence. However, the ability to produce toys cheaply in countries like China, Indonesia and Thailand provides cost benefits over and above the cost of inventory obsolescence. The clockspeed of the toy business has been accelerating as kids have been getting older younger (KGOY) (Garner). This has effectively shortened the product lifecycle as children move from one stage to another more quickly.

In addition, many toys are tied to media launches such as movies and television shows, which are frequently one off production runs. One example of increased clockspeed for Mattel is the production of matchbox cars based on the characters in “Cars”- the movie. Matchbox cars of Lightning McQueen, Tow-Mater, etc. were available to coincide with the release and marketing of the movie. These toys will have a much shorter life cycle than the venerable 1974 Volkswagen Beetle matchbox car. Toymakers often only have one shot at forecasting inventory levels for the holiday season or a movie launch.

The shorter the product lifecycle, the more responsive the supply chain must be (Fisher, Harvard Business Review, March/April 1997). However, Mattel has many of its manufacturing plants in Asia which creates a longer cycle time since shipping distances are large. A more responsive supply chain would put the manufacturing as close as possible to the point of sale. For Mattel it could develop a more responsive supply chain that is better able to respond to unexpected demand surges by having factories in the United States and Europe where shipping times would be reduced from weeks to days.

Of course, the supply chain responsiveness is balanced by the much higher cost of labor in the U. S. and Europe. An extreme example of supply chain responsiveness is in the cans for Pillsbury dinner rolls (Module 1 of SCM Design readings). They have a very fragile container package that takes up a lot of space to store empty cans waiting on the dough. Pillsbury worked closely with the can manufacturer to reduce can damage, transport costs, packaging inventory by having the can manufacturer build a plant adjacent to the Pillsbury factory.

The packaging cans were literally delivered through a wall between the two factories. The can demand was directly tied to the roll demand and the packaging company could respond instantaneously to production rate changes at the Pillsbury factory. Mattel has invested billions of dollars in overseas factories and building new factories closer to the point of sale is neither practical nor economical. Another example is with Wal-Mart’s supply chain. Wal-Mart’s runs more of a lean supply chain than a responsive supply chain.

Most of Wal-Mart’s products are sourced from overseas which makes it tough to have a responsive supply chain as outlined above. Wal-Mart, like Mattel, uses POS data in order to minimize inventory storage and obsolescence costs (Module 1, Slide 3). In addition, the Mattel supply chain has had recent success in reducing the number of LTL shipments resulting in significant savings (InformationWeek). Since the clockspeed of the toy industry has been getting much faster, obsolescence costs have become more important to Mattel.

Any way to reduce these costs, such as reducing inventory, will help Mattel keep a healthy business. In summary, the faster clockspeed of the toy industry would, in theory, dictate that manufacturing be close to the POS to increase supply chain responsiveness. However, the practical issue of much lower labor costs in Asia have driven Mattel to source nearly all of its products from that region. Rather than having the most responsive supply chain possible, Mattel has attempted to design a leaner supply chain as evidenced by the use of POS data sharing and combining shipments.

These attempts at creating a more efficient supply chain are very similar to what Wal-Mart uses in its world class retail supply chain. Mattel Outsourcing Policy It is interesting to note that unlike its competitors, Mattel owns factories in Asia, particularly China, that produce about 50% of Mattel’s products (Desert News 8. 3. 07). Mattel has very strong brand equity in products such as Barbie, Hot Wheels, Matchbox and American Girl as well as Fisher Price Branded products. In order to control the quality of these products and reduce product pirating Mattel strategically chose to keep the manufacture of its key product lines in house.

While the factories are located in low cost regions of the world, Mattel retains control of these facilities and feels they are in a better position to protect the brand image. One off runs of toys, such as action figures for movies are typically outsourced. To manufacturing equipment is relatively modular and one off runs can vary in sizes. Since media related toys haven’t been designated as core business by Mattel, the company can take advantage of leveraging their volume to get a good price on a short run of toys. Mattel can then use its existing transportation and distribution systems to bring the toys to market.

Bibliography 1. BusinessAssurance. com, September 25, 2007. http://businessassurance. com/mattel-apology-to-china-not-the-end-of-it/ 2. CIO. com, September 6, 2007. http://www. cio. com/article/135600/Toy_Recall_Tests_Mattel_IT 3. CFO. com, August 3, 2007. http://www. cfo. com/article. cfm/9609132 4. 1Datamonitor: Global Toys and Games Industry Profile; January 2008 5. Datamonitor: Hasbro, Inc. ; Company Profile; October, 2007 6. 2, 6Datamonitor: Mattel. Inc. ; Company Profile; October, 2007 7. 3Directions Magazine, “The Strategic Implications of Wal-Mart’s RFID Mandate,” July 29, 2004. http://www. directionsmag. om/article. php? article_id=629&trv=1 8. Electronics Design, Strategy, News, “What Mattel has to do with the electronics supply chain” August 17, 2007. http://www. edn. com/blog/690000269/post/250013225. html 9. Harvard Business Review, “Just in Time for the Holidays,” December 2005, McNulty, Eric. 10. Harvard Business Review, “Strategic Sourcing: To make or Not To make,” November 1992, Ravi Venkatesan, Ravi. 11. Harvard Business Review, “Distance Still Matters:The Hard Reality of Global Expansion,” September 2001, Ghemawat, Pankaj. 12. Hasbro 2007 Annual Report 13. Hoovers: Hasbro, Inc. ; Profile; August 2008. 4. Hoovers: Mattel, Inc. ; Profile; August 2008. 15. 5InformationWeek: “Steady Supply,” November 24, 2003. http://www. informationweek. com/news/business_intelligence/showArticle. jhtml? articleID=16400193 16. Independent, The, “The Loss of Our Innocence,” Garner, Claire. August 15, 1996. http://findarticles. com/p/articles/mi_qn4158/is_19960815/ai_n14062080 17. Mattel 2007 Annual Report 18. Mattel Analyst Meeting, June 17, 2008 http://www. shareholder. com/mattel/downloads/MattelAnalyst08_Debrowski. pdf 19. New York Times, The, Barboza, Davis and Story, Louise. July 26, 2007. http://www. nytimes. om/2007/07/26/business/26toy. html? pagewanted=1&ei=5124&en=1da84f065e1c66dd&ex=1343188800&partner=permalink&exprod=permalink 20. Samsung Data Systems; “Design for Supply Chain,” 21. Supply Chain Digest, “Global Supply Chain: What Will the Supply Chain Fallout be from the Mattel Toy Recall? ” August 8, 2007. http://www. scdigest. com/assets/newsViews/07-08-08-1. php? cid=1164&ctype=content 22. Supply Chain Digest, “Global Supply Chain: Mattel Incident Shows Companies Can’t Go On the Cheap when Sourcing from China, Must Take Proactive Control of Entire Supply Chain” August 8, 2007. http://www. scdigest. om/assets/newsViews/07-08-08-2. php? cid=1165&ctype=content 23. ALLBUSINESS Supply Chain Europe, “What Clients Want from a 3PL,” February 1, 2005. http://www. allbusiness. com/manufacturing/miscellaneous-manufacturing-doll-toy-game/10568322-1. html 24. Tuck School of Business “Mattel, Inc. : Vendor Operations in Asia,” Case 1-0013, 1998. 25. 7Yahoo. com; http://biz. yahoo. com/ap/080826/mattel_bratz. html APPENDIX I- Method As you must have seen from our paper and the references cited in our Bibliography above, Team 2 members did not rely solely on Mattel’s public relations information and web site for our content.

We were quite creative in finding information, not only by visiting the various web sites from the Links section of the Blackboard, but, by researching data from numerous and very diversified independent sources over the internet, including Datamonitor, the Toy Industry Association, Hoovers, Wall Street Journal, CFO, CIO and Information Technology magazine websites, Information Week, Business Week, Supply Chain Digest, Yahoo Business website and Harvard Business Review, to mention a few. In some cases, we were not able to ascertain sufficient details regarding specific aspects of the Mattel supply chain.

In those instances, we relied on our own industry knowledge (from having worked with clients from the toy industry) to bridge the gaps. Our team also leveraged Chevron’s internal Market Intelligence resources to gather some of the data needed for our paper. APPENDIX II- Product Recalls Not all was rosy for Mattel and the traditional toy industry in 2007. In August and September of 2007 (Datamonitor), Mattel recalled 21 million toys either because they were tainted with lead paint or because they contained small magnets that could be ingested by children.

Also, in September 2007 Mattel recalled 11 toy models, including eight pet and furniture play sets sold under the Barbie brand and three Fisher-Price toys, due to high levels of lead (Datamonitor). Mattel incurred losses due to legal costs, testing, advertising and collecting recalled products totaling over $100 million, (Datamonitor). The company surveyed consumers after the recalls to find out if any of its brands had been harmed, and found that the Polly Pocket brand had a negative image in the minds of the customers.

Polly Pocket toys were among the 18 million that were recalled because they had small magnets that could be pulled off and swallowed. Although these toys were manufactured in China, they were recalled because of a Mattel design flaw rather than a problem in the supply chain. APPENDIX III- Lessons Learned A lesson learned that is interesting is that for a long time ago, the purchasing activity has been changing and making some evolution within the organizations.

The supply chain professional is now seen as a skilled professional that understands and knows how to extract value of a relationship and the impact it and have in the organizations bottom line. We now understand that there is a huge amount of theory regarding supply chain management and how it has been implemented in different businesses. We can say that Chevron is not asking or putting the supplier in a hard position when talking about these concepts, because this is something that has been going on for quite a while.

The good thing about it is that it has been proven that works and that it add value to the process. Also, the tools are there to better visualize and analyze the different components and aspects of the supply chains so a more robust strategy can be developed. We can see that the market is influenced by various conditions and situations that make it unique and special when it comes to execution. On the actual global environment, is important to keep the enterprise thinking without losing the local conceptions and particular beliefs so a more efficient implementation can be achieved.

Also, suppliers are accountable and also responsible to support the entire process, not just provide a good or service so both parties can get advantage of one another and be successful. You always need to keep an eye on the big picture. Theoretical supply chain design may indicate placing manufacturing plants and distribution centers in one place, however practical constraints may lead a company to do something different. In this case, one would think the nature of the toy business (fast cycle time, unknown demand) would drive a company to have a very responsive supply chain. However, Mattel has chosen to site most of its anufacturing plants thousands of miles away from the consumer. The reason is that labor costs are so much lower at these plants it more than offsets the costs of a less responsive supply chain. This deviation is fine as long as the company fully understands the value tradeoffs it is making. With the recent lash back on toys made in China (apparently, even though Mattel agreed that it was due to its design flaws and not a fault of the Chinese manufacturers), the incident raises a few questions in my mind. How safe is it to tie 65% of ones production capacity to any given single country, either it be China, India or Malaysia?

If one were to be designing a fault tolerant supply chain design, wouldn’t you consider hedging your bets of such a disaster by spreading your manufacturing capacity in multiple countries? Mattel seems to have taken this into consideration already as it has manufacturing plants, not only in China, but also in Malaysia, Indonesia, Thailand and Mexico. This seems to be a calculated move and not just a happenstance. Again, it shows that Mattel is implementing supply chain principles effectively in managing its global manufacturing footprint.

In developing countries such as Latin America you can see the huge impact of government regulatory issues in the design of supply chains of any industry. A successful supply chain is one that is conscious that its design needs to be flexible and responsive to the dynamics that regulatory issues bring to any industry. There is also risk associated to any design, as the efficiencies that a supply chain may be swept away by a government initiative, getting any firm to lose any competitive advantages it may count on. Constant awareness about the environment in locations any company may have assets on, is a critical source of risk mitigation.

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