Toy Story – The Supply Chain Edition
In my last post, I discussed how the Consumer Products Safety Improvement Act (CPSIA) will lead to a safer Christmas for children this year due to its tighter restrictions on the use of lead and Phthalates in toys, games and youth apparel. But were toys really that unsafe before the CPSIA regulation? The roots of the law can be traced back to a series of high-profile product recalls in 2007 by leading toy manufacturers. For example, in May 2007 approximately 1.5 million Thomas and Friends wooden toy train sets were recalled by RC2 Corporation due to the use of lead paint on the cars. A few months later Mattel announced a voluntary recall of a group of Fisher Price toys due to a non-approved paint containing lead being used by its contract manufacturer. Mattel conducted several subsequent recalls that ultimately totaled 1.5M toys worldwide.
Lead paints contain a neurotoxin that is harmful to developing brains in young children. Kids absorb up to 70% of lead upon contact as compared to adults, which only absorb 20%. The biggest exposure for children is from chewing on toys and ingesting paint. Lead paints were commonly used in the US until the 1970s when significant restrictions were place upon the levels of toxins allowed in consumer products. However, in certain countries around the world lead paints remain popular due to their lower price. Lead paints are 30-60% cheaper than alternatives.
Limiting the use of lead paints in the supply chain presents a significant challenge, especially in areas such as toys. Toy brand owners increasingly leverage offshore manufacturing in low cost regions such as China. In some cases, the brand owners retain control of the manufacturing process in their own plants. In other cases, a contract manufacturer is used. Over 80% of the toys imported into the US are made in China. The majority of China’s exports are manufactured in the Guangdong province, which supports a community of over 5000 factories owned primarily by Hong Kong-based entrepreneurs.
The specific challenge for lead-based paints is the need for traceability. Contract manufacturers of toys often subcontract with other suppliers who source parts and materials from other suppliers. A company making a doll might outsource the painting of the eyes to another subcontractor, who obtains paint from yet another supplier. Historically, a testing and certification process has been performed to ensure safety. However, in practice only testing of samples actually occurred. Once production started, contract manufacturers did not test the raw materials. Suppliers substituted less expensive materials and falsified certificates about the lead content. Contract manufacturers were not motivated to perform additional testing as the paint would need to be sent to outside agencies thereby delaying order fulfillment timeframes.
The usage of lead-based paints represents a significant supply chain risk even for those companies which did not have the toxins in their products. Many of the contract manufacturers which produce toys for export operate with very low margins and without a brand identity. A single incident such as product recall can result in a bankruptcy or breakup of the company leaving customers (brand owners) with a temporary disruption in capacity. For example, Lee Der, one of the contract manufacturers involved with Mattel’s incident became insolvent quickly following the announcement. The Chinese government revoked the company’s export license and the founder committed suicide.
Lead paints are not the only product safety issue with children’s toys. For example, most of the Mattel recalls were not manufacturing issues that occurred in China, but rather design issues that originated in the US. New toys entering the market contained small, powerful magnets that were not adequately encased. The magnets could be dislodged and eaten by children. Other products have cords that could be wrapped around a child’s neck resulting in strangulation.
Despite the visibility of the recalls in 2007, issues with children’s toys are relatively rare as compared to other types of consumer product safety. And with the CPSIA and European Toy Safety Directive, we can expect even fewer issues in the future. Now the key challenge is to ensure that the regulatory procedures are not burdensome for manufacturers, distributors and retailers of children products. More thoughts on how to simplify the processes associated with testing and documentation in a future post.