The Situation That Occurred with Mattel That Caused Financial Difficulties - Research Paper Example

?RUNNING HEAD: Cost Management Cost Management Cost Management Introduction Cost management represents all of the different expenses, operations, and financial activities associated with operating a business and ensuring that all aspects of business meet with budgetary needs. Cost management is not only about recognizing accounting costs, but also taking into consideration inventory, supply chain, demand forecasting, distribution and general operating costs needed to sustain organizational objectives. This paper takes references the situation that occurred with Mattel, where decision-making planning, investments, and executive strategy caused financial difficulties that jeopardized long-term profitability. Using learning lessons from General Electric, and through referencing personal experiences with cost management, learning associated with cost management and future projections about competent business planning can be developed. It is necessary to understand the demand environment and operational costs in order to successfully meet budget guidelines and secure effective cost management. Main Issues Mattel company did not fully understand its demand environment, thus the business was making decisions, strategically for long-term financial gain, that would not be sustained according to models of product life cycle. The product life cycle model recognizes the gains associated with new product launch and then follows the viability of products throughout the time period where product would be accepted by consumer markets. The life cycle model recognizes that products will eventually reach a maturity stage where new technologies or innovations begin to make demand volumes obsolete, thus the business must be equipped to launch new products to offset any losses that occur. Dooley (2005) offers that it is extremely difficult to predict whether a product will have a long and profitable life cycle or whether the product, due to competition or even changing social and lifestyle needs, will have a long period where profit is sustainable. Mattel acquired a software company, Learning Co., as a means of diversifying its product portfolio and thus offering customers more selection of product and to ensure the business sustained its quality brand in the minds of buyers. Some of the main software titles were Carmen Sandiego and other relevant software characters that were associated with lifestyle and child values. Mattel believed that this decision would provide software titles with significantly-long product life cycles, thus offering more profitability through sales volumes. Soon after acquisition, Mattel realized that the decision to utilize these particular software names was not leading to the profit expected, thus leading to higher operational costs without sales volumes to sustain projections. It was assumed that the Carmen Sandiego, and other relevant brands, would have a much longer growth period in the life cycle than consumers actually favored. The end result: Mattel was left with very high operational costs, such as inventory and supply chain, which left the business with little options but to divest some of its business holdings. General Electric, on the other hand, understands the importance of not only diversifying its portfolio of products, but to create systems and feedback mechanisms that recognize the majority of costs during the planning process. Mattel was looking too closely at the consumer environment without realizing that some products would ultimately reach the maturity stage long before projections suspected. What did this indicate? It suggested that Mattel was not proactive in creating a well diversified product line, the firm did not understand fully what was driving consumer demand ratios, and that Mattel had significant failures associated with manufacture and related operational costs. Mattel, in its proverbial effort to put all of its eggs in one software basket, did not create a supply chain methodology that would sustain unique product innovation and growth through a wide variety of activities. Thus, Mattel expended significant financial resources into creating a manufacturing and supply base that was dedicated to one particular type of software product. Why is this? The organization was attempting to modernize and become more relevant for the technology savvy consumer, thus essentially growing up from its traditional hard-line toy production that had always driven historical profitability. However, since the business was not investing considerable management time and financial resources into diversification and innovation, when consumers ultimately rejected its Learning Co. products, Mattel experienced significant drops in sales and reputation related to its long-standing brand. The main failure in this case is that Mattel was forced to incur large-scale costs of doing business by having poor management and executive planning associated with long-term brand position on the consumer market. Because of this, Mattel dedicated large amounts of its budget toward activities related to total operations that were not going to serve long-term sales volumes and meet with changing consumer demand patterns. If the business had taken adoption from the diversified GE and dedicated more of its budget toward innovation and new product launches, it would have only dedicated some of its facilities to one particular brand of product. Instead, Mattel found itself in a budget pinch that led to divestiture of several divisions of the business since it did not have an effective cost control system and mechanism to ensure quality throughout the entire planning and sales processes. New Learning Personal learning experience, taking into reference the Mattel situation and its failure to effectively plan for long-term consumer demand, comes in the form of a self-proprietor business. The student maintains and operates a DVD business that caters to the consumer market. In this business, cost management consists of effective planning for long-term profitability by taking into consideration supply chain and replenishment of inventory, generalized accounting, distribution of product, and operational costs that include utilities and rent (among other administrative costs). The business procures inventory, considers the costs of sales, exacts a retail price in line with budget and profit needs, and then markets the product to achieve higher sales interest. One of the main issues associated with cost management is the cost of operations, which can quickly deplete total profitability. “The basic financial aim of an enterprise is maximization of its value” (Michalski, 2008, p.2). This is relevant to the DVD business not in terms of manufacture such as in the case of Mattel, rather the organization must consider primarily the costs associated with product purchase and replenishment of stock inventory and then determine how to recoup these costs with each individual transaction. When operational costs such as utilities rise, the business is forced to either reduce expenditures in marketing or to add a higher price tag to the final sales product to ensure that the business does not take a loss. The learning that occurred, in reference to Mattel, was to diversify not only product, but not to believe that customer demand levels would always be sustainable based on product variety. For instance, at this company, the organization purchases certain percentages of DVDs based on theme and rating, and thus must look (as Mattel did) to the consumer environment to determine volume purchases. The difficulty in this situation, as reinforced by Timme & Timme (2003), are the concerns associated with holding inventories. The DVD company is charged taxation, among many other expenses, that will ultimately lead to higher inventory costs and thus reduce the total profit margin for the organization. With most business organizations, their inventories are considered to be assets, where the life cycle of the product is extended and will be considered liquid opportunities for capital growth in the event that inventories are sold for cash. However, this DVD business cannot always consider that customers will be drawn to particular themes or whether they will defect to digital entertainment through the Internet, thus the organization cannot always consider high volumes of held inventory stock to be a long-term asset. The business looks toward the Mattel scenario and the GE model to understand the importance of product innovation and diversification as it relates to the supply chain costs. Proper strategic planning realizes that new technology and changes to consumer lifestyle will greatly impact the volume of DVDs purchased and the means by which they are sold to customers. The life cycle of the product is difficult to predict, thus the business owner should be looking toward alternative product variety and service delivery in the event that operational costs of holding inventories arise. Further, the DVD business has experienced significant increases in utility costs, especially electricity, thus the organization is forced to scale back on budget provided for distribution to offset these potential profit losses. Much like Mattel that did not follow a more diversified manufacture model to create innovations, this DVD business cannot afford, financially, to allow operations to be dedicated to only one method of inventorying and distribution. Instead, the business must recognize that changing supply chain and inventorying could help to offset the rising costs of electricity so that the customer is not provided a higher price tag or the company does not need to change its marketing in distribution. Attran & Attran (2007) suggest that the supply chain should be established for short-term product replenishment, a lean type of inventorying, to avoid higher costs of inventory holding. This DVD business learned that the organization has ample opportunities to monitor costs as a proactive measure hedging against rising utility and other operational costs, thus providing budget conscious purchasing methods that can stay in-line when operational costs continue to rise. Much unlike Mattel, the business is working at improving systems and capital expenditures, rather than relying on a singular business decision, in the event that the organization experiences unexpected price increases for conducting business. Future Projections Even though the situation with this organization was quite different from Mattel, the notion that the business would always have high demand with a single product line and could therefore adjust its entire production facility toward this goal is flawed. An organization only maintains certain budget for specific activities ranging from purchase to final sales, thus it must consider the broader internal and externally-driven factors before creating a strategic plan related to costs. The DVD business learned through the Mattel case that innovations, lean supply chain methodology, and research into the consumer marketplace are major factors in improving cost control and establishing a business that is set to evolve. Mattel is a much larger conglomerate, however the business principles of proper management planning are critical factors to sustaining long-term cost control activities. Cost control is about understanding the dynamics of the external market and then adjusting the business, operationally and strategically, to meet these factors without significant cost burden. For instance, the DVD company recognized rising costs of utilities and other operations, and therefore adjusted its planning processes to include less inventory, improved supply chain, and reducing reliance on high-cost distribution methods. It did not automatically assume that the consumer market would be accepting and demanding for specific products, therefore management began looking toward evolutionary business models to sustain innovation. Future projections that would benefit the business would be to look closely at Mattel and understand fully how General Electric’s more progressive management style would benefit the organization. GE gave Mattel a model by which to innovate and to alter internal operational factors that could sustain rapid improvements in product production and sales. The main key is understanding what customers value and how their lives evolve and then creating a cost effective business model that allocates costs to the most long-term activities that will bring total profit value. This DVD business learned through the Mattel case that it should always be in a state of change, ranging from supply through sales, as a means of being ready in the event of higher costs. It should not assume that business will always be rewarded by ongoing continuity, and it should never make assumptions that the traditional way of doing business will lead to cost control and effective cost management. Conclusion The organization should create a quality assurance and control program that looks at all angles of the business before launching a long-term plan, such as in the case of Mattel. It should not ever allocate its capital to one particular business activity believing that the profit model will be sustained by putting all assets into a single business function or product. Changing environmental issues, such as cost increases in operations, can radically change the costs of doing business. This DVD company must be more innovative in order to succeed and create a model of doing business where changes to systems and processes can be implemented without incurring high costs. References Attran, M. and Attran, S. (2007). Collaborative supply chain management, the most promising practice for building efficient and sustainable supply chains. Business Process Management Journal, 13(3), pp.390-404. Dooley, Frank. (2005). Logistics, inventory control, and supply chain management. Choices. 20(4). 2005. Michalski, G. (2008). Value Based Inventory Management. Institute of economic forecasting. Retrieved July 28, 2012 from http://www.ipe.ro/rjef/rjef1_08/rjef1_08_6.pdf Timme, S. and Time, C.W. (2003). The real cost of holding inventory. Supply chain management review. Retrieved July 29, 2012 from http://www.mcasolutions.com/pdf/Cost_of_Inventory.pdf Bibliography Bannon, L. (2001, November 14). New playbook: Taking cues from GE, Mattel’s CEO wants toy maker to grow up. The Wall Street Journal (Eastern edition), A1. Read More