The Lesson of Teddy Bears

By Kevin Meyer

Thanks for regular reader Craig for bringing this story to our attention – another example of the hidden costs of outsourcing.

The German toymaker Steiff, which is famous for its high-quality teddy bears, moved some of its production to China in a bid to cut costs. Now it is pulling out due to concerns about quality and logistical difficulties.

You can probably guess what's coming… yes, the reputation for high quality. 

"We want to make the most beautiful, best and safest teddy bears and
stuffed animals in the world," he says, tugging at a piece of bear fur.
"Look, there's no fluff. That's because we also weave the fur instead
of just knitting it."

Steiff puts a great emphasis on its manufacturing philosophy,
Frechen says. He's talking about the company's reputation for
hand-made, high-quality production — real, honest and devoid of
hazardous substances.

Well, that's the desire.  Here's what happened.

But why does he have to mention all this in the first place? Didn't
practically every German grow up with a Steiff animal? Doesn't everyone
know that, for some people, the stuffed animals remain a lifelong
object of their affection? Even German Chancellor Angela Merkel has
three Steiff animals, the celebrity gossip magazine Bunte reports: a rabbit, a duck and a lamb.

Given Steiff's reputation, why does Frechen needs to talk the
company up so much? The answer is simple: A minor globalization
adventure almost destroyed the reputation of this deeply traditional
company.

Yep, they joined the lemmings chasing cheap labor, assuming they could maintain quality.

In 2004, the company's then-management, in an effort to reduce costs,
began producing in China. Of course, the Chinese-made products were not
the company's flagship teddy bears and expensive collectors' items, but
a cheaper collection called Cosy Friends. The purpose of the venture
was to fight the low-cost producers that were filling department stores
with cheap stuffed animals from Southeast Asia.

Four years later, Frechen, who was named CEO in 2006, announced the end
of the Chinese venture. He says he was skeptical from the start, but
now he is convinced. "We don't want it any more," says Frechen. "China
isn't part of our story. We want to place a Steiff product in a baby's
crib and be able to assure the parents that nothing can happen."

So even if you move the low end of a product line, the impact on reputation can cascade across all products.  For the less informed, here are some of the problems they experienced.

First the obvious costs of quality…

Steiff's problems were of a different nature. The animals were often
sloppily sewn together. In many bears, the eyes were not properly
aligned. Perhaps Asians might have felt that the bears' new gaze was
cute, but for European and American customers the animals' stare looked
unappealing and even mean. The cross-eyed bears were rejected during
quality control in Germany.

The costs of long distance communication and training…

The globalized
production of a sophisticated product entailed unexpected difficulties.
For example, it takes an average of eight to 12 months for a seamstress
to learn how to assemble the complicated Steiff patterns at the desired
quality level. Hundreds of German Steiff employees traveled to China to
train personnel.

The costs of retraining…

But it turned out to be a costly program that ultimately wasn't worth
the effort, because many Chinese factory workers do not return to their
jobs after the Chinese New Year. Instead, they take jobs with other
companies or simply stay home.

The costs of increasing wages…

The system drove up wages over time, leading to significant labor cost
increases during the period of Steiff's involvement in China. What
began as a low-wage venture became more and more expensive. Moreover,
Steiff had trouble finding companies that were willing to meet German
quality requirements.

The costs of shipping…

Finally, shipping costs rose as a result of
rising oil prices, and the long distances that the products had to be
shipped made it difficult for Steiff to react quickly to the market.

The hidden costs of time lags versus market appeal…

While Knut was turning from a cuddly baby into a larger, not-so-cute
polar bear, thousands of stuffed animal versions of baby Knut were
still en route to Europe. As a result, Steiff was unable to take full
advantage of all the hype surrounding the celebrity animal.

So a great lesson… if only they had learned.  Unfortunately they continue to chase cheap labor… sort of.

Steiff has long been manufacturing its products through companies it
owns in Portugal and Tunisia. An additional 400 jobs have been created
in Tunisia, to which much of the company's Chinese production is being
shifted.

In the country's interior, where the factory is located, Steiff can
depend on the loyalty of its workers, because there are no other jobs
that pay a comparable wage within a wide radius. The shorter shipping
distances also enable the company to react more quickly to the market
once again. "If companies request special orders three months before
Christmas, we are once more in the position to do that," says Frechen.
Steiff has about 550 employees in Tunisia, 300 in Germany, about 100 in
Portugal and 20 in the United States.

An improvement, but still a philosophy of labor as a cost, not an asset.  And when more companies relocate to Tunisia, driving up wage rates?  Let the globetrotting begin again…