Wednesday, March 25, 2009

CPSIA - If We Can Meet the Standards, Why Do I Still Hate This Law?

An interesting question comes up from time to time: If our company can easily meet the new lead and phthalates standards, why am I so uptight about the CPSIA? It is true that our products will be basically unchanged under the new law, and the few products which we will modify slightly are being changed mainly to avoid ambiguities in the law. My strong position against this law has apparently given some people the impression that we are having trouble with the standards. This was demonstrated most recently at the ICPHSO meeting when I asked a question about reporting compliance, and received a response that implied that my concern must be based in the "difficult nature" of our products. Not so. If we don't perceive a serious issue with complying with the standards for our company, why am I kicking up a fuss?

a. The New Law Changes the Economics of Our Products. Under the new law, we will incur tremendous new costs over time. Each of the following costs will materially affect the economics of each product we sell: (i) testing costs (and we don't even know the required frequency of such testing yet), (ii) tracking label costs on both packaging and product, (iii) administrative costs incurred to monitor legal compliance with a myriad of rules, plus advertising requirements, labelling requirements and reporting requirements, and (iv) legal risks including enforcement actions by State Attorney Generals and the risk of large fines for non-compliance. Risk equals cost (think of sub-prime loans) so even uncertain future expenses must be included in our calculations on some discounted basis. When we calculate the profitability of each item, we must account for all of these (and other) costs. Since the perceived value of our products is inelastic (little pricing power), profitable revenue is very dependent on selling at the right price for us. In addition, having reduced our operating costs significantly to survive the current severe economic downturn, our ability to absorb these additional costs through productivity gains and efficiencies is rather limited. Many items will go from profitable to unprofitable in a blink as this law phases in. This is a non-mass market phenomena, of course. Companies selling in high volumes will not experience many of the problems that we face. Their economics are more favorable since they spread costs over many more units. Companies like ours will be beset with a major Darwinian process devouring their product lines.

b. The New Law Changes the Economics of our Business. The complexity and risk of this law creates new and irresistable incentives to change our business model. The legal risks/costs under this law tend to rise exponentially with the complexity of the tasks one must take on. In other words, the more you try to do (in our case, products we offer for sale), the more likely you are to violate the law. Why? Because of the sheer number of requirements for each item to be compliant, FULLY-COMPLIANT, with the law, the odds of properly complying with the law goes to ZERO with a big product line. And, as the number of tasks rises, focus on what's important will certainly be lost (remember the old saying, when everything's important, NOTHING'S important) which suggests that serious safety issues will RISE even as resources devoted to compliance increase exponentially. A surprising result? No, the more complexity, the more predictable (the more likely) is spectacular failure. This is essentially a statistical argument, which cannot be countered by good intentions, great organization or legions of saints working on your team. "Cops on the beat" won't matter, either (thanks, David Arkush). In another delicious irony of this law, owing to overarching complexity, legal infractions will rise, which consumer groups and regulators will chalk up to low character among children's product companies and call for tougher enforcement . . . . Yes, this will be a self-fulfilling prophecy.

The risk of failure, and the SEVERE (and ridiculous) penalties possible for failure under the law, makes it foolhardy to stick with a model requiring thousands of items to be sold. Again, the economics won't support that model. The CPSIA wants our company to sell 50 items, not our current 2,000, and wants us to sell them in lots of 50,000 units, not 500-10,000 as we do currently. The longer we defy the CPSIA and its economic incentives, the worse we will do financially. This will also create real disincentives against being a distributor of children's products. It's only a matter of time before these incentives work their magic - the market always responds. Wal-Mart should love it!

c. The New Law Turns Our Business Into A Tedious Bureaucracy - And We Don't HAVE To Do This. Under the CPSIA, we must undertake a number of urgency, zero-tolerance activities that are essentially bureaucratic in nature. For instance, we need to monitor warning labels in our catalogs and on our websites, manage test reporting on multiple standards and posting of such material on a ftp site, manage the perpetual changing of tracking labels on product and packaging throughout the year (estimated to be not less than 20,000 product changes per year at our company - and that could be a low estimate), train and re-train dozens of people annually on a long list of crucial compliance issues, closely manage the evolving regulatory environment (with ever-changing rules, regulations, laws, FAQs, interpretations, seminars, webinars, postings, requests for comments, etc.), and so on. Please note that none of this has anything to do with designing our products, maintaining their basic saleability or safety (yes, safety), marketing our brands or products, investments in infrastructure or people, etc. It's a major diversion of resources to pure paper-pushing.

Why do you think we work so hard at being a great educational company? Why do you think we get up early and stay late, work weekends, go to tradeshows, take calls late into the night? It's not so we can keep busy. Our mission is not to stack paper to the Moon - we want to make the world a better place. I can tell you - the prospect of turning our company into a big CETA project, a bureaucractic branch of the U.S. government, is repellent to me. This vision of our company leaves me feeling short of breath. Can we be expected to keep working as hard or with as much commitment if this happens? I think we would find better things to do with our time and capital. Nothing is more chilling than the thought that our business would be ruined by this terrible diversion of resources and mission.

d. I Cannot Abide the Lack of Trust Implicit in the Law. The CPSIA brands all children's product companies as untrustworthy. We must prove that we comply with law before we enter the chain of commerce, and are never paroled from this over-reaching and terrible requirement. Put into a different context, that's like requiring all American businesses to be audited for compliance with labor laws before being allowed to transact business. Why stop there? Why not require that Starbucks have each cup of coffee tested before handing it over at the drive-through window? There is simply, plainly no reason to be so distrustful basically of ourselves. Who do you think the Children's Product Industry is? It's Wal-Mart and Target, it's Toys R Us, but it's also the local clothing store, the shoe store, the bike store, the ATV rental facility, the jeweler, the schools, the electronics store, many restaurants, the office supply store, the school supply store, and all of their suppliers, and many more institutions. Have I named the employer of 60% of your block yet? The Children's Product Industry is . . . YOU and ME and ALL OF YOUR NEIGHBORS. Are we all really that untrustworthy? I find this insulting and illogical. I bristle under the burden of that slur.

The impact of the CPSIA is far-reaching. The sound bites that sum it up neatly miss the point entirely. There is nothing neat about the law. It's impact will be felt for years in devastation that only slowly manifests itself. This is not an episode of CSI-Miami that gets resolved in 60 minutes. It's more like the slow destruction of an eco-system. That eco-system is your community. It's time to stand up for our rights - this can't happen on our watch!

See you at the April 1 Rally in Washington, D.C. You can get all the details on We also hope to have online streaming if you can't join us in person.



Mary Beth said...

Amen Brother!

cmmjaime said...

Yes, PLEASE have streaming video for the Rally next week. Many of us who cannot attend really want to see it!

marianne said...

I love your analogy to Starbucks. While that just sounds crazy to even consider...when I first hear of CPSIA I thought it was crazy too. I spent weeks/months trying to wrap my head around this over-reaching law thinking "There's no way".

Now it's reality and you are absolutely correct that it sets our industry up to be a culture of distrust.

The CPSIA rally is a huge milestone to show our we are honest businesses, care about children, and can stand up for ourselves.

I'll be there in spirit!

mijofr said...

Don't forget to point out that the Consumer Product Safety Commission published a report to congress on March 20, 2009 admitting that they do not have the resources to comply with their end of the law. If the governmental agency charged with ensuring compliance admits they can’t comply with the law how in the hell are we supposed to comply with the law.

This law is simply another was to get wealth from those that have it into the hands and coffers of the trial lawyers and State AGs.

Sadly it does nothing to protect shildren other than eliminate products for children while putting Mommy and Daddy out of work.

Rick said...

Very eloquent. Thank you.