Sunday, October 18, 2009

CPSIA - The TIA Just Wants to HELP You!

FULL DISCLOSURE:
  • Our companies are members of the Toy Industry Association (TIA).
  • We are on the record as opposing the Toy Safety Certification Program (TSCP).
  • The dues of TIA members paid (and continue to pay) for the development of the TSCP, as well as the salaries and bonuses of the representatives mentioned below.
  • The "15 month rule" will soon be released by the CPSC (on or before November 14). It will address, among other things, testing frequency and sample sizes for testing, and is expected to include the so-called component testing rule.

Did any of you watch the lengthy TSCP hearing (video link and text link) at the CPSC on October 14? This hearing was apparently jointly requested by the TIA, Consumers Union (CU) and Consumer Federation of America (CFA). Interesting bedfellows, huh? This hearing provided much to reflect upon. In this post, I will address the issues presented by the TIA's program and the TIA's authorship from a small business perspective. I will return to the consumer groups later.

[Some of my readers may be from outside the toy industry and may think "This does not apply to me!" Please bear with me and read on. This may not be your problem TODAY, but it is a sign of things to come.]

TSCP Basics:

The TSCP is a complicated initiative that is difficult to explain succinctly. Here is the document defining the TSCP. You can access the TSCP website here. While I will attempt to summarize it here, you should rely instead on the definitive documents published by the TIA.

The TSCP is a program designed by the TIA to ensure that toy companies comply with law. As Elizabeth Borrelli (Executive Director, TSCP) puts it: "TSCP is a conformity assessment system. It is not a testing program but a comprehensive, effective and efficient system to verify that toy manufacturers have satisfied requirements of the CPSIA (and retailers) and that their toys confirm to applicable safety standards." The TIA says that the TSCP is a "work in progress".

The TSCP goes far beyond the requirements of the CPSIA. [The TIA acknowledged this repeatedly at the hearing. For instance, see the video at 134:30 and 149:30.] It is also a "voluntary" program, not a requirement of law. The TIA wants to foster broad acceptance of its initiative. They presented it to the CPSC for the agency's endorsement. Carter Keithley, President of the TIA, called the need for CPSC support "absolutely crucial". [Also, see the video at 135:15.] According to the TSCP specifications, the program includes: "1) hazard analysis and\or risk assessment for toy product design, 2) factory process control audits and 3) production sample testing to validate that the factory is producing, at the time of sampling, toys that meet U.S. safety standards. These three elements will be verified or audited by accredited certification bodies."

A few details about the TSCP:

  • Factory Ratings - There are three levels of factory compliance under the TSCP: Tier 3 (non-ISO 9001 factories), Tier 2 (ISO 9001 factories) and Tier 1 (ISO-9001 factories that have met unspecified additional criteria to be established by the TSCP). Mass market factories are highly likely to be Tier 1, and small fry factories are likely to be Tier 3 or Tier 2. The terms below, according to the TIA, are designed to provide an "incentive" for non-Tier 1 factories to raise their compliance to Tier 1 standards. [Too bad for you if you and your factory don't want to incur this expense.]
  • Hazard assessment - This pre-production analysis must prepared by or under the supervision of a responsible officer of the company on a product-by-product basis and must be attested to in writing. [Remember this.]
  • Testing Sample Sizes - Under 3's: not less than 18 pieces; over 3's: not less than 12 pieces; big or expensive items: not less than 3 pieces; under 1000 pieces sold per year: sample size TBD; minimum production run: 500-1000 pcs (whatever this means).
  • Sampling procedure - Tier 3 - need outsider to select all samples; Tier 2 - outsider picks samples randomly 4-6 times per year; Tier 1 - The factories select samples themselves.
  • Testing frequency - Tier 1: greater of once a year or every million pieces, plus one extra heavy metals test annually (Max - never more than four times a year); Tier 2: greater of twice-a-year or every 500,000 pcs. (Max - monthly); Tier 3: greater of quarterly or every 150,000 pcs. (Max - every other week). [You read that right.]
  • Security - Samples must have special seals to avoid "adulteration"

The TIA insists that the TSCP was designed with small business in mind, has been vetted by small business interests and has been applauded by small businesses.

What Happened at the Hearing:

The TIA spent a great deal of time explaining the terms of the TSCP. The consumer groups spent their time explaining why this program that goes far beyond the law ISN'T ENOUGH. The CPSC Commission asked a lot of questions and spent a bit too much energy (in my view) complimenting the TIA on their work. One Commissioner (Anne Northrup) pushed back with probing questions about TSCP economics and the intiative's impact on small business (see the video at 78:49 for about 15 minutes and later at 146:35).

What Does the TSCP Mean for Small Business?

The TSCP, if adopted, would be catastrophic for small toy companies or companies making toys with factories catering to the specialty market (rather than the mass market). Although the TIA denies this point (explicitly), the TSCP significantly favors mass market companies in an almost shameless way. Consider, for instance, the cost of participation in the TSCP. Rick Locker, outside counsel to the TIA, talked about a cost of $65 per item to enter the program. [He noted that for this $65, toy companies "now have $2 million of technology available to them" (123:48). Hey, TIA Members, do you realize what Mr. Locker means? The website they created cost $2 million. That's some fancy website they built with your money.] Upon questioning by Ms. Northrup, none of the TIA spokespeople would admit or guess at the overall cost to participate in the program (84:00 - and check out Northrup's reaction at 85:15).

What might those costs be? Well, we know it costs $65 per item simply to key the product into the website. Then there's the cost of the rating of the factory. [The TIA insists that this cost will not be borne by importers but instead by the factory. See video at 150:50. Apparently, this overhead is not passed along to the factory's customers, unlike all other factory overhead.] What might this cost? The TIA provided no estimates. I believe the one-time cost of becoming ISO 9001 is estimated at tens of thousands of dollars from a "standing start". Likewise, the comparable compliance process with ICTI-CARE (Toy industry Code of Conduct) ain't cheap. Figure TSCP ratings to cost thousands, and possibly much more, depending on the actions required to make the transition to the new TSCP standards. Then there's the cost of regular audits and re-certifications. Many of the new requirements will likely lead to on-going, incremental administrative expenses at the factories, suggesting that product costs will float upward on a go-forward basis under the TSCP.

Finally, the TSCP costs will include all the usual safety tests required for each participating item, plus additional testing and processes. I have previously posted typical safety test costs in this space. [Rick Locker cited a cost of $300 per phthalate test in his testimony, as a point of reference.] INCREDIBLY, by publishing the TSCP terms, the TIA has apparently conceded that safety testing might be necessary or desirable multiple times per year. Testing frequency has NEVER been regulated by the U.S. government previously but will be addressed by the "15 month rule" shortly. I believe the TIA's actions here will provide cover for the CPSC to impose similar testing requirements, despite the obvious market interference. How easy will it be for me, as an industry participant, to argue against testing frequencies put forth by my own trade association? Surely they are looking out for my best interests and would only suggest what's reasonable and necessary - RIGHT?! Ummm, let me get back to you on that . . . .

Taking all of the above into account, I personally think the per-item cost to "pass" TSCP will be in the many thousands of dollars per item per year. For illustration purposes, however, I think we can confidently use a cost of $5,000 per item (all-in, blended). [Yes, I am predicting a blended cost of $5,000 per item to get this coveted certificate. Quite affordable . . . .]

How would a $5,000 TSCP cost affect you versus Big Toy? To answer this question, we must make some reasonable assumptions. For Big Toy, I am going to assume annual production of 1 million units of a hypothetical toy at a Tier 1 factory. For you, I am going to assume production runs of various sizes, all at a Tier 3 factory (which means you must test each time you produce, since you are unlikely to produce more often than twice-a-month!). For both you and Big Toy, I am going to assume a FOB factory cost of $5.00 per unit.

Here are the numbers:

Big Toy:

  • COGS: $5.00
  • TSCP: $5,000
  • Production Size: 1,000,000 per run (or per year, doesn't matter under Tier 1 rules)
  • Cost per unit for testing: $5,000 divided by 1,000,000 ($.005, rounded to one penny)
  • New blended cost, including testing: $5.01, or a cost increase of 0.1% - NOT BAD FOR BIG TOY!

You:

  • COGS: $5.00
  • TSCP: $5,000
  • Production Size: Various run sizes illustrated below (as a Tier 3 factory, you will test each lot)
  • Cost per unit for testing: 1,000 pcs - $5.00 per unit; 2500 pcs - $2.00 per unit; 5,000 pcs - $1.00 per unit; 25,000 pcs - $.20 per unit
  • New blended cost, including testing: 1,000 pcs - $10.00 (a cost increase of 100%); 2,500 pcs - $7.00 per unit (40% increase), 5,000 pcs - $6.00 (20% increase); 25,000 pcs - $5.20 per unit (4% increase).

Call me crazy, but I think this is rather favorable to Big Toy. Let's see, a cost increase of 0.1% versus a cost increase of 4-100%, which is better? Notably, for importers that sell to dealers, these cost increases are MULTIPLIED at retail, only compounding the competitive problem. The TSCP-induced gulf between specialty and mass markets costs will massacre specialty market toys. MASSACRE.

There is simply NO WAY that this program was vetted in any meaningful way by small business. If you were one of the small business reviewers, please announce yourself to my readers by commenting on this post (with name, email and phone number). Let's have a debate!

There are other factors here that favor Big Toy, such as TSCP sampling methods and sample sizes which will punish small toy companies in more than one way, and TSCP's required full traceability of components (also found in the RILA-BRC standards).

Even the liability risks under the TSCP favor Big Toy which can afford to provide expensive lawyers to back-up company officers. Notably, the TSCP requires a written personal attestation by a senior company officer of the TSCP product hazard assessment. Do you want to sign this little piece of paper and take on some serious personal liability? If that sounds really good to you, please consider the remarks of Chuck Rogers, Senior Technical Director for the TSCP, at the hearing (139:28): ". . . under CPSIA, when that company official signs that attestation, and it becomes part of what is required to get a safety mark [under the TSCP], I can tell you company officials I have talked to take that very, very seriously and they're going to be extremely cautious and prudent before they sign that. AND IF SOMEONE DOES SIGN AN IMPROPER ATTESTATION, AND THAT PRODUCT IS LATER FOUND TO HAVE A SIGNIFICANT DEFECT, YOU KNOW, IT WOULD BE WITHIN THE COMMISSION'S PURVIEW, I SUSPECT, TO ASK FOR THAT ATTESTATION." [Emphasis added.] So, in other words, the TIA is trying to sell this program to the CPSC as a source of evidence to be used against its members and its industry. Love it! Where do I sign up?

A Few More Hearing Highlights:

- Ms. Tenenbaum asked about counterfeit certificates. The continuing interest of the CPSC in the "switcheroo" and other nefarious acts mystifies me. What is the basis for treating me and all other members of our industry as scumbag cheaters? Why is this kind of question even posed? Of course, the TIA only feeds these suspicions by specifying tamper-proof seals on samples. Why would such a thing be necessary, other than a conviction that toy companies are such creeps that consumers and the government can't only trust them? How often does this kind of fraud happen, and if the CPSC knows about it, why haven't they acted decisively against the bad guys? Your guess is as good as mine.

- The hearing featured several TIA assertions that small businesses will be so, so grateful for the TSCP. The most surreal sell job was by Chuck Rogers, who illustrated virtually every remark with anecdotes from his days at Sunbeam and Wal-Mart. Very relevant to this topic. . . . Rick Locker twice gave detailed explanations of how small businesses will save money with the TSCP (at 77:30 emphasizing reduced record keeping and at 87:50 emphasizing safety test cost savings). Mr. Locker seemed to confuse the cost of factory audits with the cost of safety tests under the CPSIA - he used an example of 20 customers requiring 20 different tests, thereby multipying testing costs 20x. This scenario makes no sense to me since only certain specific safety tests are required to comply with the CPSA, as amended. You don't need a different safety test report for each customer - but you might need a different audit report for each mass market customer. Factory audits, notably, are a mass market phenomena, and typically confront small businesses only when dealing with mass market customers.

- The TSCP is good news for you, according to Elizabeth Borrelli (90:40): "If [the TSCP] was significantly additive [to costs], then our membership and our Board wouldn't support us moving forward with it, frankly." Feel better yet?

Final Thoughts:

The astounding TSCP initiative crafted by the TIA is a BUSINESS. The TIA, in proposing it, is going into business in competition with certain of its members. This move is troubling for a trade association. In addition, the TSCP adds significantly to the burden of the already excessively burdensome CPSIA. To promote this change to a regulator seemingly predisposed to treat our industry harshly is reckless and shortsighted. It is known, however, that certain toy companies are already planning to take these compliance steps and more. [In response to a question by Commissioner Adler, Hasbro's representative at the hearing confirmed that Hasbro will exceed the TSCP requirements.] Was the TIA acting with the notion that what's good for Big Toy is good for everyone else? Amazingly, this disruptive program is clearly favorable to only a small handful of TIA members and seemingly disadvantageous to a far larger number of toy companies. [I don't put much stock in the hand waving by TIA representatives at the hearing - show me the detailed analysis proving that this initiative saves money for any small business.] Given the heavy presence of mass market companies behind the development of this program, the mass market benefits and focus come as no surprise (to me).

It is worth noting one more full disclosure item: Earlier this year, I asked the TIA to help defray our advocacy expenses in opposition to the CPSIA. Despite their massive lobbying budget, they turned me down for several reasons. In a remarkable phone call, they explained to me that, among other things, (a) the TIA would not contribute to the expenses of the Alliance for Children's Product Safety unless I would allow them to exercise control over its activities, and (b) they believe the law would never be changed and preferred to channel the TIA's "limited" resources into efforts to live with the law. [There is obviously a gulf between my views and theirs.] In any event, whether it is cause or effect, the TSCP seems to have attracted a multi-million dollar investment by the TIA and essentially it appears that the TIA burned the bridges behind it - promoting the TSCP now is a primary focus of the TIA.

For those TIA members who have gotten this far in this long post, you may want to ask a few questions of TIA officers and board members.

9 comments:

Sebastian said...

Out of curiosity, what constitutes small business in this context? Obviously Learning Resources is far smaller than a behemoth like Mattel or Lego. But it is also a great deal larger than the home based businesses that are selling through Etsy.
We homeschool and I can say that Learning Resources labels are on a large number of our math manipulatives and early childhood toys.
Is there a definition for small business in terms of finances or employees?

Rick Woldenberg, Chairman - Learning Resources Inc. said...

The definition most people use for "small business" is 500 employees or less. That is the definition used by the federal government. In this particular case, the concept of small business has more to do with sales volumes. If your company has less than 500 employees but sells mainly to Wal-Mart and its brethren, you are likely to be less concerned about the TSCP for the reasons outlined in this post. If, however, your business focuses on low volume customers in a specialty market (like the homeschool market), this program is deadly. In this sense, I use "small business" here as a label for businesses with a low volume or specialty market focus.

Thank you for supporting Learning Resources! We appreciate it.

challengeandfun said...

I have been concerned about the TSCP since it early beginnings last year. Initially they were floating a $10-12 cost per certificate (not to test the product, but the electronic certificate a company creates based on third-party testing--the marginal cost of which, to TIA is next to nothing). Sure, $10-12 is not much...unless you have to multiply it by many products (and many certificates per product). It adds up far too fast for many small companies. That cost has since been adjusted downwards significantly, but I always felt...HEY, they are supposed to be making my life easier, not profiting (heavily) from a lousy law. Then I read many of the protocols for different tiers of factories and after I picked myself up off the floor, quickly realized I was on my own.

We actually produce product in THIS country. We work with small factories that cannot afford such costs and would laugh at us if we ever suggested such costly certification.

I have expressed my consternation to TIA about the TSCP and explicitly told them that this program does not work for small business. If they lost that message, and are reading comments, it is here in black and white for them again.

This program, and TIA's lack of support to fight for us is a significant reason why we will most likely NOT be renewing our TIA membership next year.

Rob Wilson
Challenge & Fun

Rick Woldenberg, Chairman - Learning Resources Inc. said...

Based on the hearing, I believe the current cost to enter an item into the TSCP database and thereby be eligible for an electronic certificate is $65 per item. This does not include any testing or certification processes, just entering the information into the fancy $2 million database. Sounds like a lot to enter data into a database, but then again, I have reported being charged $100 by a testing lab to confirm that we had included proper tracking labels on a product. Just blends in after awhile . . . .

I am glad you reached out to the TIA and told them how you feel. I hope everyone else will also pick up the phone. The TIA works for its members - and it needs to hear from its members. If you have comments or opinions on the TSCP, be sure to let them know (ASAP).

KidBean said...

Thank you, Rick, for once again bringing clarity to a very complicated subject. I can't say for certain but I'm pretty sure most of the small businesses I work with here in the USA would be categorized as Tier 2 or 3. Most of these businesses operate out of the owner's garage, basement, or workshop and have fewer than 5 employees. CPSIA was devastating enough, then the upcoming mandatory compliance with ASTM F963 adds another nail to the coffin, and TSCP will surely be the final nail.

The toys I sell are typically made by hand from either a. unfinished wood or wood finished with natural oils or b. organic cotton, inside and out. These materials are inherently safe and yet they are going away in the name of "safety" because the entrepreneurs who make them can't afford the ridiculously expensive testing, tracking & labeling.

It's very, very sad and shameful that so many of these small US businesses are being regulated away. These misguided, adversarial laws are directly removing many safe, eco-friendly toys from the market. At a time when American consumers want MORE US-made products (see this month's issue of Playthings Magazine at http://www.playthings.com/article/CA6698858.html), our government is making it nearly impossible for us to meet that demand.

If this is Obama's idea of helping small businesses, I'd hate to see how he treats his enemies. I can certainly tell you how I WON'T be voting next time around.

Melissa Zenz
KidBean.com

Rick Woldenberg, Chairman - Learning Resources Inc. said...

KidBean, I agree with you BUT I think it is also worth noting that the mainstream toy industry and mainstream education industry will get pummelled, too. Our company manufactures its products overseas - but that does not surrender the moral high ground in any way. I fear that the CPSIA issue gets marginalized by over-emphasizing the plight of the handcrafting industry. I do not think handcrafting is unimportant - but I think the main message is being lost. We are ALL going to be crushed, not just local cottage industries or eco-friendly toys. We have done a quick survey of our overseas factories - and yes, most will be Tier 3. That's BAD for us, too, if TSCP becomes standard.

I would put our safety record side-by-side with anyone's. We have one of the best safety records of any company in our industry over a very long time (I am trying hard not to jinx myself here). So let me say plainly, Tier 3 overseas factories are not necessarily the problem. Ironically, I believe the problem lies in the apparent difficulty some companies have had in patrolling and monitoring their supply chain and manufacturing systems. This is probably more a casualty of complexity than anything else. We use some Tier 1 factories, too. The issue is how you select those factories and how well you can control their activities. The TSCP's focus on Tier 3 v. Tier 1 factories is a head fake by Big Toy - they want to pass the buck.

I also think that there is a bit jingoism in the rules. The notion that American companies are faultless and that mysterious foreign factories are the bad guys is completely off-base. For one thing, it is the products of American companies that were recalled. The products are manufactured to American specs, and it is American companies who supervise quality control. Why are we giving them a pass? Some notorious cases involved companies that exercised poor judgment - or worse. Again, blaming foreign factories is a cop-out.

I would also like to say PUBLICLY that I trust our overseas trading partners. We have done business with many of them for years, and like us, they are family-owned. We know the Mom, the Dad, the brothers, the sisters. They know us, too, even my Mom. This kind of closeness creates great opportunity for alignment of goals nad mission. They are like family - and I trust them. My trust has not been abused, either, although we have had QC problems from time to time, like anyone. They are an important part of how we build trust with our customers, too.

KidBean, you are completely right that the CPSIA debacle is shameful. It certainly is. The reason isn't that handcrafters or other small enterprises will fall victim. The reason is that ALL economic damage here is gratuitous and unnecessary. You are a victim, I am a victim, even the mass market companies are victims - but for what? Politicians and consumer groups gesticulate wildly about lead and phthalates, but provide little data; there is no connection between the terms of the vaunted law and the goals of the vaunted law. Political stubbornness is behind the refusal to address the known issues. Politicians are on a mission - and are indifferent to your plight and mine. I continue to reproduce Senator Durbin's words to make this point - and he's my Senator.

Shame, shame, shame - that's the word of the day. Democrats = shame.

Tracy Barnhart said...

I agree with everyone that this law is awful and it will likely drive me out of business pretty quickly. But please, this is not just a democrat issue. The law was enacted under Bush. The problem is not democrats (yes I am one and yes, I hate this law). The problem is that the people who wrote the law were politicians and not scientists. The people who run CPSC are not using science to make their decisions. Ms. Tenenbaum was Secretary of Education here in SC and did a good job but she has probably never worked in a laboratory and had to determine what laboratory tests are appropriate and what tests are not. I have. The problem with this law is that science and logic were overrun by fear.

Rick Woldenberg, Chairman - Learning Resources Inc. said...

Tracy, while you are right that this bill was passed by a non-partisan super majority, it has BECOME a partisan issue. More than 100 Republicans have subsequently voted for various bills to amend the CPSIA. The Democratic leadership is intransigent and will NOT allow any CPSIA amendment bill to move. They, thus, become the problem. The Democrats are afraid that opening up the bill will mean that it gets gutted. Why would it get gutted? Because it's defective. It was their career achievement to get the overly broad CPSIA passed during a panic, and now insist on our living with it. Or dying with it. The Dems seem indifferent to these outcomes.

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