December 10, 2015

Case Study: Why Supplier Capacity Management is Mission Critical

Neil Shenoi

bankruptcy_gavel.jpg2015 was a rough year for Fuhu Inc.

Named America’s fastest growing company by Inc. Magazine in 2013 and 2014, the maker of the nabi-brand of children’s tablets filed for Chapter 11 bankruptcy on Monday amidst a messy financial battle with its investor and exclusive manufacturer, Foxconn. There’s word that Mattel is “coming to the rescue,” having tentatively agreed to buy the struggling business’s assets for a mere $9.8 million. In this post, we explore the chain of events that lead to Fuhu’s bankruptcy as a cautionary tale of how unmitigated supplier capacity risks, demand variability, and weak supplier relationship management brought a successful consumer electronics company to its knees. 

Fuhu experienced a tremendous growth period between 2010 and 2013, raking in over $195 million in revenue in 2013 alone. Trailblazers in the children’s technology business, Fuhu has sold over 4 million Nabi tablets primarily through retail outlets like Wal-Mart, Toys-R-Us, Best Buy, and Costco Wholesale. To boost profits and remain competitive in a market saturated with competitors like Apple and Amazon, the company has provided a subscription service called the “nabi Pass,” granting nabi tablet owners an exclusive domain of apps, games, and media.

Paper-thin profits and endless potential supply chain risks aside, the tablet market is a tough arena to maintain growth. Since tablets are replaced less frequently than smartphones, there is considerably more demand variability in the tablet market, leading to increased supplier capacity risks. It’s also a seasonal market. Tablet sales peak around the year-end holidays, making the December shopping season the best time for tablet companies to pull in profits and remain competitive. During this season, inventory management and just-in-time manufacturing are critical to electronics companies.

In 2013, Fuhu relegated the engineering, development, and manufacturing of their signature nabi tablets – essentially the entire production process – to Foxconn. Foxconn is not only the world’s largest contract electronics manufacturing company, but Fuhu’s top creditor and major stakeholder.

However, Fuhu’s tragic nosedive began in late 2014 following a major capacity disruption from Foxconn. Foxconn failed to deliver on-time its shipments of nabi tablets intended for Christmas shoppers, depriving Fuhu of sufficient inventory to supply its retailers. By the time shipments arrived, holiday customers had already purchased rival tablets, leaving Fuhu with tremendous overstock at the beginning of 2015. Having missed a vital revenue opportunity, Fuhu returned over $90 million worth of inventory back to Foxconn, agreeing to buy back the nabi units as necessary. The rippling bullwhip effect hit Fuhu hard.

Unable to recover from the holiday setback, the small company quickly found it in a catch-22 with its contract manufacturer. In September, Foxconn shut off supply of the Nabi tablets and left Fuhu struggling to stock the major retailers for the upcoming holiday shopping season. Meanwhile, Fuhu already owes Foxconn over $46 million. According to court documents, Foxconn has been aggressively pursuing payment from the small company. To add, Fuhu says Foxconn cut communications in October, forcing Fuhu to turn to another top lender to help preserve services and make payroll. Soon after, the loan was declared in default, leaving Fuhu strapped for cash and enough inventory to stay in operation.

Fuhu’s appearance before a bankruptcy judge on Tuesday was funded by a $300,000 loan from Mattel Inc., Fuhu’s potential buyer. The pending sale has priced the struggling business’s assets at a meager $9.5 million, an astonishing corporate fire-sale. Time will tell whether or not Mattel will be able to preserve Fuhu’s products and services. Foxconn, citing business confidentiality clauses, has declined to comment on the matter.

Fuhu’s dilemma is a supplier capacity management horror story. Within a year, the leading children’s technology company was brought to the brink of extinction, all due to a chain of events caused by a late shipment. We don’t know the level of supplier engagement Fuhu had with Foxconn prior to its fall, so it’s unclear if this devastating capacity risk was inevitable. However, we do know that Fuhu choked from relying too heavily on the contract manufacturer and lacked supplier visibility. I’m left wondering if things could’ve turned out differently for the tablet company had they implemented proper supplier capacity management measures.

Supplier capacity management helps businesses prepare for inevitable disruptions by analyzing and proactively mitigating supplier capacity risks. It involves gathering supplier intelligence at the company, product, part, and process level in order to detect capacity disruptions before they happen. Supplier relationship management will prevent critical communication breakdowns. Such proactive risk mitigation processes can help businesses avoid a fate like Fuhu’s.

Learn More About Supplier Capacity Management

References

  1. Children's Tablet Maker Fuhu Files for Bankruptcy, Agrees to Sale to Mattel
  2. Fuhu's Fight with Foxconn Could Hit Holiday Sales
  3. Fuhu Files for Bankruptcy Amid Fight With Foxconn
  4. Information About Fuhu's Chapter 11 Bankruptcy
  5. Fuhu, Once a Rising Star, Files for Bankruptcy
  6. Fuhu Inc. Files for Bankruptcy Protection; Mattel Inc. to the Rescue

Topics: supply chain visibility, supply chain risk management, supplier capacity management