Karhu works through few glitches in opening China factory

An email and a number of phone calls over the last several weeks regarding the very late delivery of Karhu skis and possible quality-control issues on a number of those skis – largely because of the company's shift to producing skis in China – prompted SNEWS® to check in with the company to learn more and separate fact from fiction.
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An email and a number of phone calls over the last several weeks regarding the very late delivery of Karhu skis and possible quality-control issues on a number of those skis – largely because of the company's shift to producing skis in China – prompted SNEWS® to check in with the company to learn more and separate fact from fiction.

If you have not heard by now, Karhu USA has shifted the majority of its production from Canada to China. Apparently, a number of Karhu dealers were still finding out skis were coming from a China factory as late as mid-November. Currently, 84 percent of the company's ski line is made in China (including all XCD and telemark skis and the entry level Nordic skis such as the Rendezvous and Ursa), with the balance of production for the higher end Nordic skis coming from Europe (6 percent made in the Ukraine, 5 percent in Finland, and 6 percent in Austria).

Karhu decided in 2004 to make the move to a Chinese factory so that it could better compete with the larger companies, Mike Welch, national sales manager for Trak Sports USA, which includes both the Karhu and Line brands, told SNEWS®. Even when the Canadian dollar was trading at $1.57 against the U.S. Dollar, the margins for the company were razor thin, we were told. As the USD weakened, that difference slipped to as low as $1.15, and that meant Karhu would be losing money on every sale with skis that were still higher priced and offering the retailer less margin.

"Obviously, this move was a monumental task for a company the size of Karhu. We are very proud of the work that has been done by all of our employees to pull it together. We have had a full team over in China for the last eight months, including everyone from engineers, right on up to Doug Barbor, Karhu's owner," Welch said.

And the company has needed every one of them and then some in China as it turns out. The problems that arose for the company, which Welch asserts were all unforeseen, were the result of a combination of events, including the very short timeline to pull off the factory change, factory machinery getting held up unexpectedly by Chinese customs, training new factory staff to make skis, and an jump in pre-season orders.

Consider that before Karhu could even ship any machinery to China, it had to first finish all 2004/2005 production, and then make all the necessary samples for the upcoming trade shows and rep needs.

When Karhu began telling retailers about the move to China at both SIA and Outdoor Retailer Winter Market, including that the move would mean retailer margins would go up by as much as 10 points and ski prices would be coming down, pre-season bookings jumped by 45 percent, we were told.

It was still looking like things were going smoothly until it became evident various pieces of critical machinery were not making it through Chinese customs as quickly as hoped or needed. A two-month buffer to get the factory up and running and work through any production hiccups vanished.

Welch told SNEWS® that factory machinery was not online fully until August but even then it was not operating at capacity since it was training new Chinese employees, ones that had never made a ski in their lives.

Yet another glitch in the bes-laid production plans quickly became evident as Karhu wrestled with knowing what the scrap rate would be, something that it hadn't had to really worry about when it ran its own Canadian factory – one that was very dialed in and experienced very few production challenges. Welch told us that when the company produced skis in Canada, the scrap rate was 2 percent or below. At the Chinese factory, the scrap rate was running as high as 20 percent initially.

Suddenly, the factory was running out of a particular color of needed ink, or out of wood that was required for the wood cores on some skis. Shortages would pop up without sufficient notice to respond. At times, even though it was the factory's responsibility to have sufficient materials, Welch told us, the China-based Karhu team scrambled and purchased product itself just to keep the factory lines operating.

Needless to say, retailers counting on Aug. 1 ship dates for preseason orders were greatly disappointed. As one retailer who requested anonymity told us, "Hard to get excited about selling product that promises a higher margin and great performance when that product is arriving well after the selling season starts. Any higher margin we might have enjoyed will quickly disappear with late season discounting."

Welch fully acknowledges that the late delivery of our skis has not helped anyone but he also insists that, "We have been very open with our retailers and our rep force has been working to communicate the changing timelines with each shop."

As of the end of November, Karhu reported that it was 90-percent caught up on deliveries of all Nordic ski orders and 60 percent caught up with all telemark ski orders. The company told SNEWS® that it expected to be fully caught up with all orders by Dec. 15.

"Karhu is a small company and that allows us to be very flexible and work individually with each of our retail partners to address any changes or adjustments that need be made as a result of these delays," said Welch.

Welch also acknowledged that because it tried to move so quickly to pull off what he termed, "a miracle," a number of blems made it through quality control in China and into retailers' hands. Most of problems appear to be cosmetic in nature and primarily limited to the Ursa ski – smeared graphics, rounded edges, bubbled top sheets, etc.

"We stand behind our product 100 percent and always have. Using the same machines, raw materials and processes that have used for years has allowed us to make a fairly seamless transition. Any problems that a retailer has regarding some of the cosmetics on their skis have been and will continue to be addressed promptly and accurately. Karhu has a long and proud tradition of standing behind its product and this year is no exception," Welch told us.

Welch also told us that as of our contacting the company for this story, it would be opening all shipments of skis from China and inspecting them for problems before shipping them on to retailers awaiting orders.

SNEWS® View: Ouch. Karhu committed the ultimate business sin – expecting the best, not anticipating the worst, and having no apparent cohesive plan to deal with the worst if it occurred. As a result, the delivery timeline became a moving target that Karhu and its reps were constantly scrambling to keep up with.

Karhu is not the first company to have been caught up in the challenges of moving production to China, and it likely won't be the last, but perhaps others can learn a bit from Karhu's missteps. First, why the secrecy? Welch admitted to us that Karhu didn't tell anyone about the move outside of its current circle of dealers, and only in meetings. No press release or formal notice was issued by Karhu. While Karhu says it told all of its retailers at SIA and Winter Market, quite a few retailers with whom we spoke (mostly in the outdoor specialty realm) had no idea of the move to China until later in the summer. Some even as late as November. Communication that is open and honest with all may not solve all the problems, but it sure will make them a whole lot easier to stomach and deal with.

Second, expect the worst. What if the boat carrying the machinery had sunk? Or the machinery arrived damaged? There was no window built into this plan for any significant delays, and ultimately, Karhu's dealers paid the price. Getting skis in late November and early December is just not good business for any ski retailer.

Third, if the worst happens, treat all retailers equally, at least in terms of communication. We do know that the likes of REI and L.L. Bean had great communication about this and that deliveries to them were rolling in as soon as product was made available. That is just good business practice. However, it would have been much better had Karhu personally called every one of its accounts (even the very smallest ones) once product did start rolling off the production line to check in with them and begin offering possible solutions without excuses for late delivery that was costing its smaller accounts vital business. Yes, some may have cancelled orders, and some may have demanded deep discounts, but the reality is, deliveries that are months late are not a retailer's problem – it is the problem of the manufacturer to make good. Some retailers told us if they had they been told much earlier they would not see skis until late November, they would have been able to fill in with cheap skis from various sources. Now, it is too late for that.

However, all that said there is some shine under all the tarnish for Karhu dealers. We sincerely doubt that Karhu will replicate this event in any way, shape or form. They are way too good a company for that and this is definitely a first for them. Realize that the company will have one full year under its belt. We would expect in that time the skill level at the Chinese factory will have gone up, the scrap rate down, the required levels of raw materials needed for production will be on hand, quality control will dramatically improve, and production will start months earlier than it did this year.

In the long run, this is definitely the right move for Karhu. China production does promise to offer improved margins for all, lower prices for consumers, and quality that should equal that of production in Canada as the factory gains more experience. It also will ensure that Karhu is able to remain competitive and in business – something the company would not have managed had it stayed the course with Canadian production, low margins and higher ski prices.

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