The State of the Furniture Universe

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In our last issue Wood Digest talked with Art Raymond about the prospects for the U.S. furniture industry.  Our interview concludes with Art’s ideas on survival strategies for U.S. furniture producers.
Art’s consulting firm, A. G. Raymond & Company, specializes in assisting their clients solve operations problems in areas such as plant layout, production control, materials utilization, and manufacturing strategy.  Clients include furniture producers, cabinet makers, and other secondary wood products manufacturers in the U.S. and in 18 foreign countries.
 

Last month we discussed increasing competition from offshore producers and falling profit margins for the U.S. furniture industry.  Is a U.S. producer forced by these conditions to compete on price?

The price you charge will always be important.  But your selling price is only one piece of your buyer’s cost.  If you make it easy for your customers to do business with you, you can achieve higher prices.  What you have to deliver is solid value, and it’s one of senior management’s chief responsibilities to define what ‘value’ means to their customers. 

I believe that there are a lot of customers who define ‘value’ as reliable quality and service at a reasonably competitive price. 

Let’s face it, by definition, only one company in a market niche can be the lowest cost producer.  If factors other than price didn’t enter into buying decisions, only one company would survive in each market. 
 

How can a U.S. producer compete?

One of the best ways to defend your distribution from competition, be it domestic or offshore, is fast delivery.  When people find out I’m in the furniture business, they lecture me on how long it took to receive their furniture order.  Poor quality, bad design, and price are rarely mentioned.  Admittedly my survey is unscientific.  But I think delivering faster than your competition will get you more sales.  Companies like Ikea and Stanley in our own industry are proving this point.

It goes without saying that a U.S. producer should always be able to deliver faster than offshore competitors if they design their entire process wisely.
 

So how does a producer offer fast delivery?

There are only two ways that I know of to give the consumer instant gratification.  You can either keep an inventory of your finished products in a warehouse or build your products faster than your promised delivery time.  Any other strategy is a variation of these two.

In a complex process like conventional furniture production, both of these models require inventory.  Either you have finished goods or you have components in some stage of completion in stock somewhere in your process. 
 

But isn’t inventory bad?

Strictly speaking, yes.  It’s ideal to have your entire process working just in time.  But in reality we need inventories to buffer the inevitable variation in supply and demand.  The inventory that you need to support your marketing plan can be mathematically calculated.  Every company should be making that determination and then managing to that level of investment.  Yes, it can be minimized.  But first you need to know how sensitive inventory is to changes in factors like order quantity, marginal unit costs, and customer service.  It’s a basic responsibility of management to set an inventory target for their operation.
 

Let’s turn to the plant floor.  What’s the key challenge there? 

We’ve got to simplify the production side of our business.  People often say that furniture manufacturing is not rocket science.  I say it’s more complicated than that.  Just look at the scope of production in a typical casegoods plant.  You’ve got to buy, dry, and cut lumber, that is a wildly variable material, at the least cost per net board foot.  Then you’ve got to coordinate an often-complex series of machining sequences for thousands of components.  Add to that the need to master finishing technology, and you’ve got a level of complexity that isn’t faced by many so-called manufacturers in other industries.

History is full of people from outside our industry who thought they could wring more profits out of our business.  But many of them have left with their tails between their legs and a few less dollars in their pockets.  And unfortunately they left the industry basically unchanged.

We’ve brought much of this complexity on ourselves.  And ‘we’ in this case means both the manufacturing and distribution sides of the business. 
 

So how can a furniture manufacturer simplify his process?

First start with your product range.  Identify your core products – those sold in high volume to your best customers.  Evaluate just how critical the remaining SKU’s are to you.  Cut out those products that your core customers don’t really value.  If a product just has to stay, figure out how to make it profitably.

This process can be brutal, but if you continue to clog up your plants with marginal SKU’s, you’ll never improve your bottom line.   And remember that it’s those slow moving items that make inventory management difficult and consume a disproportionate share of your inventory investment.
 

Okay, we’ve rationalized the product line.  What’s the next step?

First get your plant on schedule.  In our experience striving to be on time and complete with every order is the most powerful device a manager can use to find and fix his plant’s weaknesses.  Single-minded attention to that goal will force you to cure all of the problems that you have been ignoring for years.

Remember our goal is fast delivery of our customers’ orders.  If you can’t build your products on time, you can’t manage your inventory.  Your only option at that point is hire some smooth-talking customer service people.
 

Is outsourcing part of this simplification strategy?

Absolutely.  Remember that your customers don’t really care where, when, or who made the products you offer for sale.  They only care about the total cost of doing business with you.  If you can’t do something competitively whether it’s a carved part or a complete product, then source it from qualified suppliers. Of course, you must know your real costs to run that make vs. buy analysis.  That’s often a challenge by itself, but it can be done. 

Then consider the staggering cost of building a modern, fully integrated plant.  Let’s look at a simple example.   To build a fully integrated wood casegoods plant takes $1 of investment in plant and equipment for every $2 to $2.40 of annual capacity.  With the average industry cash flow at about 7.5%, our return on investment, simply speaking, is between 15% and 18%.  That’s well below the hurdle ROI most companies like to see on a $20 million investment.

 We can leverage our capital and our skills by letting others that are more efficient provide part of the process.  Look at the motor car industry.  They’ve replaced those huge vertically integrated plants with cheaper, more focused ones that rely on a few key suppliers.  A BMW made in South Carolina has a 70% purchased part content vs. about 40% for wood furniture.  By making one model – the Z3 roadster - they’ve got the ultimate in product focus.  By simplifying the scope of their process each worker is producing nearly $300,000 per year.  Compare that with the average casegoods worker at around $93,000.  Plus they generated these results with less capital investment per $1 of capacity than required for a fully integrated plant.
 

What about the people requirements for this shorter, simplified process?

Every furniture producer in the U.S. is complaining about the scarcity of skilled workers.  If we simplify our processes, we need fewer workers.  But these workers will also need different skills. 

Many in our business are restructuring their plant floors to create “cells” or “plants within a plant” that make specific parts or products.  That’s great if they man these “cells” with self-managed teams that can take care of quality, production control, and machine set-up.  But those skills are not found in the typical furniture worker today.  It takes more than simply rearranging the plant layout.  You have to invest in training to improve teamwork and thinking skills.  Looking again at BMW, each worker there goes through 70 hours of testing to determine aptitude for the job and then 2 weeks of orientation in the assigned job.  And after that, on-going education ensures that new skills are developed.  That’s non-stop dedication to sharpening their people assets.

Also if your strategy involves outsourcing, your managers will need talents in product engineering, negotiations, quality assurance, and logistics.  Those skill sets are not often found in the typical furniture producer’s org chart.

In today’s world we compete with our people assets.  Look at companies like Microsoft.  If their balance sheet could reflect the value of their people, it would be their biggest asset.  In the end you better be giving your workers a solid reason for working for you rather than someone else.   You’ve got to train and motivate your people.  In return they should care if you’re successful,  know how to help you succeed, and have reasons to learn new skills. 
 

We’ve focused on the production side of the business.  What can be achieved in retailing?

Ideally producers and retailers could improve cooperation on product design and demand management.  Why can’t retailers who supposedly know the consumer work closely with a producer to develop and test market a new group?  Then once the group proves successful, why not communicate point-of-sale information directly to the producer’s computer to enable thoughtful inventory management.

Ethan Allen has proven this tactic with its single-source store network, and Bassett among others is following.  We’re also seeing retailers like Restoration Hardware entering the production side in hopes of streamlining their sourcing.  But will it take ownership to control this cooperation?  Or can trust be developed between independently owned retailers and producers?  Watching Furniture Brands’ strategy with retailers Havertys and Benchmark will give us a clue. 
 

What’s your biggest fear for our industry?

Right now times are good for most producers.  And now’s the time to plan for the future and begin to work that plan.  Unfortunately the average senior executive spends about one-half hour per month on strategy.  Ten years from now, we will be suffering the consequences of this lack of strategic focus.  And the beneficiaries will be your competition wherever they are.
 
Yes, we’ve got some problems – offshore competition, poor intermediate-term demographics, a fragile economy.  But smart managers will see these problems as opportunities.  Since success in furniture manufacturing depends on wise management, nothing will really be different.  Think creatively about ways to help your customers buy your products.  There’s a place in that process for U.S. producers in some shape or form. 
 

More information on organizing for the future can be obtained from A. G. Raymond & Company by phone at 919/831-0070, by e-mail at info@raymondnet.com, or by visiting www.raymondnet.com.
 

October 1999