Challenges & Opportunities for the Furniture Industry
An Interview with Art Raymond

In the good old days furniture manufacturers operated like isolated, independent links in the value chain from the forest to the consumer. Each firm bought lumber, coatings, hardware, and cartons from a few key vendors located just down the road. Technology was pretty simple, and the choice of materials was few. We made and delivered large quantities of few products to traditional furniture retailers. The growth of the middle class after WW2 and the ensuing housing boom fueled solid demand for furniture. Well-run companies could sell all that they could make.

The emergence of Taiwan as a serious competitor in the late 70’s changed the manufacturers’ universe. We’re now faced with overcapacity on the supply side and large, powerful retailers in a confusing array of alternative distribution channels. In an effort to differentiate themselves, companies expanded their product lines and took on a variety of new methods and materials in an effort to hold down price.

But the balance of power shifted away from the manufacturer, and the result was lower profitability. Profits are now about half the level of the early 80’s. So while we were complicating our production processes in scope and scale, we had less capital to invest in our plants.

Is this overcapacity chronic or cyclical?

Economists will tell you that chronic overcapacity almost always leads to falling prices. Furniture prices since the early 70’s have not kept up with consumer price inflation. We’re giving the consumer more value for her dollar than ever.

And now other offshore competitors are adding more capacity. Last year about 3 million square feet of new capacity was built in China alone. That’s the equivalent of Stanley – the 15^th largest furniture producer in the U.S. And this new capacity is better equipped than most U.S. plants.

Won’t world economic growth absorb this extra capacity over time?

The problem is demographics. In the developed world populations are rapidly aging. The U.S. baby boomers will begin retiring by 2010, and the group that follows – Generation X – is about half the size. Household formations – a prime driver of furniture demand – are forecasted to fall from 1.3 million in the late 90’s to below 1 million by 2008.

Given that scenario what is the biggest challenge facing U.S. furniture manufacturers today?

Without doubt, it’s identifying where your company will fit in tomorrow’s furniture universe. Will you be a fully-integrated producer or just assemble, finish, and distribute. In a very competitive world, if you aren’t among the best at what you do, you won’t survive. Manufacturers in particular are vulnerable. It’s only a matter of time before Chinese producers employ the Universal model and come direct.

Does ‘best’ mean low cost?

‘Best’ means different things to different customers. Some buyers want the lowest price; others demand customer service. One of the key responsibilities of senior management is to define what ‘value’ means to their customers. I believe that there are a lot of buyers out there who define ‘best’ as solid quality and excellent service at a reasonably competitive price.

After all, only one company in a market niche can be the lowest cost producer. If factors other than price didn’t enter into buying decisions, there would be only one supplier in each market.

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 can achieve higher prices.

Beyond price how can a U.S. producer compete?

In my opinion, fast order fulfillment. Every time someone finds out I’m in the furniture business, they feel compelled to lecture me on how long it takes to receive their furniture order. Very few talk about poor quality or design. Even fewer mention price as an issue.

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 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 $92,000. 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 developed 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 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 retailers. Furniture sales rose by 5.7% last year, and producers are reporting double-digit growth. Even the retail side that lagged in previous years is reasonably profitable.

So now’s the time to plan for the future and begin to work that plan. But you’ve got to focus on strategy continually – more than the average half hour per month that most senior executives commit to it. I don’t want to see our industry squander its opportunity like Texas oil men in the 70’s. Remember that cartoon of a down and out oil man saying "Please Lord let me have one more boom. I promise not to screw this one up".

Yes, we’ve got some problems – China, demographics, a fragile economy – but these problems are really opportunities for smart managers to shine. And carve out their link in the furniture value chain of the next century.