Furniture Circling the Globe

Last month we told you about a couple more furniture companies that are following the outsourcing lemmings chasing cheaper labor overseas without looking at their total costs and internal waste.  If they would take the time to look around they would find several examples of furniture companies who are globally competitive from U.S.-based factories by implementing lean manufacturing methods.

A hat tip to our friend Mark Graban at the Lean Blog for letting us know of a rather unique article that describes some other outsourcing lemmings in the furniture industry who got a jolt of global perspective that helped put them on a different path.

As president and chief executive of Sauder Woodworking Co., the $700 million ready-to-assemble furniture giant in Archbold, Ohio, he made tough calls in recent years to move some production to Asia to cut costs and stay competitive.

But then the jolt came down from on high.

Then, last July, who should show up on his corporate doorstep but Ikea officials, who had a similar problem. The Swedish retail giant had to cut costs — and planned to do so by moving cabinet frame and shelf production from Europe to America.

However he didn’t quite understand it at first.

We are to Ikea what China is to a lot of furniture companies.

No, that isn’t what’s going on at all.  Sauder outsourced to China out of a mistaken understanding of total cost and a lack of understanding of the impact internal waste was having on his cost structure.  Those products were being returned to the U.S. on container ships… huge amounts of cash tied up in inventory potentially at risk and long cycle times.  Ikea on the other hand is trying to be closer to their customers in the U.S., and that is one of the very few valid reasons to move a factory to a different country.

Ikea designs in Sweden, runs the costs of shipping, resources, materials, and labor, and found that it was cheaper to make furniture in Archbold for distribution than to make it at its Poland plants and ship it to the U.S.

Unfortunately most of the furniture industry doesn’t understand this concept, and instead simply follow the lemmings.

The average American furniture worker is paid $14 an hour; Chinese counterparts get 69 cents an hour, according to a 2001 industry study.  Labor-intensive items made overseas can yield savings of up to 800 percent in labor costs, Sauder said. "There are certain products you can automate and certain processes you just can’t," he said.

I’m a little curious how you can achieve "800 percent savings"… isn’t 100% the maximum?  I think the numerator and denominator got flipped… but that shouldn’t surprise us since they don’t really understand manufacturing cost to begin with.  And this has the expected effect:

Today, 75 percent to 80 percent [of furniture] is made in China, Taiwan, Vietnam and other Asian countries.  "We should have seen it coming earlier than we did. All we needed to do is look at textiles," said Michael Dugan, chief executive for 17 years at Henredon Furniture Co. who now is a business professor at Lenoir-Rhyne College in Hickory, N.C.

Of course part of the reason they don’t understand is due to the likes of Professor Dugan.  Like most business school professors, he thinks in terms of simple wage rate differentials instead of total cost and the opportunity presented by a focus on internal waste reduction.  Luckily some business schools are starting to realize that domestic manufacturing can create competitive advantage.

Sauder was smart enough to eventually realize the true cost of offshoring and the opportunity of onshoring.

Sauder bought two firms with ties to Asian production — Progressive Furniture Inc., of Swanton and Studio RTA of Los Angeles. Progressive used factories in Mexico, China, and Indonesia; Studio RTA used plants in China and Taiwan. "They were knowledgeable about world markets and world production, which was something we lacked," Sauder said.  But he quickly realized Asian manufacturers have limitations and U.S. plants could be competitive by streamlining.

As he learned, wage rates aren’t the only factor.

Still, labor costs aren’t the only factor. Others include labor hours, materials, freight costs, time in transit, overall time to make a product and get it to market, and who has been trained to do what.  "I would not want to go head on with real cheap labor costs. That would be death," said Art Padilla, a professor of business management at North Carolina State University. One advantage of building domestically is faster delivery, he said.

Yes!  Another business school professor that comes clost to actually getting it!  Tack on the potential quality and obsolescence risk in that transit inventory, the lost investment opportunity for the cash tied up in transit inventory, and intellectual property concerns and you are getting close to the full picture.  Close enough.  We’ll add NCSU to our unfortunately short but thankfully lengthening list of universities that are teaching their students how to succeed in America.

The article cites La-Z-Boy as another example of a furniture company that gets it.

Delivery speed is why La-Z-Boy continues to assemble upholstered products in America and why it likely always will, said Stegeman, the company treasurer.  La-Z-Boy uses Toyota’s production system that eliminates waste, operates with virtually no inventory, and continually improves production. The Michigan firm calls its version "celluar" manufacturing, or using a team or "cell" of employees with the skills to make an item of furniture, like a sofa. They produce customized items quickly and as needed, saving on resources, inventory, warehousing, and delays.  About 40 percent of its U.S. plants use the system; the rest are to convert within 13 months.

Other furniture manufacturers should first look to the likes of La-Z-Boy before following the outsourcing lemmings off a cliff.