Niche Nonsense

by BILL WADDELL

Don't get me wrong.  I am pleased to see that Louise Jonaitis is "Breathing New Life into Maine's Mills."   Folks like her who have the faith in American manufacturing capabilities to put their money where their mouth is are both rare and wise.  The saw mills and wooden products manufacturers she and her buddies are buying up cheap and bringing back to life have the potential to be fantastic investments if they are managed right. 

The bone I have to pick is with the notion that they can only be successful in niche markets – nibbling around the edges of the mainstream making high priced stuff for specialized markets, leaving the core of the market to 'mass producers' where low cost manufacturers in third world countries have an inherent advantage. That is utter nonsense, based on long-outdated thinking, and wrong economics.

"She said she'll strive to distinguish her products from imports, with no plans to go head-to-head with foreign manufacturers.  'I don't see us competing with China,' she said. 'We don't even want to be in a battle with them.'

Robert Rice, a wood science and technology professor at the University of Maine, said the successful wood products plants around the state put out specialized products made with specialized equipment for niche markets.  'Those kinds of businesses do well.  They don't serve huge markets, but theyr serve sophisticated markets and buyers, and they look for niche markets,' he said."

Now Mr. Rice is an academic so we should not have particularly high expectations of him, and he is talking about the existing wood products manufacturers in Maine who very likely have rationalized their way to being bit players in boutique markets.  If so it is because they are lousy managers – not because of some valid manufacturing or economic principles that say they have to settle for for so little.

Ms Jonaitis, however, has to know better if she is going to make a go of it.  If she doesn't see herself competing with China, and doesn't even want to "want to be in a battle with them" she is sealing her fate.  The only way to avoid the battle is to sell so little and be so unprofitable the Chinese don't care.  Make any money, however, and she will surely be in the battle and she had better be prepared for it.

The sort of thinking the good professor describes is based on a convoluted understanding of economies of scale.  She ought to give Bob Emiliani a call and have him shoot on up from Connecticut to Portland and set her straight.  He can rant on the myth of economies of scale better than anyone I know.

Economy of scale and all of the old thinking about mass production is built on the foundation of amortizing fixed costs over a lot of stuff.  If the plant costs a million bucks a year to own and operate over and above the direct costs of the products, then it stands to reason that if you make a hundred thousand things then the fixed cost per thing is $10; but if you make a million things the fixed cost per thing is only $1.  So making more of that thing is cheaper.

The economy of scale believers will tell you that, if you make a million of the thing, you will be on the Chinese radar and they will get into the market with their built in labor cost advantage, and the shipping costs will be negligible when those million things can be moved by the container load, so the only way to make money is to stay in markets where the volumes are low and customers have no choice but to pay the higher prices inherent in low volume production.  That's the logic, anyway.  And it is a convenient excuse for the poor management practices that are the real reason your costs are so much higher than the Chinese.

That logic failed to be logical when Shingo and a few of the boys at Toyota conjured up Single Minute Exchange of Dies– SMED - quick changeovers.  In one fell swoop, it was no longer necessary to make a million of the same things for the economics to work.  The fixed cost to amortize per thing is the same if you make a million of the same thing, or a thousand each of a thousand different things – or one each of a million different things.  You don't make fewer things in total when you can do SMED just because you make a lot of different things. 

The exception is limited to tooling costs – not a big deal in the woodworking business, but potentially an issue when you make stuff that has to be molded or stamped.  But tooling is becoming more flexible all the time and a molder or a stamper worth his salt does all sorts of magic with inserts and in-mold voodoo that makes even this less of an issue.  (and in most cases the tooling cost per item is more an accounting rationalization to go to China than a legitimate reason)

As soon as the Chinese – or the Mexicans or the Indians or the Vietnamese – figure out lean and SMED, those geese of those manufacturers the professor mentioned is cooked.  The perceived advantage of playing in markets with low volumes is gone.  And all that is left is management.

"The trick now is to implement a profitable business model," Ms Jonaitis said.  She is right about that, and the answer is right there in the article.  Her customer, Stanley Furniture, has been buying imported stuff but has had problems with quality and delivery.  No big surprise there.  The profitable business model she seeks is a lean business model – one that is intensely focused on value for customers and on the relentless elimination of any cost that is not contributing to value.  Traditional accounting and old school volume thinking won't get her there.

The selection of the business model will make or break the deal.  Hiding in the shadows of some niche or another, assuming economy of scale will enable her to succeed with the same manufacturing management thinking the Maine wood products industry deployed before they went under won't work.  You can't hide in a niche.  If the Chinese don't find you, a well managed American manufacturer will.