By Steve Lawser — Executive Director, Wood Component Manufcaturers Assn.

Because of the importance of outsourcing to the wood products industry, the Wood Component Manufacturers Assn. has periodically conducted “make vs. buy” studies to measure outsourcing trends.

The first WCMA make vs. buy study was conducted in 1984 as a follow-up to the now Kitchen Cabinet Manufacturer Assn.’s benchmark research, “Assembly Versus Integrated Operation of Kitchen Cabinet Manufacturers,” conducted in 1966-70. At that time, kitchen cabinet manufacturers wanted to know if it was more profitable to outsource wood components or make them in-house. The KCMA study showed that cabinetmakers who outsourced more than half of their components had an average 25% return on net worth compared to only 12% for those integrated factories that produced most of their components in-house.

The 1984 WCMA study conducted by the accounting firm of Touche-Ross, and a 1993 study conducted by Vance Research Services on behalf of the WCMA, also indicated that assembly-oriented furniture and cabinet manufacturers that outsourced the bulk of their wood components enjoyed a higher return on net worth compared to those who made their own components.
Earlier this year, the WCMA once again commissioned Vance Research Services to perform a new study. It is the first comprehensive, industry-wide study to examine outsourcing from both a domestic and global perspective.

Because this study was conducted online, the survey questionnaire was sent to more companies, covering a wider variety of wood products than the previous studies. The survey was e-mailed to 3,953 companies who are subscribers to Wood & Wood Products or Custom Woodworking Business. A total of 304 companies completed the entire survey. Companies from all major wood product categories – cabinets, furniture, millwork, etc. — were represented.

Like the previous studies, the 2006 outsourcing study projects that North American wood product manufacturers will continue to outsource more of their components and products to outside suppliers. Even with downsizing, woodworking companies that outsource can maintain and even increase annual sales volumes by relying on multiple suppliers. Outsourcing has stretched out the good times and minimized the bad times in the cyclical woodworking industry. The new study, like its predecessors, concluded that companies that outsource tend to know their costs, have tight control on production and focus their resources on what they do best, allowing them to better succeed in today’s highly competitive global market.

2006 Study Highlights
The following subheads and bullet points, plus the accompanying charts, highlight findings of the 2006 outsourcing study.

Study Demographics

• One-quarter of respondents primarily manufacture residential cabinets.
• Nearly three-quarters of respondents work in companies with less than 50 employees.
• All U.S. geographic regions are represented in this study, as well as Canada.
• Sixty-two percent of respondents are W&WP subscribers and 38% are CWB subscribers.

Outsourcing Components

• Sixty-two percent of North American woodworking professionals
currently outsource components, primarily from the U.S. and Canada.
• Woodworking professionals estimate the dollar value of wood component parts they purchased in the last 12 months as $901,069, on average.
• Half of woodworking professionals indicate the top reason preventing them from outsourcing more/any components is because they want control over production.

Top 10 Reasons for Outsourcing Components

• Outsourced components cost less• Do not have the manufacturing capabilities or space• Take advantage of others’ expertise• Increase productivity and efficiency
• Save time to focus on more important things
• Reduce capital expenditures
• Better quality
• Reduce inventory and overhead
• Concentrate on product development
• Expand variety of products
In-House Manufacturing
• On average, North American woodworking professionals manufacture 58% of their wood component parts in-house.
• Two years from now, woodworking professionals estimate 68% of their wood component parts will be manufactured in-house.
• Drawer fronts (53%), plywood parts (49%), cabinet doors (47%), drawer boxes (47%) and drawer sides (46%) are the top five wood components that woodworking professionals manufacture in-house.
Top 10 Reasons for Producing Components In-house
• Control quality of product
• Produce one-of-a-kind custom products
• Products too specialized to outsource
• Use existing capacity
• Quantities too small to outsource
• Lead time required to outsource
• Capability not available outside
• Less expensive to make in-house
• Difficult to find quality sources
• Lack of reliable sources

U.S. and Canadian Component Suppliers

• On average, North American woodworking professionals purchase 34% of their wood components from U.S. and Canadian suppliers.
• Two years from now, woodworking professionals estimate 37% of their wood components will be outsourced to U.S. and Canadian suppliers.
• Cabinet doors (53%), mouldings and millwork (53%), drawer boxes (42%), solid rounds and dowels (36%), and drawer fronts (33%) are the top five wood component parts outsourced from U.S. and Canadian manufacturers.
• Consistent quality (49%), good relationships with suppliers (49%) and better control over costs (48%) are woodworking professionals’ top reasons for buying component parts from U.S. and Canadian manufacturers.
• Product quality, price and dependability of supplier are the most important factors to woodworking professionals when selecting U.S. and Canadian suppliers.
• The Internet (75%), trade journals (68%), trade shows (68%) and buyer’s guides (62%) are the top sources woodworking professionals are likely to use when locating potential U.S. and Canadian suppliers of wood.

Foreign Component Suppliers

• On average, North American woodworking professionals purchase 7% of their wood component parts from foreign suppliers.
• Two years from now, woodworking professionals estimate 30% of their wood components will be from foreign suppliers.
• Mouldings and millwork (23%), solid rounds and dowels (21%), plywood parts (19%), stair spindles and newel posts (14%), and turned table and chair legs (14%) are the top five wood component parts outsourced from foreign manufacturers.
• Price (37%), better control over costs (28%) and the ability to add new products (19%) are the top reasons woodworking professionals buy component parts from foreign suppliers.
• Product quality and price are most important to woodworking professionals when selecting a foreign supplier of wood components.
• The Internet (42%), agents and brokers (37%), trade journals (37%), trade shows (37%) and buyer’s guides (35%) are the top sources woodworking professionals are likely to use when locating potential foreign suppliers of wood.

Rough Mill Use

• Slightly less than one-quarter (24%) of woodworking professionals’ companies have their own rough mill; an additional 4% say they plan to add a rough mill within 12 months.
• Among those who currently have a rough mill or plan to add one in the next 12 months, 56% would consider purchasing components from outside suppliers if their rough mill reached full capacity.
• Among those who would consider purchasing components from outside suppliers if their rough mill reached full capacity, 94% would most likely purchase from U.S. and Canadian manufacturers.
• Slightly over three-quarters of woodworking professionals do not anticipate expanding their rough mill capacity within the next two years.

Financials

• On average, woodworking professionals indicate that their companies’ gross margin is 21%.
• Woodworking professionals indicate an average 12% return on equity for their company.

Read the Full Report

The entire report is available on the WCMA’s Web site at no cost. To access it, log onto www.woodcomponents.org and click the NewsFlash section.