W&WP March 2004
Sizing Up the Furniture Manufacturing Landscape
Furniture Brands International executive says blending domestic and offshore production is the recipe to succeed in today's market.
By Rich Christianson
Furniture Brands International is the kingpin of U.S. furniture manufacturers and is parent to some of the industry's most recognizable names including Thomasville, Broyhill, Henredon, Drexel Heritage, Lane and Maitland-Smith. The St. Louis-based company posted sales of nearly $2.34 billion last year. It views "accelerating the expansion of (our) dedicated stores and galleries" as paramount to gaining greater "control of our retail destiny." The company entered 2004 with 191 single-branded stores and is reportedly aiming to expand that number by about one-third by year's end.
FBI has shuttered about one-third of its U.S. plants in recent years in stepping up its offshoring program, yet continues to manufacture about 75 percent of its products domestically. As a strong proponent of global sourcing, the company has been one of the most ardent opponents of the antidumping petition that seeks duties on Chinese wooden bedroom furniture.
In a wide ranging interview, Lynn Chipperfield, FBI's senior vice-president and chief administrative officer, discusses his company's blended strategy, opposition to the antidumping petition and other issues.
Brands International recently announced the impending closing of two Drexel Heritage plants. How many furniture plants and how many employees will that leave Furniture Brands International with in the United States? How do these numbers compare with the company's domestic manufacturing portfolio of five years ago?
Furniture Brands operates 37 domestic manufacturing facilities and employs approximately 17,000 workers in the United States. Sixteen of the facilities manufacture case goods, 20 make upholstered furniture and one is a major supply plant. We also own two foreign plants that were acquired in 2001 as part of the Maitland-Smith subsidiary - one in Indonesia and one in the Philippines. The company has closed 21 of 60 plants and reduced its workforce by approximately 6,000.
How many of the plants were closed because of a decision by the company to have products made overseas? Why were the others closed?
The decision to close a facility is extremely complex and involves many factors, but it usually boils down to the issue of capacity. In order to be competitive our plants must run at high-capacity utilization rates of 90 percent or better. When a plant is running at a rate in which consolidation is possible, the company makes the decision to close and consolidate.
A facility's capacity utilization rates depend on demand for the products produced. The sluggish economy, therefore, is as much to blame for our consolidation as any other reason, including outsourcing.
What are some of the overriding factors that Furniture Brands considers in deciding whether to produce a product line domestically or overseas?
The preference is always to produce product domestically, but the decision is made on a case-by-case basis. Generally because of the lower cost of labor, certain offshore manufacturers are capable of producing certain kinds of furniture much more cost effectively than we can here in the United States. On the other hand, there are many items that are still more efficient to manufacture in our domestic facilities.
One example is one of the most successful collections in the industry's history, Broyhill's "Attic Heirlooms." First, it's a very large collection - a high SKU count. Second, each piece is available in one of four finishes. What makes this difficult to import, therefore, is the Asian manufacturer is set up for long production runs with little variance in product. Attic Heirlooms is no such collection. Also, due to the collection's size and finishing options, it would be cost-prohibitive to inventory sufficient quantities to service our customers. Drexel Heritage's "Tuscany" collection is another example for many of the same reasons.
What specifically is Furniture Brand's "blended strategy?" Why is it important to the short- and long-term health of the company?
The company's blended strategy describes the manufacture of certain products domestically and the sourcing of certain products internationally. At present the blend is 75 percent domestically produced and 25 percent sourced.
Offshore sourcing allows us to broaden our product offerings and to provide furniture to the consumer that we might not otherwise be able to offer on a cost-effective basis. A balanced program that combines offshore sourcing with our strong domestic manufacturing base gives us a competitive advantage and gives greater possibility of job security to our domestic workforce.
Another beneficiary is the furniture consumer, who will have an increased number of furniture options and will find greater value in our products.
What might be a good example of a product introduction made possible by offshoring?
One excellent example is the extremely successful "Hemingway" collection by Thomasville. The products are unlike anything the company has previously produced. The products are very eclectic; they blend interesting and unusual materials, have a broad array of finishes and are, as a result, very labor intensive. This product simply cannot be made domestically at a price the Thomasville consumer would pay.
To our knowledge, Furniture Brands International is the only U.S. furniture manufacturer to actively oppose the antidumping petition filed against Chinese wooden bedroom furniture manufacturers. What role has Furniture Brands played in trying to defeat the petition so far and what more might the company do to try to block it?
We believe the antidumping action will and should fail. The products we are bringing in from offshore are our own products. We design them and we seek out quality manufacturers to produce them to our specifications. We also negotiate pricing. The classic case of an offshore company manufacturing its own products and dumping them into our domestic markets simply doesn't exist in China, at least not among the larger producers. If there are a few bad apples making unwise business decisions over there, the marketplace will ultimately weed them out, just as it does over here.
In addition, we believe protectionist efforts like this are shortsighted and do not serve the best long-term interests of our industry. We must find a way to compete in the global marketplace, and hiding behind tariff walls is not the way to accomplish that. So far, the only results of this petition have been to distract our industry from the real task of remaining competitive, to threaten an interruption in the long-awaited increase in consumer spending patterns in our industry, and to increase global manufacturing capacity in countries such as Vietnam as U.S. manufacturers - including most or all of the petitioning companies - look for alternatives to China. The jobs we have lost are not coming back. Our charge is to preserve to the greatest extent the remaining jobs by competing globally, and we won't accomplish that by relying on lawyers to run our businesses or on the government to bail us out.
Are you surprised that other major furniture companies that import products, such as Ethan Allen and Ashley Furniture, have not been more vocal in protesting the petition?
We do not wish to speculate about the motives of other companies in the industry. We do believe, however, the industry as a whole will suffer with the imposition of tariffs.
There are many among the furniture machinery and supplier ranks who believe U.S. furniture manufacturers would not be going offshore to have their products made if they had instead invested in new plants, more productive equipment and more efficient methods. Do you agree or disagree with this criticism? Why or why not?
Certain products lend themselves to production offshore generally because of the lower costs of labor. On the other hand, there are many items that are still more efficient to manufacture in our domestic facilities. To a large degree that depends on product design, but to a large degree it depends on technology and other production efficiencies as well.
It is absolutely critical to invest in lean, efficient, technologically superior manufacturing facilities to be competitive. Furniture Brands has made many such investments and will continue to do so.
How much money does Furniture Brands invest in equipping its plants each year?
Our capital expenditures budget is upwards of $40 million. The bulk of that figure is invested in plants and equipment.
Does Furniture Brands have any plans to build a state-of-the-art furniture factory anytime soon in the United States? Why or why not?
With current capacity utilization rates in the mid-'80s, additional domestic manufacturing capacity is not justified. We have invested in state-of-the-art technology at all of our companies, but always in the context of existing facilities. Late in the year 2000 the company announced that it would not build additional manufacturing capacity in the United States in the foreseeable future.
Another common criticism of the furniture industry is that it typically takes eight weeks or more for furniture to be delivered to the consumer. Is this the case with most of Furniture Brands' furniture? How good of delivery times can we have? What's Furniture Brands' experience in order-to-delivery times of domestic-made versus offshore-made products?
Lead times vary greatly by product and by company. Upholstery is almost always made-to-order, so it takes longer than wood products you may already have on inventory, which could ship almost immediately. We generally think or our overall lead times in the four- to six-week range, with lead times being shorter in case goods and longer in upholstery.
With respect to imported furniture, the company maintains an appropriate increased inventory to cover the extraordinary shipping distance. This increased inventory burden is an essential element to a successful sourcing program. And with that you have touched on a critical issue with respect to imported furniture. We call it the distinction between "first cost" and "final cost."
First cost is fairly simple. It is the price you pay from your vendor, plus freight. Final cost however, is much more difficult to calculate. These are the costs that eat away at your margins often on an unknown basis. Insurance, additional warehousing, and risk of obsolescence are but a few examples.
We have said the following for a long period: Take a product manufactured in North Carolina and land it in a warehouse in North Carolina; then take that same product, manufacture it in the Far East, load it in a shipping container on a dock in Hong Kong, bring it across the water, land bridge it across the United States and land it in that same warehouse in North Carolina. You will generally see somewhere between 3 and 5 percent better margin on the imported product. That is, if it is done perfectly. There are plenty of ways to trip up along the way. The product can be over-ordered. Now you're faced with an entire warehouse of product that may have to be sold at a discount simply to get rid of it. Conversely, it can be under-ordered, resulting in the opportunity cost of lost sales.
Can you envision the day when one or more of the furniture lines Furniture Brands is having produced offshore is brought back to the United States for manufacturing? What circumstances might it take for this shift to take place?
The production that has been shifted overseas will not come back to the United States. Our responsibility as managers is to produce our products in the most cost-effective manner. To the extent we can configure our domestic operations to be globally competitive, those operations are secure in the United States. In addition, to the extent future designs in our product line lend themselves to domestic manufacture rather than imports, we will expand our domestic manufacturing to accommodate.
What role, if any, do you think the federal government should take to help make U.S. furniture makers more globally competitive?
The role of governments is to create a business climate in which the best companies can compete globally. Tax issues, health care, tort reform, etc. all contribute to that climate. But if the question is whether government protection will make us more globally competitive, the answer is "absolutely not."
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