WIC 2004 — An Outstanding Conference
Tucson, Arizona was the setting for the 13th Annual Woodworking Industry Conference last month and over 250 delegates and guests were in attendance, representing AWI, AWFS, WMIA and WMMA.
Each association held general business and committee meetings, company representatives sponsored contact table sessions and educational workshops and exchange forums were available to all attendees.
The opening general WIC session featured international speaker John Kennedy of Kennedy Consulting, who presented a high-energy talk to delegates and guests on workforce retention and motivation.
The Opening General Session was also the setting for presentation of the WMIA 2004 Partner of the Year Award. This year's winner was Delta International Machinery of Jackson, Tennessee. The award, presented by Marketing Committee Chair John Henderson, was accepted by Kirk Figan and Mike Strickland of Delta.
Concurrent workshops, held on Saturday morning, included:
- "Re-Energizing Your Organization for Greatness," presented by Bill Blades.
- "Engaging China: Myths and Realities," presented by Michael Colopy.
- "Increasing Profitability Through Lean Manufacturing," presented by David Berger.
- "Knowing When to Redefine or Expand Your Business," presented by Art Raymond, AG Raymond, Mike Carson and Steven Lawser.
- "Tips and Tools for Managing the Hispanic Workforce," presented by Timothy Longwell.
- "Glimpses of the Future", presented by Richard Judy.
These workshops were well attended and provided much valuable information for the delegates.
New in 2004 were three exchange forums, held on Friday. The forums included an Education Exchange, Business Partnership Exchange and Public Policy Exchange. Preliminary evaluations indicate that these forums were a well-received addition to WIC.
Social events included the Tuesday evening Early-Bird Dessert Reception, Wednesday night Welcoming Buffet Dinner and Closing Cowboy Steakfry. The weather in Tucson was beautiful and the Arizona night sky provided a magnificent canopy for the outdoor evening events.
The annual WIC golf tournament and luncheon provided a highly enjoyable afternoon for 64 delegates and guests. Tournament winners were the foursome of Tom Reisert, Nancy Reisert, Tom Anderson and Jennifer Anderson.
Second place went to Blair Tullis, Dan Jones, Michael Burdis and Mark Chappel. Third place winners were Tim Weaver, Barry Howerton, Chuck Morrison and Kevin Robinson.
Other winners included:
- Men's longest drive—Kent Noble.
- Women's longest drive—Penny Loving.
- Men's closest to the pin—Steve Byers (#3), Tom Reisert (#7), Larry McGilliard (#13) and Rick Hannigan (#17).
- Women's closest to the pin—Claire Strouse (#3), Jenny Anderson (#7), Debbie Bruckman (#13) and Nancy Reisert (#17).
Mulligans were available for sale to all participants and a total of $1,010 was collected and donated to WoodLINKS.
The annual WIC tennis tournament had few participants but lots of fun. Tournament winner was Edward Strahota.
Special WMIA events included a First Timers' Reception on Wednesday evening and Member Dinner on Friday night. The setting at the Hilton El Conquistador was well suited to all events held during the week, from the business meetings to the social gatherings. Delegates and guests enjoyed their time in Tucson.
Mark your calendars now for WIC 2005, which will take place April 20-23, 2005 at the Hilton Sandestin in Destin, Florida. WMIA officers and staff look forward to seeing you there!
Wholesaler-Distributor Health Insurance Costs Jump Again Employees Share Pain of Rising Premiums
Data compiled by the National Association of Wholesaler-Distributors (NAW) reveals a substantial increase in group health insurance premiums paid by industry employers. Information was provided by nearly 500 wholesale distribution companies of all sizes and across all lines of trade.
Ninety-nine percent of the companies responding to the NAW survey offer health insurance as an employee benefit. Explained one survey participant, "Retaining good people requires an insurance package." Another agreed: "Good health benefits are a necessity to keep good people."
For the third year in a row, industry employers recorded double digit premium increases, with this year's boost reaching 16 percent. Hardest hit are employers with 50 and fewer employees, who experienced a 20% average hike. This increase is a three-point reduction in the rate of increase these small employers experienced last year, but is equal to the increase recorded in 2002. Wholesaler-distributors with more than 500 employees faced premium increases averaging 14%, a two-point improvement from their experience in each of the last two years.
For the second consecutive year, wholesaler-distributors with 51 to 500 employees saw a decline in their average rate of increase after reaching 20 percent in 2002. In 2004, wholesaler-distributors with 51-250 employees reported a 16 percent increase while those with 251-500 employees witnessed a 13 percent average premium boost.
The reaction of individual employers was pointed: "Health care costs are the one thing that keeps me awake at night," said one. "Fastest growing cost of doing business," said another. A third wholesaler-distributor opined, "It is a crisis."
A comparison of NAW's current data with that gathered in the 2002 and 2003 surveys shows that employees are sharing the pain of sharply rising premiums with their employers. Ninety-eight percent of the employer participants in the current NAW study said that if the current trend continues, workers can expect even more of the same, itself a concern to their employers.
Commented one survey participant, "I have had double-digit rate increases for the last three years. If it continues, I will have to raise the employees' percentage, and I know that some would drop their insurance." Said another, "Last year our increase was 21 percent and this year it is 38 percent! We have no choice except to ask the employees to pay more of the premium, increase the deductibles and reduce benefits." A third employer warned, "At some point, we may need to terminate health insurance as an employee benefit."
"From a public policy perspective, there are a couple of things our data continues to make painfully clear," observed Jim Anderson, NAW Vice President-Government Relations. "First, government at all levels must stop imposing cost-generating mandates on health insurance plans and the employers and workers who purchase them. Second, there is an urgent need for enactment of association health plan (AHP) legislation to enable smaller employers and their employees now struggling in the small group market to benefit from greater competition and choice in the marketplace. It is among smaller employers where the uninsured problem is greatest, where the affordability problem is felt most severely, and where rising premium costs remain at their steepest. Enactment of AHP legislation would offer the prospect of real market-based solutions to a real and growing problem," Anderson concluded.
IWF Set for August in Atlanta: Don't Miss Out
There's still time to be part of this year's International Woodworking Fair (IWF), but the clock is running and meeting hotels are filling up fast!
Set for August 26-29 in Atlanta, IWF is the largest woodworking trade show in the Western Hemisphere, with more than 1,200 exhibitors expected at Atlanta's Georgia World Congress Center.
The three conference hotels are in walking distance of the Georgia World Congress Center, the site of the show. The WMIA headquarters hotel is the Westin Peachtree; the secondary hotel is the Wyndham Atlanta; and for this year's show, a third hotel has been added: the Fairfield Inn. As usual, the hotels fill on a first-come, first-served basis. The good news is that the hotels have rolled back their rates for IWF to 2000 rates.
Housing reservations opened Nov. 3 and the room block will be held until June 25. If you haven't registered yet, contact IWF for the housing and travel brochure and individual reservation form at (770) 246-0608 or by e-mailing info@iwfatlanta.com.
Please note you must use the reservation form-one for each attendee—to obtain a WMIA hotel room and return it by fax or mail, as no reservations are accepted by phone.
For more information or to register, visit the show's web site, www.iwf2004.com.
Profitability Planning: Why Bother?
As new home starts decline, cabinetmakers say much of the strong demand for cabinets will come from remodeling.
By Dr. Albert D. Bates
A large group of WMIA members don't ever develop a financial plan. They simply buy things and sell things and hope that it all works out for the best. Another significant group of firms follows a very specific three-step approach:
- Develop a detailed plan, often using outmoded procedures.
- Lock the plan into the desk drawer for fear someone will see it.
- Pull the plan out next year and repeat the process.
Only a final, very small, group of firms actually plans proficiently. They plan for profitability and they use that plan as a basis for control during the year. While this group is not assured of success, research studies suggest that firms that engage in proper financial planning enjoy slightly higher sales and dramatically higher profits than those that do not.
The problem is that most firms don't have a precise understanding of how planning should be done or what the goals should be in the planning process. This report will address those issues by looking at two specific factors:
- Realistic Profit Goals—A review of the goals that WMIA members should strive for in order to produce a satisfactory return on investment.
- Planning for Profit—An identification of how the profit planning process might be employed by the typical WMIA member to reach the profit goal.
Realistic Profit Goals
In setting a profit goal, the first issue is to decide which measure of profitability to use in the planning process. There are numerous ways to look at profitability, each with its own strengths and weaknesses. By far the best measure of overall company performance is Return on Assets (ROA) because it measures the return on the totality of all of the investment in the business.
Return on assets is simply the profit the firm produces during the year (before taxes) expressed as a percentage of the total asset investment required to generate that profit. Total assets is the total amount of money invested in the business, regardless of who made the investment.
In setting a target for ROA, it is useful to start with the three reasons why the firm needs to generate a profit to begin with—providing a risk return, supporting growth and offsetting inflation.
- Risk Return—The profits generated by the firm must at least exceed the risk-free return available in alternative investments, ideally by a large margin.
- Growth—Virtually every firm wants to grow. This growth requires additional inventory, accounts receivable and ultimately more capital equipment. The only way to fund such growth is by generating a profit and reinvesting these funds in the business.
- Inflation—While inflation has abated in recent years, it still persists at a modest level. For planning purposes a firm has to think in terms of producing a modest profit that will offset the impact of inflation.
The profit level required by a specific WMIA member depends upon the unique combination of these factors. Generally, firms should strive for at least a ten percent ROA. For the top tier of firms a legitimate goal is twenty percent.
Planning For Profit
The primary reason firms develop a plan and then forget about it, is that in their experience planning doesn't have any impact. The real problem is that most firms plan improperly so that even if they follow the plan closely, they don't produce an impact. The plan must lead to better results. The key to that is to use what is commonly called profit-based planning.
Profit-based planning reverses the entire budgeting process. It suggests that as the first order of planning each year the firm should set a realistic profit objective. Realistic is the key word in the equation. It is what the firm can reasonably expect to achieve in the future based upon past performance.
The process behind profit-based planning is extremely simple, almost to the point of being rudimentary. Behind this simplicity lies an extremely powerful planning philosophy, however. Namely, that without appropriate planning, profits are likely to always be inadequate. Without a goal, you will always be headed nowhere.
Exhibit One demonstrates how return on assets is used in profit-based planning for the typical WMIA member. The process involves six steps. The left side of Exhibit One has the results already entered for the typical WMIA member. The right side has space for you to enter numbers for your firm. It is a critical process that should be approached very seriously.
- Step One—Enter actual pre-tax profits for the latest complete fiscal year. For the typical WMIA member this is $19,500.
- Step Two—Enter total assets at the end of the year. Again, using the number for the typical firm, $1,950,000.
- Step Three—Calculate return on assets. This is simply profit divided by total assets, expressed as a percent of assets, or 1.0%.
- Step Four—Set an improvement goal for return on assets. A goal in the range of two to three points is strongly suggested. This forces the firm to do better, but doesn't produce an unattainable one-year improvement. In the exhibit an improvement factor of 2.5 percentage points has been used.
- Step Five—Add the old ROA figure and the improvement figure to obtain a new ROA target, or 3.5%. This is well below the twenty percent figure that was suggested as an ultimate goal. However, it starts the firm moving toward that profit level.
- Step Six—Take the total asset figure from step two and multiply times the new ROA target from step five. This produces a realistic profit target of $68,250 for the firm for next year.
Clearly, this process is extremely simple. The calculations can be done in two or three minutes. Because of its simplicity many firms avoid the entire process, thinking that life just isn't that easy.
Of course, achieving financial success probably will not be easy. However, profit-based planning does one absolutely essential thing—it identifies how much profit the firm really ought to produce. Failure to establish this goal is a fundamental reason why the typical firm continues to have sub-standard profit performance. It is a problem that can be overcome with proper planning.
Moving Forward
Most firms never plan, so profits simply end up being whatever is left over at the end of the year. They don't plan because they don't think they should bother. However, those firms that engage in profit-first planning inevitably produce substantially higher profits than those that do not. It is a profit opportunity that is open to all firms. It is an opportunity that should not be passed up.
About the Author:
Dr. Albert D. Bates is founder and president of Profit Planning Group, a distribution research firm headquartered in Boulder, Colorado.
A Managerial Sidebar on
Return on Assets Versus Return on Net Worth
Return on assets (ROA) is the best ratio available to management for measuring the economic viability of the firm. That is, it does the best job of determining whether or not the firm has an economic model that justifies its continued existence.
In contrast, return on net worth (often called return on equity) does the best job of measuring the return on the owner's investment. RONW is an extremely valuable tool. Many executives prefer RONW as it answers the question of "what's in it for the owners?"
However, firms that produce a high RONW, but a low ROA are doing so only by employing a high level of financial leverage. Ultimately, such firms face major financial challenges, particularly in times of economic difficulty. Firms should continue to employ RONW, but they should make ROA their major focus in evaluating past results and planning for the future.
For the typical WMIA member the two ratios are:
|
Return on Assets
Profit Before Taxes
Total Assets
$19,500
$1,950,000
=
1.0% |
Return on Net Worth
Profit Before Taxes
Net Worth
$19,500
$780,000
=
2.5% |
A return on assets below 5% is a cause for serious concern. Literally, the company is not producing an adequate return to ensure its survival. A return between 5 and 10% is adequate. When the return reaches the 10 to 20% range, the firm is producing strong results. Anything above 20% is outstanding.
Woodworking Equipment Purchases Down in 2003
Contributed by Modern Woodworking
Purchases of major equipment by wood products manufacturers were down for the second year in a row in 2003. DETAILS
Frameless Pioneer Expands South
Contributed by FDM
An in-depth profile of James Lestorti of LesCare Kitchens Inc., winner of this year's WMIA Innovator of the Year award. DETAILS
Merging Function & Form
Contributed by Modern Woodworking
Functional hardware manufacturers incorporate design elements in their newest product offerings. DETAILS
Remodeling Sector Should Sustain Cabinet Demand
Contributed by Wood and Wood Products
As new home starts decline, cabinetmakers say much of the strong demand for cabinets will come from remodeling.
By Susan Lorimor
As 2004 brings an expected slowdown in last year's torrid pace of new home starts, industry leaders believe remodeling will pick up most of the slack to sustain a healthy U.S. cabinet demand.
"Remodeling is now over 70 percent of the business," says Dick Titus, executive vice president of the Kitchen Cabinet Manufacturers Assn.
Titus said the past eight years have been exceptional for KCMA members. "We're fortunate that we recorded 93 consecutive months of growth through December (2003). We're expecting 2004 to be similar to 2003 — maybe a little lower."
In 2003, cabinetmakers who took part in KCMA's Trend of Business Survey posted $6.1 billion in sales, up 13.1 percent from 2002. The monthly sales growth rate for December 2003 increased by 22 percent from December 2002.
According to the most recent U.S. Department of Commerce figures available, about $12 billion worth of wooden kitchen cabinets and countertops were shipped in 2002.
Titus says low interest rates, new home demand, and a strong kitchen and bath remodeling market fueled growth over the past several years.
Job Growth More of a Factor Than Interest Rates
The National Association of Home Builders says it expects housing starts will fall about 4.8 percent in 2004, and sales of existing homes will decrease 5.3 percent. They would be the first declines since 2000.
The National Association of Realtors said continued strength in the housing market this year will depend more on improvements in the labor market than on interest rates.
"Fixed-rate loans are currently around 5.7 percent, but we project a gradual rise to 6.5 percent in the fourth quarter," said David Lereah, NAR's chief economist. "As interest rates move up, the strength of the housing market will depend largely on job growth, which we expect to accelerate and drive demand for homes as the year progresses."
In January, the nation's unemployment rate fell to 5.6 percent, the lowest level in more than two years. Companies added 112,000 new U.S. jobs, denoting the fifth straight month of payroll gains and the largest in three years, according to the Associated Press. Economists, however, had expected 38,000 more jobs would have been added. Since President Bush took office, some 2.8 million manufacturing jobs have been lost.
Still, analysts say the economy is expanding. Real gross domestic product — the output of goods and services produced by labor and property in the United States — rose 4.1 percent during the fourth quarter of 2003, up from earlier estimates of 4 percent growth, according to the Bureau of Economic Analysis.
In the third quarter, real GDP increased 8.2 percent.
Popularity of Kitchen Remodeling
The National Association of the Remodeling Industry says more than 1 million homes will undergo major renovations or remodeling this year.
According to the NAHB, the most common remodeling jobs in 2002 were kitchen renovations. A survey of remodelors found 63 percent of their jobs were kitchen makeovers, followed by bathroom remodeling, 61 percent, and room additions, 58 percent. About $6.6 million were spent on kitchen remodeling.
"Remodeling has come on strong with our dealer base," says Angela O'Neill, director of marketing for Wellborn Cabinet Inc. of Ashland, AL. Wellborn distributes through about 700 dealers. In 2003, it bought Cabinetry by Karman, a $20 million company in Salt Lake City.
Though O'Neill says 2003 sales were also strong in new construction, she adds, "The indications we read are that remodeling will come on stronger."
Wellborn posted about $110 million in sales in 2003. O'Neill anticipates a 10 percent to 15 percent sales increase this year.
American Woodmark Grows with Home Improvement Stores
American Woodmark Corp. of Winchester, VA, says 65 percent of its 2003 fiscal year sales were in the remodeling market, compared to 35 percent in new homes.
The company, which operates 13 manufacturing facilities and 10 service centers across the country, is coming off a strong year, and anticipates further growth in 2004. It lays claim to being the third largest kitchen cabinet manufacturer in North America.
American Woodmark had a net sales increase of 13 percent to $563.5 million in fiscal year 2003. "This marks the first year in our history with over half a billion dollars in net sales," says James J. Gosa, president and CEO.
American Woodmark says it foresees another 15 percent to 20 percent rise in fourth quarter sales, for the period ending April 30, 2004. Solid growth is expected in the new construction and remodeling sectors.
In January 2004, the company broke ground on a 250,000-square-foot plant. Gosa says there are plans to double the plant's size in the next few years.
However, American Woodmark has a definite advantage over many competitors in the cabinet industry. Its cabinets are sold in 1,515 Home Depots and 952 Lowe's across the country. A year ago, The Home Depot Inc. had 1,370 stores in the States. Lowe's had 854 in 44 states.
When the home improvement giants grow, so do American Woodmark's sales opportunities. The company also puts its cabinets in stores like Builders Square.
Masco Grows, Armstrong Declines
Masco Corp. of Taylor, MI, also had a great year. Net sales in its cabinet about sector increased 9 percent, from $2.8 billion in 2002 to $3.1 billion in 2003.
Fourth quarter net sales increased 13 percent, from $722 million in 2002 to $814 million in 2003.
Meanwhile, Armstrong's cabinet sector showed decreased net sales in 2003. Sales fell to $204.8 million, from $226.9 million the year before. Armstrong said that was due primarily to reductions in volume, and there was an operating loss of about $11.1 million.
Guarding Against Imports
While Titus says economically, the cabinet industry has fared much better than other manufacturing sectors, imports are a concern.
Wellborn's O'Neill says cabinet imports do not affect her company. American Woodmark reports the same. Yet, Titus says some KCMA companies do import components from China and integrate them into manufacturing.
"One of the overriding concerns is noting what has happened with furniture with manufacturing moving offshore," Titus says. "Cabinet manufacturers had taken steps to increase productivity before China became a cause (for concern among furnituremakers)."
Over the years, most major cabinetmakers have invested in new technology and machinery, Titus says. Cabinetmakers have ensured they are making themselves competitively.
O'Neill says her company has heard dealers are bringing in imports, but they are "very entry-level" cabinets, without options. Such cabinets are not Wellborn's niche, so the imports do not affect the company.
"Anytime you think of imports, you think of what happened with the furniture industry," O'Neill says. "We want to make sure we have a variety of products."
Titus says the KCMA is drawing policy makers' attention to the state of U.S. manufacturing. "We're encouraging our members to make their representatives aware of their concerns," he says.
The KCMA recently joined the Coalition for the Future of Manufacturing. Launched by the National Association of Manufacturers , the coalition seeks public and governmental support to help U.S. manufacturers be more globally competitive.
What's hot for 2004?
Angela O'Neill, director of marketing for Wellborn Cabinet Inc., of Ashland, AL, says she sees a trend in two-toned, painted cabinets."
It's maybe a combination of midnight black, with white or cream paint," O'Neill says. She says the trend began a couple of years ago, and is more prevalent today.
Wellborn's black painted accent finish, Midnight, shown above, has a low sheen to create a matte look. The finish is offered on two maple door styles, and Wellborn says it pairs well with almost any color scheme.
Also hot are lots of detail, through accessories and mouldings, from legs to turnings, O'Neill says. |
Sizing Up the Furniture Manufacturing Landscape
Contributed by Wood and Wood Products
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."
