Making profitable outsourcing decisions: a new make vs. buy study sheds light on the latest trends in domestic and global outsourcing of wood components
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.
* 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 Wood & Wood Products subscribers and 38% are CWB subscribers.
* 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 fast 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
* 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.
* 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.
By Steve Lawser
Wood Component Manufacturers Assn.
IWF SEMINAR EXAMINES PROFITABLE
Being competitive in today’s tough global marketplace requires a regular review of all manufacturing processes, including determining whether some production should be outsourced. Outsourcing can make sense for many wood products businesses. Determining which products offer the greatest opportunities for outsourcing to improve productivity and profitability is a key decision.
Outsourcing used to mean buying from local or domestic suppliers. But, today, it can mean buying products from global suppliers as the term “offshoring” indicates. Rising material, production costs and global competition have made manufacturers in all industries work harder to keep costs down. One of the best strategies for cost control is outsourcing some part production to specialists.
Due to a strong interest in outsourcing among woodworkers, the Wood Component Manufacturers Assn. cosponsored a seminar, “Profitable Decision-Making When Outsourcing Components & Products,” at the recent International Woodworking Fair in Atlanta. The seminar was attended by nearly 300 woodworkere who wanted an update on the latest trends in outsourcing components and products.
A panel of experts, each with more than 20 years of experience in the wood products industry, shared their thoughts and experiences on outsourcing and offshoring. They outlined the characteristics they look for in a supplier and how they develop relationships to make their partnerships work. The panelists also discussed how outsourcing has benefited their companies, as well as some of the pitfalls to avoid. The seminar was moderated by Steve Lawser, executive director of the WCMA.
Rich Christianson, associate publisher and editorial director of Wood & Wood Products, presented the results of the latest outsourcing trend study (see related story). He noted that outsourcing and off-shoring can only be expected to become more important tools for North American wood products manufacturers to use to remain globally competitive.
Reed Felton, president and COO of TJ Hale, discussed how his company outsources various components for his store fixture units from a wide variety of suppliers, including China. Most of the components TJ Hale outsources are made of metal, glass and other non-wood materials that the company does not have the capability to make in-house or find domestically for a lower price.
Walt Gahm, vice president of manufacturing of Kitchen Kompact, detailed how his company outsources 100% of its components for final assembly and finish at its Jeffersonville, IN, plant. Gahm discussed how his company relies on dependable companies that have supplied them with quality components made to their exact specifications. Kitchen Kompact has formed long-standing relationships with its key suppliers for their mutual benefit, noting that reliability and dependability are more important than just price. Gahm also explained how his company-wide employee incentive plan has motivated employees to achieve very high levels of productivity.
William Smith, CEO of Fuller Architectural Hardwoods, discussed how his company uses high-quality components from outside suppliers to help produce its distinctive line of architectural millwork products. Smith indicated that product quality and time of delivery are critical factors when choosing a supplier.
Dave Groom, international manufacturing specialist for the furniture industry, has extensive woodworking experience, which has included an active role in outsourcing from both domestic and global suppliers for several leading furniture manufacturers. He provided a historical account of Universal Furniture to illustrate the evolution of the global furniture industry and outsourcing.
Does your company currently
Due to rounding, pie equals more than 100%
Note: Table made from pie chart.
Please estimate the total dollar value of wood
component parts purchased by your company
from outside sources in the past 12 months.
Based on those who currently outsource components [187).
Due to rounding, graph does not equal 100%.
Mean = $901,069
Less than $500,000 73%
$5,000,000-or more 4%
Note: Table made from bar graph.
Considering the wood component parts
that your company currently uses,
what percentage are:
Manufactured in-house 58%
Manufactured by U.S./Canadian suppliers 34%
Manufactured by foreign suppliers 7%
Based on those who currently outsource components .
Due to rounding, graph does not equal 100%.
Note: Table made from bar graph.
Does your company have
its own rough mill?
No, but planning
to add one
in the next
12 months 4%
Note: Table made from pie chart.
COPYRIGHT 2006 Vance Publishing Corp.
COPYRIGHT 2008 Gale, Cengage Learning