Snap Shot: Furniture Logistics
Will the shift to global sourcing—combined with an economic downturn, housing slump, high fuel costs, and lack of visibility—unseat the furniture industry?
Transitional isn't just a style of furniture. It also describes the furniture supply chain, which is beginning to move beyond first-phase, low-cost country sourcing strategies just as the housing market hits a slump, taking furniture sales with it.
Furniture companies face a confluence of difficult conditions, particularly from demanding consumers whose buying decisions are increasingly based not just on low price, but on how fast a retailer can deliver.
They also expect their deliveries to be in perfect condition, gently carried into the home by polite drivers who leave no tracks in their wake.
An economic slowdown, increased competition with furniture e-tailers, little use of technology apart from some top players, and a high percentage of the sales dollar dedicated to logistics costs make it a tough time to be in the furniture business.
But the news isn't all bad.
Increasing use of consolidation centers near the source of supply or strategically placed near customers, innovative and fast cross-country furniture carrier services, the growing availability of real-time visibility tools, and an increasingly collaborative attitude among trading partners are some strategies helping the furniture industry feel its way toward effectively managing supply chain costs.
"It's more important than ever to control costs and maintain service," says Carl Abernathy, vice president sales and marketing for specialized furniture carrier Four Truckers Inc. "It's critical for furniture companies to scrutinize every aspect of their supply chain."
While the furniture industry has been more willing to share ideas than most, trading partners are still working to transform adversarial supply chain relationships into collaborative ones.
"We have to recognize that we all play for the same team, and the object is to move the product from the point of manufacture to the customer," says Pat Rooney, a consultant for Cambium-Group, a third-party logistics provider based in Greensboro, N.C.
That level of cooperation becomes particularly critical in tough economic times, when it takes creative strategies to keep dressers and dining room sets moving on time, damage-free, and cost efficiently.
HOT TOPICS: Top-of-Mind Issues In Furniture Logistics
The fuel surcharges ocean carriers imposed last January are particularly bad news for the furniture industry, with its low SKU counts per container. Fuel surcharges reached $950 per 40-foot container in January 2007—a difficult hit to absorb, particularly in today's economy.
Not surprisingly, some furniture retailers take issue with the rate increase. "Carriers are trying to make a profit off fuel," claims Gill Mitchell, corporate traffic manager for Salt Lake City, Utah-based furniture retailer R.C. Willey.
A vessel carrying 4,500 containers could net $3.6 million in fuel costs, he calculates.
"No way is that vessel burning $3.6 million worth of fuel," Mitchell notes. Yet, because there is no standard for fuel cost reporting in the ocean industry, shippers do not always know what they are paying.
That makes it difficult for furniture companies to forecast costs, and is particularly frustrating with carrier contract renegotiations set for April.
The Need for Speed
Furniture retailers may turn inventory just four to five times a year, but when furniture does sell, customers want it fast. Furniture companies have tested various strategies for maintaining ready inventory while controlling costs.
Furniture manufacturers continue to offer discounts to retailers willing to buy full containers. In addition, they are opening consolidation centers in Asia to combine SKUs—bedroom and dining sets, for example—and even mix several customers' orders.
Retailers are also increasingly asking manufacturers to amass stock in strategically located U.S. distribution centers to facilitate quick deliveries.
"Furniture retailers initially jumped on the bandwagon to buy direct containers Free-on-Board (FOB), but now are moving toward buying more domestically and requiring manufacturers to hold additional inventory in the United States," says Bill Smith, director supply chain management, Globe Express Services, a global logistics solutions provider.
Many furniture companies prefer to use specialized carriers, particularly for LTL deliveries. Specialized carriers can help avoid damages that occur when mixing furniture with other goods and surcharges for difficult delivery locations. But they base scheduling on volume, while common carriers offer the benefit of regularly scheduled shipments.
Some companies take a different approach to furniture deliveries. Freight forwarder Manna Freight Systems (MFS), for example, relies on specialized pallets to speed deliveries—cross-country within five days.
"It's high-speed, white-glove home delivery," explains Robert Masters, MFS senior vice president.
That speed provides a business benefit particularly for Internet furniture purchases: keeping a lid on returns.
"The sweet spot for furniture delivery is 72 hours. Until then, there is little buyer's remorse," Masters says. "But, after waiting six days for delivery, customers tend to change their minds."
It's better to deliver one or two days late than damaged, he adds.
Total Landed Costs
When furniture was largely sourced domestically, shipping was standardized—freight moved either pre-paid or collect. Costs were predictable and businesses maintained an advantage by keeping product close to demand.
But the growth of offshore sourcing has shifted distribution locations and complicated the equation.
"Furniture retailers are moving away from collect freight toward landed freight charges," Abernathy says. "They want to sell to customers with freight included so costs don't vary dramatically."
Furniture companies need more supply chain visibility than most have today. Large manufacturers and retailers are investing in visibility technology, and operators at all levels are demanding data from their 3PLs and freight forwarders.
"Customers want to talk about four things: cost, quality, service, and information," says Abernathy. "For furniture carriers, information can mean the difference between getting or losing the business."
Some third parties deploy processes and technology specifically to help small furniture retailers and wholesalers better manage their suppliers.
"Small companies are used to domestic practices, receiving delivery within two weeks," notes Tom Craig, general manager for LTD Supply Chain, a logistics solutions provider based in Glenmoore, Pa.
"But when sourcing internationally, the furniture is not even loaded on the boat within two weeks. Small companies have to adopt best practices used by larger companies, such as being demand-driven and addressing supplier performance issues."
Take a large, delicate product such as furniture, and add inadequate packaging, long shipping distances, increased touches, and the need for fast delivery. The result? An increase in damages, which can drive up costs and impact customer satisfaction.
"The slightest scratch can cause the customer to refuse delivery," says MFS' Masters. "Worse, a consignee may refuse a 10-item shipment because one piece is damaged."
To tackle the issue, furniture companies are placing a renewed emphasis on packaging standards that had been relaxed as production moved to low-cost countries.
"By investing $3 or $4 more in packaging, a company can save hundreds of dollars," says Cambium's Rooney. "Once furniture is damaged, it's costly to repair and can't re-enter the new product stream."
If companies don't demand a high level of quality packaging and inspection, they likely need more "deluxing"—the process of preparing furniture for final delivery. The use of low-quality materials and inadequate construction techniques means some furniture cannot be repaired.
Companies also reduce damage by inspecting goods as soon as a container is opened, and using flat-packing for ocean transport.
Case Study: Fius Massages Its Supply Chain
Fius Distributors has been in business for only 18 months, but the North American distributor has already tweaked its logistics strategy several times. Now it's about to change again, as the company adds a large retailer—Inada—to its roster of specialty store customers.
Fius buys Inada massage chairs by the container from China and Japan, and brings them into U.S. ports using a freight forwarder. It stores the containers in two of its 3PL's DCs in Indiana and Santa Fe Springs, Calif.
LTL carrier Old Dominion transports items to Fius dealers either one at a time or collectively. When dealers request it, Fius uses specialized furniture carrier MFS to move goods individually for white-glove delivery to customers.
Managing that complexity as a start-up can be tough.
"We'd like to find a carrier that can move the goods from China to the customer's home, but we have not yet been successful," says Clifford Levin, president of Fius. "The strategy we currently employ provides the fastest delivery for the time being."
Fius is also challenged by keeping a lid on rising freight costs; even customers who spend $6,000 on Inada's massage chairs are cost-sensitive, and SMB retailers need to maintain margin.
"Vendors are trying to hold freight costs down for their customers, and we're trying to keep retail costs down to the end customer. We're absorbing freight costs to maintain market share," Levin says.
Fius also needs real-time visibility to avoid manual processes in ensuring chairs are reaching their destination; with a price tag ranging from $3,000 to $7,000, it can't afford to lose sight of even one massage chair.
The distributor is looking forward to building the market muscle of a large retailer. "Inada can assist us with supply chain challenges," says Levin. "Because it has buying power, it can probably pull containers right from ports.
Acquiring this customer creates a logistics and sourcing challenge, but I know it will make us a better company."
One area that has taken Levin by surprise is the lack of scrutiny over last-mile deliveries.
"Because quality is such a driving factor, especially in the last mile to the home, I'm not convinced that carriers are aggressively following up with customers to determine their satisfaction with the service, or using penalties or rewards based on customer feedback," he says.
Case Study: Rearranging the Furniture Helps Control Costs
R.C. Willey rode the housing boom into new markets in Las Vegas, Reno, and Boise. But that larger trade area is now putting pressure on the southwestern furniture retailer to cap rising supply chain costs.
Willey operates 13 130,000-square-foot mega-stores supported by a 750,000-square-foot distribution center in Salt Lake City and smaller DCs in Las Vegas and Roseville, Calif.
"I feel the pressure because sales are down compared to several years ago," says Gill Mitchell, corporate traffic manager for R.C. Willey, which sells appliances, electronics, flooring, and furniture. "We have to try to be more competitive and take action to drive sales."
Within the supply chain, Mitchell is seeking ways to "negotiate freight costs as low as we can," he says. "We're specifically looking for more cost-effective ways to move shipments domestically."
Key to achieving that goal is gaining visibility and control over freight movements. While total landed cost is growing increasingly popular among furniture manufacturers and importers, "we fight it from the transportation side," says Mitchell. "It's attractive to buyers or vendors to establish a retail price based on total landed cost.
"But that costs us more than if we control the freight, and we lose total visibility into our supply chain," he adds. "We prefer to handle most of our own transportation, and buy FOB origin so we can keep control."
R.C. Willey has boosted its control of inbound containers from 68 percent in 2006 to 90 percent in 2007. The company uses a freight forwarder to bring in about 300 containers a month, mostly from China and Vietnam through Long Beach, Calif.
Willey's vendors continue to establish consolidation warehouses in Asia. If the company runs through an initial order of a hot item, it can place smaller re-orders of mixed containers and receive them within 30 days rather than the 60 to 90 days it would take to wait for production.
"We pay slightly more compared to buying direct," Mitchell explains, "but the time savings make it an efficient system."
To help manage growing complexity, the firm is considering investing in a transportation management system.
Case Study: Badcock Uses Technology To Polish Furniture Logistics
Adopting and integrating new technology is challenging. Doing so within an automation-lagging industry in the midst of an economic slowdown is even tougher. But W.S. Badcock is succeeding, and early results are helping to keep sales healthy.
Badcock is a 104-year-old vertically integrated importer and retailer of furniture, appliances, and electronics. The company works with more than 300 stores throughout the Southeast, about 75 percent of them dealer-owned.
Badcock's business model is shaped around serving customers who want to know their order is in the warehouse and take delivery within days of the sale.
To maintain high customer service levels while containing costs, Badcock is rolling out a seven-year technology plan designed to provide visibility, communication, control, and streamlined business processes. The plan replaces and augments legacy applications with packaged software.
But adopting supply chain best practices through technology is tough when some suppliers can't even accept simple EDI transactions. So the company implemented Berwyn, Pa.-based software developer Boomi's enterprise integration tool. Boomi enables Badcock to trade data regardless of its partners' capabilities while encouraging their conversion to EDI.
"By consolidating to one system, we gained process improvement and security," says Ronald Mallory, director of technology infrastructure for Badcock.
The company now uses EDI for 57 percent of its purchase orders, and that number is climbing.
Badcock is also gaining control of inbound and outbound freight costs. Minimum order quantities from factories in China, Vietnam, Indonesia, Malaysia, and other Asian sources, together with long make-to-order sales cycles, drive up delivery time and costs.
"We have to wring every possible point of time waste from our transactions," says Bill Trimble, Badcock's CIO.
In addition, Badcock is transitioning from 100 percent Cost, Insurance and Freight (CIF) terms for its 5,000 loads a year to 100 percent FOB, working closely with its 3PL to attain lower landed costs.
"As part of that transition, we needed a software tool to automate forecasting and purchasing," says Trimble.
Badcock deployed a solution that creates forecasts based on inventory levels in its four DCs. The company is also seeking to increase its order frequency rate and is reviewing possible order consolidation before containers leave Asia. Currently, they are broken down and reallocated in U.S. DCs.
The company also has a TMS and WMS on its radar screen to handle freight movement from ports to DCs and out to stores.
"We want to be able to commit to a delivery schedule and serve customers at a high level," says Greg Brinkman, Badcock's vice president of purchasing and international logistics.
The transition to this new approach involved significant change management. Badcock is working closely with suppliers to share risk on all its purchases and is nine months into a supplier performance benchmarking effort.
"That's easier to do with partners who also work with big-box retailers than fine furnishings companies not in the mass market," notes Brinkman.
Badcock's supply chain revitalization effort has yielded a high in-stock percentage, fewer lost sales, and the ability to contain the cost of goods sold.
"Moving forward, we want to reduce inventory levels as well as improve on-time shipping performance and inventory management," Brinkman says.
With the savings gained so far, Badcock remains in the enviable position of posting solid sales numbers while forging ahead on a technology plan that promises even more savings down the road.