Outsourcing - the wave of the future.

The term "outsourcing" refers to the practice of purchasing parts or finished goods from outside companies. Outsourcing has become the latest "buzzword" in our economy as more U.S. manufacturers are purchasing component parts from outside sources as a way to lower their costs and improve profits. The growth of outsourcing has received a great deal of media attention as a result of decisions made by General Motors and McDonnell Douglas to purchase more parts from subcontractors or outside companies.

Both GM and McDonnell Douglas have discovered (as have many U.S. furniture and cabinet makers) that it has become less expensive to purchase their component parts from outside sources rather than make their own parts. With increased global competition and a low inflationary economy, it has become more important than ever to keep costs down. This has caused U.S. manufacturers in many different industries to re-evaluate their manufacturing processes.

These companies are realizing that bigger isn't necessarily better as company "restructuring" and "downsizing" have become the norm rather than the exception. Manufacturers are lowering their labor and overhead costs by having someone else produce their components for them.

The old strategy of producing everything in-house is no longer successful. Manufacturers are realizing that it is more cost effective to outsource components to outside specialists who can produce the components at a lower cost, rather than producing them in-house.

Contributing to the evolution of the wood components industry is the significant growth of outsourcing components by furniture, cabinet and related wood product manufacturers. Rising production costs and increased global competition have caused finished wood product manufacturers to re-examine the need to produce everything in-house. Purchasing components allows a manufacturer to more accurately determine and control his production costs. Once a company accurately determines its production costs, it is much easier to calculate a profitable selling price.

Adding a component partner to their businesses has allowed furniture and cabinet manufacturers to respond quickly to consumer preferences, reduce their capital investment and lower their overhead, inventory and lumber handling costs. Component manufacturers are specialists at what they do and can supply furniture and cabinet makers with high quality, usable parts to be delivered when needed.

The wood component products industry has expanded as furniture, cabinet and other finished wood product manufacturers purchase more of their components from outside sources. This has created an increasing trend among woodworkers to produce more value-added wood products as a way to diversify and grow.

Component producers have become more competitive in today's global marketplace because of their ability to achieve significant productivity gains through capital investment and by modernizing their plants to lower labor costs and achieve greater yields.

In turn, this has enabled dimension and component buyers to lower their production costs and compete more profitably.

Make vs. Buy Considerations

A recent study of major U.S. furniture and cabinet manufacturers reveals that companies can achieve higher profits by purchasing their components from outside sources. These companies indicated the ability to save money and better control their costs by purchasing wood parts from component specialists were the two most important reasons for purchasing their components from outside suppliers.

This study was conducted for the Wood Component Manufacturers Association by Vance Research Services and is a follow-up to a similar "Make vs. Buy" study conducted for the WCMA by the accounting firm of Deloitte & Touche in 1984.

More than half of all survey participants intend to increase purchases of wood component parts from outside sources. Only 8 percent of the participants expected their component purchases to decline. The survey participants revealed that they plan to buy an average 15.7 percent more wood components during each of the next two years.

These furniture and cabinet producers plan to purchase a variety of semi- and fully-machined component parts including cabinet doors and parts, edge-glued panels, cut-to-size blanks, mouldings, table and chair parts to name a few. Manufacturers who purchase their components from outside suppliers enjoy a significantly higher return on equity compared to those companies which produce most of their wood parts in-house.

Reasons to Buy Wood Component Products

Many furniture, cabinet and related wood product manufacturers are discovering the advantages of using wood component products produced by outside dimension manufacturers. Following are 12 good reasons for purchasing hardwood dimension from independent suppliers, as revealed by the latest "Make vs. Buy" survey of furniture and cabinet manufacturers:

Better Control Over Product Costs: One advantage of purchasing wood parts is that exact material costs can be determined, eliminating the guesswork that often enters into the calculation of a given product's cost. This knowledge will make it easier to calculate a profitable selling price for the finished product.

Assurance of High Quality, Usable Component Parts: Most component manufacturers specialize only in manufacturing wood parts. They concentrate their efforts on the details of component part production. Thus, a component buyer is more assured of obtaining high quality, usable wood components made to his exact specifications.

Realize a Greater Return on Investment: Studies have indicated that furniture and cabinet manufacturers can achieve a higher return on investment by allocating their resources to the design, assembly, finishing and marketing areas, while letting someone else make their wood parts for them.

Reduce Capital Investment: The purchase of wood parts permits furniture and cabinet manufacturers to operate with a minimum investment in land, labor, buildings, machinery and equipment. To compete in a volume market, the component parts manufacturer must maintain a large investment in modern woodworking machinery. Not every furniture or cabinet manufacturer can justify this investment.

Location Advantage of Component Suppliers: Most wood component manufacturers are located in rural areas close to timber supplies and have lower land, labor and material costs, resulting in lower production costs. Some component manufacturers own timberlands and have their own sawmill to ensure a consistent timber supply.

Save on Transportation Costs: Raw lumber is heavy, bulky and consequently very expensive to transport for many woodworking firms. More than half of the weight of rough, air-dried lumber is water or waste material. By purchasing wood components, a furniture and cabinet manufacturer can save on transportatinn costs, since nearly two-thirds of the weight and bulk of the lumber is removed at the dimension mill.

Less Wood Waste: Disposing of wood waste is a problem to many companies. However, dimension and component manufacturers can effectively utilize their wood waste as steam fuel for operating their dry kilns and heating their plants, which lowers production costs.

Save on Inventory and Lumber Costs: Furniture and cabinet manufacturers who produce their own wood components find it necessary to carry a lumber inventory of the various species used, which ties up working capital that could be more effectively used elsewhere. Also, fluctuations in the market price and availability of lumber can influence production costs and have an adverse effect on the bottom-line. By purchasing wood parts, a manufacturer can increase working capital and reduce inventory carrying costs through quick turnover.

Reduce Overhead Expenses: The use of purchased component wood parts will reduce overhead expenses without a reduction in sales volume. Reductions of raw material inventory and machinery purchases will cut the costs of inspection, supervision, maintenance, indirect mill costs, insurance, depreciation and taxes. More time and talent can be devoted to improving the design of the finished product, marketing and efficiency in assembling and finishing the product.

Advantages of Specialization: Component manufacturers can justify more and better equipment because they serve a variety of markets. They can maximize their lumber yields by cutting sizes for more than one customer from each board, have the opportunity to develop more skilled labor, have advantages in basic raw material procurement and have the economic justification for research and development in their specialty. The component producer is more knowledgeable about product costs and can supply parts more economically than companies making their own parts.

Enter New Markets and Add New Products: The component parts buyer can obtain new and different types of wood products that would not otherwise be accessible because of limited production capabilities. Many furniture and cabinet manufacturers find it difficult to justify purchasing expensive equipment needed to produce a promising, but unproved product. Therefore, they find it more economical to purchase the necessary parts and concentrate their efforts in the design, finishing and marketing areas.

Add an Interested Partner to Your Business: Like a subsidiary or extension to your manufacturing operation, the component supplier can contribute to a more profitable business venture. Many furniture and cabinet manufacturers are finding that they prefer to design assemble, finish and market their products, leaving the woodworking and machining to the dimension industry.

Outsourcing components is beneficial to both producers and users of wood parts. It enables furniture and cabinet manufacturers to achieve higher returns on their investment and it creates additional opportunities for independent component producers. Since our woodworking industry has traditionally been governed by feast-and-famine cycles, outsourcing tends to stretch out the good times and minimize the bad times. The future for outsourcing component parts is very positive as the woodworking industry joins many other manufacturing industries in recognizing the benefits of purchasing components from outside sources rather than attempting to produce everything in-house.

EDITOR'S NOTE: Copies of the latest "Make vs. Buy" study are available for $25 each by writing the WCMA at 1000 Johnson Ferry Road, Suite A-130, Marietta, GA 30068; phone: [phone].

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"The number one reason for outsourcing component parts is controlling and knowing what your costs are," said Sam Stolzfus, president of Keystone Wood Specialties. "This involves much more than simply being able to "'buy cheaper.'" Other advantages cited by Stolzfus include:

1. Eliminating the cost of inventorying raw materials for the component.

2. Eliminating the need to buy machinery that is only used for specialized items.

3. Reducing the demand for high-cost, skilled labor to produce the components.

4. Eliminating valuable storage space required to inventory raw materials.

5. Reducing waste removal costs.

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The mounting competitive pressures to produce better quality products at lower costs and in less time provide strong reason to partner with component specialists, said Reiner Kamp, president of BHK America Inc.

"The old premise that only total vertical integration ensures that a company is the lowest-cost producer is no longer true," Kamp said. "Automobile manufacturers have long realized this fact and continue to outsource parts and components previously manufactured inhouse. They realize competitive bidding can generate substantial cost advantages compared to manufacturing products in-house.

"This underlying principle also applies to our industry. Rapid changes in consumer preferences, combined with increased competition, will force manufacturers to establish new niche markets. Identifying these markets is only half the battle. If a product can't be designed, manufactured and brought to market in a relatively short time period, the opportunity will most certainly be lost.

"To achieve this goal, manufacturers will search for suppliers that can assist during the initial design stage. Manufacturers will form alliances with suppliers they feel will give their company a cost - hence market - advantage.

"As vendors, we will be challenged to respond by quickly offering components to meet different price, design and manufacturing objectives."

Steve Lawser is Executive Director of Wood Component Manufacturers Association in Marietta, Georgia