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Study links component purchases with profits.

The ability to save money and better control costs by purchasing wood parts from specialists rank as the two most compelling reasons cited by major component purchasers.

A new study of major U.S. furniture and cabinet manufacturers reveals companies which purchase large percentages of their wood component parts from outside sources are more likely to enjoy a higher average return on equity than companies which produce more of their parts in-house.

The phone survey of 25 members of the American Furniture Manufacturers Assn. and 25 members of the Kitchen Cabinet Manufacturers Assn. also identified manufacturing cost considerations as the leading reason why companies purchase parts from specialists. Among other things, the study, conducted by Vance Research Services, surveyed the types of component parts that are bought and future intentions of companies to purchase components.

The survey is a follow-up to a 1984 mail-out study conducted by Touche Ross & Co. (now Deloite and Touche). Furniture and cabinet companies were selected because they are two dominant consumers of hardwoods. Traditionally, one of the most difficult operational decisions for these manufacturers has centered on whether to buy wood component parts from outside sources or to invest in a rough mill operation in order to produce components in-house. The make-vs.-buy equation has taken on added importance as of late because of the soaring cost of hardwood lumber.

This article summarizes some of the new study's findings and notes some of the comparable data that emerged from the 1984 study.

Wood parts purchasing

On average, survey respondents purchase 38.6% of the wood component parts used in the assembly process from outside sources (Fig. 1). Twenty-six percent of respondents purchase at least two-thirds of their wood components from outside sources. Fourteen percent purchase between 34% and 66% of their wood component needs and 42% purchase one-third or less. Eighteen percent indicated they do not purchase any wood component parts from outside sources.

Types and value of parts purchased

On average, respondents report purchasing approximately four different types of component parts from outside sources.

The most common wood component part purchased is cut-to-size blanks (Fig. 2). These are typically purchased by 56% of firms that purchase wood component parts. Mouldings follow closely with 54% reporting purchases. Other common parts purchased include rounds and dowels (46%), drawer fronts and parts (39%), cabinet doors (34%), and edge-glued panels (34%).

Twenty percent of those that purchase wood components report an annual purchase value of more than $2 million. An additional 15% purchase between $500,000 and $2 million in wood component parts. About three out of five report purchases of less than $500,000.

Why parts are purchased

On an unaided basis, about one-half of those who purchase wood component parts from outside sources report that one of the most important reasons why they purchase these products instead of manufacturing them in-house is because they believe it is less expensive to buy than to make. Just over half, 51% reported this as a compelling reason to purchase wood components. ("Make vs. Buy").

About one-third, 34%, said they purchase parts because they lack the necessary equipment. Other reasons cited by respondents included: lack of technical or engineering capabilities (27%), better cost control (15%), and faster response time to new styles (12%).

Things were different in 1984 when the Touche Ross study was conducted. Then, hardwood lumber was more available and less expensive, and long production runs were the norm. These changes are reflected in comparing results from the Vance study with the Touche Ross survey findings. In the 1984 study, the pecking order of compelling reasons for buying wood components went as follows: better cost control, less expensive to buy than to make, lack of necessary equipment and capital better invested elsewhere. Technical capabilities and faster response to new styles, third and fourth respectively in the 1993 study, ranked ninth and 10th in the Touche Ross survey.

In-house parts manufacturing

Almost three-fourths, 72%, of the firms surveyed operated a rough mill within the past 12 months for the purpose of manufacturing wood component parts for their furniture or cabinet lines.

On an unaided basis, the major reason cited for investing in a rough mill was the belief that they can manufacture their own parts cheaper (56%). Other major reasons noted include: desired control over source of parts (44%) and trouble getting on-time delivery from suppliers (28%).

Average return on equity

To gauge profitability, firms were asked to indicate their average return on equity for their furniture and/or cabinet lines. For purposes of the survey, return on equity was defined as the profit after tax for product sales divided by the sum of total assets less total liabilities for these same products.

The mean average return on equity is 15% (Fig. 3). The highest average return on equity, 20.1%, was reported by those who purchase in excess of two-thirds of their wood components from outside sources. Those in the mid-range, purchasing 33% to 67% of their wood components, average a return on equity of 16.4%. Those who purchase one-third or less of their components report an average return on equity of 12.6%.

These findings are consistent with the 1984 study and a 1970 study conducted by the National Kitchen Cabinet Assn. (now KCMA). Both previous studies concluded that in many cases a kitchen cabinet or furniture manufacturer can realize a greater return on investment in the design, assembly, marketing and distribution areas rather than investing large sums in capital equipment required to operate a rough mill and produce their own parts.

Future buying intentions

More than half, 52%, of all survey participants intend to increase purchases of wood component parts from outside sources in the next 24 months (Fig. 4). Forty percent expect no change. Those who expect to increase purchases estimate the increase to average 15.7%.

Those who expected an increase in purchases of wood component parts were asked to indicate the specific products that they expect to fuel the increase (Fig. 5). Cabinet doors lead purchase intentions (31%), followed by cabinet face frames (23%), cut-to-size blanks (23%), edge-glued panels (23%) and mouldings (19%).

Choosing a supplier

Price (81%) and product quality (78%) were identified as the two leading factors for choosing a supplier by wood component buyers (Fig. 6). Other factors include: on-time delivery (49%), dependability of supply (20%), required lead time (12%) and species availability (12%).

Respondents were also asked about what sources they use to identify and evaluate wood component suppliers. Thirty-seven percent cited trade journals, followed by the company's sales force (29%), trade associations (22%) and trade shows (20%).
COPYRIGHT 1993 Vance Publishing Corp.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Publication:Wood & Wood Products
Date:Sep 1, 1993
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