Inner Workings of the Millwork Industry
Offshore Production Impacts Supply-Chain Design
by Allen Dyer
Will everything we sell eventually be manufactured in another country? Probably not, but it seems each month brings discovery of yet another millwork product or component being imported to the United States. Purveyors of millwork products do have quite a history of looking to other countries for lower-cost products. Even decades ago, softwood mouldings and components were being imported from Mexico, hardwoods were brought from South America and Africa and door skins came from the Far East. Today, the quantity and variety of millwork products being imported seems to have exploded compared to the limited volumes of years past.
Importation is Growing
Even without reliable data as to the overall share of our total millwork market that is now imported, one can make a pretty safe observation that it is growing. The market share gains of Southern Hemisphere pine lumber is just one instance—some argue the plantation forests of Chile, Brazil, New Zealand and other countries are now the driving force of the U.S. market for mouldings, jambs and other millwork products.
A sizeable percentage of stairway components are being produced in Asia, and products ranging from door hinges to urethane millwork are being imported from other countries. Plentiful raw materials, inexpensive labor, fewer regulations and low taxes in developing countries can add up to a big cost advantage for imported millwork products. Throw in the strength of the U.S. dollar against most of the currencies of these producing countries, and the import advantage seems insurmountable, at least when evaluated solely on unit cost of the products.
However, when all the supply- chain costs associated with imported items are included, we may find the “lower cost” conclusion to be questionable, at least on an across-the-board basis. A competitive import supply-chain may require a higher-volume threshold than a similar domestic supply chain, meaning that the cost advantage may only be realized in conjunction with large volumes. If this is true, it has potential implications for even further consolidation and functional realignment within millwork distribution channels.
The Import Dynamic
How does the import dynamic affect traditional supply-chain models? When the manufacture of a product once made in the United States using domestic raw materials moves offshore, it initially may go unnoticed by downstream channel partners. However, functions near the top of the supply chain will adjust eventually, possibly shifting market strength from one supply-chain model to another.
One function that may need to be performed at a different place in the supply chain is that of item consolidation. And a new supply-chain function may be required to avoid the sacrificing of product quality or supply reliability—two of the biggest risks associated with imports. As these and other adjustments are digested, it is possible that in smaller volume, the costs of making these adjustments can offset the unit cost advantage, in turn elevating the importance of scale and shifting advantage to larger-volume supply-chain models or to the larger-volume channel partners.
Consider the fundamental supply-chain function of item consolidation. This grouping of like items is done at one or more points in most millwork supply chains, combining items that are used together, but not necessarily manufactured together. For example, we know that a job of stair parts, which may include items manufactured domestically, items that are imported, items made from wood and items made from MDF or metal, must reach the assembly point at the same time.
Since the parts don’t all originate at the same place, it is necessary that they be consolidated at one or more steps in the supply chain—a function traditionally accommodated at both the manufacturer and distributor levels. Static inventory, storage and handling costs are usually associated with these consolidation points, so it is important to choose the right place(s) in the supply chain to consolidate items. This decision is complicated when imported items moved in large volume on a long lead time must be grouped with items made locally in smaller volumes and on shorter lead times.
Items produced domestically in smaller quantities and on shorter lead times might facilitate moving the item consolidation point all the way down the supply chain to the distributor or dealer level, but again, the introduction of imported items could favor consolidation points only at the manufacturer or large distributor levels.
A New Supply-Chain Function
Sometimes an altogether new supply-chain function is required when the manufacture of items is moved to another country. An example is the need to establish processes that help maintain the quality and consistent specification of imported shipments. One of the trickiest parts of managing offshore supplies, this requires more detailed manufacturing specifications and instructions to replace the cache of know-how and years of experience in a domestic factory.
Even complicated packaging and shipping specifications are critical for imported products, simply because there are no small mistakes when the factory is on the other side of the world and the lead time to correct mistakes is months instead of weeks. Sophisticated CAD drawings (which may not be required for products made domestically) become necessary to facilitate negotiations and to assure product quality and consistency and may require an entire new engineering function to be
Legal contracts, letters of credit, risk management strategies and expensive international travel become prerequisites to a reliable import supply chain. These functions tend to favor manufacturers or large-volume distributors as the efficient supply-chain point for this function.
Imported products do offer the promise of lower unit costs, but unless the supply-chain volume is large, those lower costs may be offset by the increased overhead costs of managing the more complicated offshore models. Since larger volume seems to be associated with the realization of those lower costs, one could make a logical case that a direct relationship exists between the growth of imports and the continuation of channel consolidation within the millwork industry.
Allen Dyer is president of ECMD Inc., a building products manufacturing and distribution company headquartered in North Wilkesboro, N.C., with production operations that include EastCoast Mouldings, Crown Heritage Stairs and A&H Windows.
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