September 2003

Distribution Channels
    Inner Workings of the Millwork Industry

Price Deflation 
Both Cause and Effect Of Millwork Supply Chain Change

by Allen Dyer

While some still worry that irresponsible forest management is depleting our tree resources, the millwork industry is wrestling with the reality of a worldwide glut of wood. The irony of that contradiction would make good fodder for discussion on another day, but for this column, let’s think about how that oversupply impacts our millwork supply chains. Also, let’s include the market influence of the excess production capacity that plagues parts of the millwork industry and recognize the efficiency-producing changes in the distribution segment of the supply chain.

One result of too much available raw material, too much manufacturing capacity and ongoing application of efficiency-producing distribution methods is the devaluation of our products. That deflation further influences our markets and can bring another round of change to our supply chains ultimately. 

The inflation-adjusted price of wood mouldings peaked about a decade ago at a level almost three times that of today’s market. Even using a more realistic benchmark of a median market price over a two- or three-year period, today’s market is in the neighborhood of half that of the early 1990s. That’s dramatic. The general price deflation of wood millwork has been huge, a reflection of supply chain changes that already have occurred and portent of future change. 

How could prices have fallen this much during a time of robust building activity and growing demand? Major changes in our supply chains, including the move offshore of our primary resource, the introduction of technology both in manufacturing equipment and information management and the lower labor costs in other countries, have combined to rewrite the millwork rule book.

Plantation pine grown in the Southern Hemisphere is a fraction of the cost of the Western woods to which our markets had become accustomed in past decades. Similarly, on the added-value side, modern sawmills and factories using new-generation optimizing technology have been built in those same countries where labor costs are much lower than in the United States. Maybe underestimated in its impact, some of today’s producers have implemented state-of-the-art enterprise resource planning (ERP) software to help manage their companies on a scale far larger than most of the dominant domestic producers of a few years ago. And, of course, oversupply wrings profits out of the sales transaction itself. We can see that supply chain changes are at the core of today’s wood millwork deflation.

While our product prices have deflated as a result of some supply chain changes, that very devaluation seems to be driving another round of changes. In the distribution segment of the supply chain, we’ve all done the simple math that demonstrates what happens to our gross margin dollars when we sell a product at a lower price with the same gross margin percentage: 20-percent margin on a product sold for $50 is $10, while 20-percent margin on that same product sold for $25 is only $5. And the fact remains that many of the underlying costs associated with manufacturing, transporting, storing and marketing the product have inflated during a time when the product price and the gross margins it produces have declined. So, what gives? 

As a percentage of cubic volume, if not as a percentage of sales dollars, circumstantial evidence indicates that some distributors are finding operating efficiencies to offset at least some of these operating cost increases—supply chain changes made necessary in order to survive in a deflated world. 

Some of those efficiencies are the result of scale or more volume being spread across the same operations. The overall growth of our industry, combined with a measure of consolidation at every functional level, has the effect of pushing larger volumes through the same supply chains, creating efficiencies. Similar to the dominant offshore producers, powerful information management technologies are almost a necessity to manage the scale of efficient new logistics and distribution models to cope with the deflated market prices effectively.

A number of questions remain. Aside from anticipated continuation of growth in market volumes, what changes might be on the horizon that could affect our supply chains? Regardless of the answers, today’s product price deflation gives us a pretty good lesson in how powerful supply chain changes and innovation can be. A holistic approach to a broad understanding of our supply chains has never been more important. 



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