CHAPTER 2

Structure of the Furniture Industry

The furniture business is composed of a number of discrete parts identified by as well as related to but outside the North American Industry Classification System (NAICS) code for the furniture segment. Furnishing elements and décor round out a fuller treatment of this market and are often bundled together to appeal to consumers as part of a total “lifestyle,” room or office entity concept. The following chapter examines the global supply chain and logistical elements that pull all parts involved in the manufacture and retail network together, from lumber to living room and beds to blinds. This process is expanded in other chapters as well for a closer look at component elements.

Furniture Industry Components

An inventory and definition of the furniture industry’s major components within the NAICS code 337 “Furniture and Related Product Manufacturing” includes upholstered and nonupholstered wood, metal, and other household furniture products, along with institutional and office furniture. Other components extend to mattresses, blinds and shades, and partition elements. The size and significance of furniture’s global supply chain underline its economic importance.¹ Table 2.1 illustrates the differences between major components of the furniture industry by profitability, measured by changes in the number of employees, and value of shipments from 2010–2011, the most recent figures available at the end of 2012.²

Table 2.1. Annual Survey of Manufacturers, 2010–2011(values in U.S. $1,000)

The relative composition of the household furniture industry, the largest segment of the industry overall, is shown by the proportion of its major components in Figure 2.1.³ Although nonupholstered case goods represent 38% of the industry, this is the segment hardest hit by the movement of domestic furniture manufacturers overseas. The 31% represented by upholstered furniture is the segment most retained in the United States largely due to the demand for customization and quick turnaround of pieces that are ordered. Institutional furniture at 18% reflects demand from hospitals, the hospitality industry, government, schools, and other organizations. Some segments are counter-cyclical, while others parallel public sector funding and legislation. The remaining 12% in other materials and markets include furniture placed outside the home or other dwelling.

Figure 2.1. Percentage of household furniture segments by relative value, 2013.

The United States is a major global supplier of wood for furniture. Ironically, raw lumber is largely shipped out of forested areas such as the Appalachian region that formerly relied on this ready supply to become prominent in U.S. furniture manufacture, but now exports this material to rival factories in Asia. Major Chinese furniture makers also obtain supplies from Russian sources that are closer to them. Wood from Brazil is a touchier consideration given market sensitivity to deforestation in the Amazon. Leather comes in various qualities, reflecting cost points in finished products. Supplies come from cattle centers such as Texas and South America, or as synthetic goods. Flammability, discussed in a later section, is a highly regulated environmental consideration.

NAICS 337110 Architectural Woodwork and Cabinetry

It remains a basically local segment that involves a large number of small enterprises. This segment employs the largest number of workers by category, usually in small companies that are highly local and well-connected to customizing what the local market wants in small order goods. Some high-end custom work requiring relatively elaborate tooling is subcontracted to overseas talent in South America (e.g., Peru, Brazil) and Southeast Asia (e.g., the Philippines, Indonesia), utilizing exotic wood and recycled one-of-a-kind pieces. Cabinetry tends to draw on local workers, meeting local demands, the reflection of the housing market, and people with disposable income.

NAICS 337121 Upholstered Household Furniture Manufacturing

It includes all furniture using stuffing materials. It was initially the segment most resistant to offshoring due to the proportion of potential customization involved from various textile types and matching, brass accessories, and wood material components. In 2012 it accounted for 31.2% of the furniture industry revenue and is concentrated in the traditional North Carolina upholstery manufacturing center the central Piedmont region. The variety of available material options, the ability to customize a piece by sending in designer-selected fabric, and the skill needed for tasks such as matching material and rapid stuffing all mitigate against large skill overseas outsourcing.

NAICS 337122 Non-upholstered Wood Household Furniture Manufacturing

It includes both solid and composite wood material, and is referred to within the trade as “case goods.” This was the first segment to rapidly move overseas to take advantage of wage rate deferential and substitution of machinery for labor. U.S. regions relying on the low-end cost point market were particularly devastated by outsourcing, as Chinese factories benefited from the latest technology as well as low cost labor. In 2012 case goods accounted for 38% of the U.S. furniture market.

NAICS 337124 Metal Household Furniture Manufacturing

It includes indoor and outdoor furniture. Its decline to less than 6% of furniture purchased reflects the elevated cost of steel, driven in part by a rapid increase in developing world demand for this construction material. The higher price of the basic metal material made the office/institutional segment a more sustainable outlet since they could more readily absorb the higher price over larger total batch orders.

NAICS 337125 Household Furniture except Wood and Metal Manufacturing

It includes products utilizing plastic, fiberglass, and natural nonwood material. It is predicted to account for less than 5% of the furniture market, but demand is growing due to its relatively low cost. Asian sources tend to supply the material (e.g., wicker, rattan, bamboo) as well as the labor, since they are more accustomed to working with it. Hong Kong was an early leader in plastic webbed furniture for this market segment.

NAICS 337127 Institutional Furniture Manufacturing

It caters to demand from public sources including government, schools, and hospitals. It accounts for 6% of the U.S. furniture market but the estimation reflects segments expanding and contracting due to public funding primarily for medium cost and reliable quality products.⁴ A boom in hospital and other medically related construction benefitted this segment and is expected to continue to provide a strong market in the future. Other segments susceptible to discretionary spending, such as hotel construction, and government funding particularly in areas such as school construction, are less likely to provide reliable markets.

Supply Chain

The furniture industry’s supply chain⁵ is fairly extensive due to the variety of materials utilized in its manufacture and the wide variety of global sources supplying these materials at various price points. Considerations for fashion, petroleum price, and politics also play into this segment, and supply chain management remains challenging. With a 17–20% tariff in place for rolled textile, it is seen as more cost-effective to import simple “cut and sew” kits with limited variety but in great quantities, principally from China where the textile business migrated along with furniture makers in the 1990s. Several Foreign Trade Zones such as those in lower-end, high-volume upholstery sites in Tupelo, Mississippi, and Asheboro, North Carolina serve to create small areas for domestic textile exemption involving rolled fabric that can be brought in for 40 days and converted to cut-and-sew kits.

Wood

Wood quality and sourcing vary widely across the furniture industry, reflecting price points (low, mid-market, or high-end) and the type and amount of technology involved. Sources depend on political as well as geographical ties with countries where certain types of wood are available and in demand by the manufacturer’s market. Examples include Myanmar’s supply of rosewood to Chinese manufacturers, for a domestic market willing to pay a premium price for traditional furniture. A major north China manufacturer began its business by utilizing cross-border wood supplies from Russia. Furniture making clusters in the United States drew on and later migrated to locally abundant forests, which now furnish substantial amounts of wood that are exported to Chinese furniture makers and then re-exported to U.S. markets as finished or partially finished case goods.

Metal

Metal parts are in demand for both utilitarian and design elements in furniture. Michigan remains a leader in basically office-oriented steel furnishings due to its location close to automobile factories drawing on steel supplies. Many metal parts makers for U.S. furniture manufacturing industries closed down as large firms migrated overseas, reinforcing the need for proximity to remaining clusters, and the time delay in obtaining parts from former U.S. furniture companies that now utilize overseas suppliers who are close by to where they are relocated.

Leather

Leather is a popular upholstery material at various price points depending on its global source and quality level needed, from South America to South and Southeast Asia.

Textile Fabrics

Textile Fabrics largely consists of broad-woven fabric used for upholstery. Other material utilized for furniture covering includes synthetic products with special qualities such as weather or liquid resistance. Lower cost, more mass produced items use “cut and sew kits” of prepared standardized material in a very limited color and quality range, largely supplied by large Chinese textile mills. The remaining U.S. fabric mills use highly efficient, high technology flexible manufacturing machinery combining a wide variety of offering for customized small and large batch runs. Mergers and acquisitions trimmed the number of manufacturers over the previous decades.

Glass

Glass is used for tables, often combined with materials connecting it to a container framework. The ability to customize glass to market demand and its fragile properties keep glass a more domestic input.

Dyeing and Finishing

Dyeing and Finishing elements include the materials—whose toxic elements make them undesirable for U. S. locales due to environmental protection laws—and the skilled craft workers who apply them in conditions that are also controlled for health reasons.

Designers

Designers furnish a critical intellectual property (IP) component that is invaluable for achieving a competitive advantage at the higher end of the market. As furniture manufacturing moved offshore, American designers began flying overseas to supply their distinctive input to name brand products. This also led to complications when very similar designs appeared on other products in countries with inadequate IP protection. Domestic designers tend to cluster in areas with a high concentration of furniture manufacturers and large showrooms, such as in the vicinity of High Point, North Carolina. Another location attraction lies in the availability of large, inexpensive storage facilities for displaying their products. Designers supply value and profit-enhancing ideas for domestic companies and foreign owned companies, located locally or abroad.

Wood Working Machinery Manufacturers

These manufacturers supply tools to the trade. An interesting market dichotomy, however, is that U.S. machinery manufacturers largely supply to new facilities setting up or expanding overseas, while U.S. furniture manufacturers tend to utilize older German and Japanese made machinery now available at lower prices due to factory closings in the United States.

Other Materials

These materials include rattan, wicker, and synthetic varieties such as plastic, largely sourced from overseas suppliers.

Manufacture and Retail

The downstream market side of the furniture industry also shifted markedly over the past several decades, as detailed below. This segment of the industry is characterized by the expansion of distribution networks from a variety of ports and warehouse nodes along principal shipping highways. Major “break of bulk points,” where large shipments from one destination are sorted out and sent in smaller groups to separate destination nodes, vary in location according to the particular manufacturer, reflecting their market concentrations. Consolidation of outlets and different shipping arrangements also varies according to the strategy or convenience of arrangements of suppliers, importers, or third parties.

Logistics, Warehouse, and Distribution

These arrangements⁷ changed in response to these conditions, including the following:

Large shipments of furniture arriving from Asia, primarily to the port of Long Beach, California, south of Los Angeles, necessitated the origination of national shipping lanes cross-continent to the large U.S. east coast (Maine to Florida) market. The following are all in year 2012 figures. California’s large population represented 13.5% of furniture market demand, the largest single state concentration in the United States. Combined with proximity to Asia as the largest supplier of imports, this created a major U.S. west coast (California to Washington state) concentration of furniture-related firms and services. While the west coast in general holds 17% of U.S. population and accounts for 18% of the domestic furniture market, shipments and distribution lines must extend to the largest number of furniture firms in the Southeast (26%), and the predominance of population and furniture market along the east coast, principally from Texas to Florida and North Carolina to New York.

The complexity of coordinating shipments from overseas manufacturers to dispersed U.S. markets triggered a rise in third party logistics (3PL) firms⁸ that consolidate furniture manufactured overseas (first party) into shipping containers, their delivery by shippers (second party) to U.S. ports, and their break up and redirection to truck and rail destination shippers who make the final delivery to retail stores (third party). The logistics industry is highly concentrated geographically, reflecting the industry’s specialization in the type of goods carried such as furniture which demands extra care in handling. The key to an industry’s logistics success lies in its ability to respond quickly and creatively to changes affecting their supply chain in order to make nimble sourcing decisions. Surging price increases of fossil fuels early in the year 2008 rebalanced the importance of various factors in the global logistics supply chain of goods subject to high shipping costs. Proximity returned to center stage as businesses predicted major upcoming location reallocations. The question of what particular stage in the production process of a specific good should occur at any given location reflects a variety of considerations.

Meridien Marketing is an example of a furniture industry service firm that provides a wide range of intermediate stage arrangements for clients. While they specialize in bridging the United States and Asia in particular, they also handle global connections in Europe, Latin America, and the Middle East. Given the variety of retailers and manufacturers involved in the furniture business, coordinating the handling of the purchase and delivery of orders, less than container size, from multiple factories benefits from assistance by a third party. U.S. firms operate from one to three types of warehouse programs: their own warehouses in the United States, a shared facility from several factories in China (with usually 5–6 factories sending to one warehouse facility), and a furniture warehouse for clients of third party providers such as Meridien where they consolidate smaller orders from numerous U.S. factories. 3PL services include supervising production and financing payment of orders from different factories overseas as well as coordinating furniture delivery to the overseas port, shipment in a mixed consolidated ocean container, and delivery to the United States side warehouse. A freight forwarding service makes delivery to the final retailer—or, with special rush arrangements to the customer. This type of comprehensive factory to floor package of services greatly expedites global sourcing for far-flung customers of various sizes, keeping order to delivery times within a range attractive to customers who understand that greater-distance-for-less-price requires a time trade-off.

China’s rise as a global factory site came when it reached a development stage distinguished by quality comparable to other locations, availability of a large supplier base, attractive government fiscal incentives, and significant wage differentials offsetting the “friction of distance.” By 2008, labor cost generalized as a percentage of total cost in China was 1–1.5%, compared to 15–20% of total product cost in Europe and 18–20% in the United States. However, from 2002–2008 the U.S. dollar decreased in value by 30% against the Chinese yuan, and wages in China continued to increase by 1015% annually. The 45 day length of the new supply chain, the time it takes a shipment to travel by water from Asia to the United States, meant a larger inventory had to be kept on hand to cover orders and the variety of places sourcing various components. The enormous surge in fuel costs spurred a new sophistication in U. S. importers seeking a more cost and time effective logistics model. The arrangement of shipping containers directly to retail stores that purchase a whole container of goods eliminates the intermediate distribution center route. Instead, wholesale importers operating out of major manufacturing centers place same end-destination goods in one container. International global logistics companies assemble a mixed container of different types of furniture. Upon arrival it is delivered to a regional cross-dock site by truck, then out to local retailers via specialized furniture carriers.

High Point, North Carolina remains one of less than 10 prominent national nodes maintained by haulers in response to the concern of being “dis-intermediated,” or rendered unnecessary by direct-dock-to-door-delivery. The area’s location on major highways within a half day of all major east coast markets ensures its continued desirability for shippers. A typical regional hub distribution network across the United States begins with delivery of containers from Asia (primarily China) at the port of Long Beach. The next stop is a California distribution center where containers are directed to the first tier distribution sites. The Pico Rivera site serves the entire west coast and southwest markets in Nevada, Utah, and Arizona. The other three major regions are re-distributed from High Point: a southern route serving the Carolinas, Georgia, and Florida; an east coast route out of a New Jersey facility that covers the rest of the east coast up through Maine; and a facility in Texas that serves the southwest. High Point distributes to the rest of the country, such as the Midwest. More regional furniture trucking firms concentrate on their local area, such as Los Angeles-based companies that handle primarily the west coast and perhaps adding the low demand Midwestern U.S. market to the regional grouping. Other North Carolina carriers in traditional furniture areas such as Lenoir also ship furniture from the California dock to North Carolina, then distribute to a hub in a high demand region such as Texas to send on to retailers. The regional hub location of Las Vegas serves a tri-state western region, while Los Angeles leads as its own regional hub for redistribution.

The reconfiguration of the multimodal shipping industry varies by major shipper, resembling, in several aspects, the development of nodal hubs in the air transportation industry affiliated to certain airline companies. Another set of hubs for a different domestic producer handles furniture components brought into the port of Long Beach on the west coast and Savannah on the east coast (from European suppliers). From their main distribution center in Tahoe, California product is sent to regional hubs in Arizona, Texas, and Utah by truck, or from Savannah to New Jersey or Virginia for the east coast, Midwestern, and Canadian retail site distribution. Logistics follows its own logic of adhering to historically important distribution centers, not yet adjusting to transportation cost minimization strategies.

Adoption of just-in-time delivery efficiencies with an increasing utilization of lean manufacturing components relied on the arrival of material as it was needed rather than residing in time-losing warehouses. The increased cost of gasoline, and a persistent shortage of truckers, put more materials in carriers as “mobile warehouses” rather than paying storage fees and experiencing lost delivery time in warehouses. Suppliers need to have their own warehouse system, since it is, frequently, only feasible to send mixed containers with different types of furniture (bedroom, dining room, living room) to retailers in different parts of the country. Trading cost for convenient delivery time, retailers, such as Vaughn Bassett, find it necessary to maintain large inventories in their warehouses since it takes relatively long for orders to arrive from abroad, and the types of furniture are difficult to anticipate.

Furniture Retail Outlets

These outlets experienced a strong consolidation over the past decade. Major trends include:

Furniture retail outlet employment, shown in Figure 2.2, reflects an improving market in the increase of numbers from 439,000 to 450,000 in the last 2 years. This demand is increasingly met with “Made in America” as well as products “Made Elsewhere.”

Figure 2.2. Furniture and home furnishings store employment, in 1,000s.

While numbers prior to 1990 are not available in current government sources to provide comparability, the cyclical nature of this measure is apparent. Recent recovery from the steep recessionary drop remains slightly above employment in the early 1990s, following the flight of manufacturers overseas.

The link between general economic recovery in the United States and furniture purchases was apparent as sales figures for the top 100 retail stores increased in 2012 for the third year in a row, with a combined increase of $2.8 billion in 2011 sales for a total increase of 9.9%. Gains were primarily realized by the largest stores and multiple brand conglomerates as they increased their share of the market along with ongoing mergers. The number of furniture stores also increased, by 7.3%, for the first time in a number of years, reaching a total of 9,137 outlets. Chains and popular brands such as Ashley (4% of U.S. furniture market share) and Rooms To Go (2.5%) increased outlets overall, but small “Made in America” offerings also became more visible. At 5% of the U.S. market, Swedish IKEA’s 30 + stores brought in 15% of their total revenue. In the year 2013 sales of living room furniture represented 43.7% of furniture purchases, followed by bedroom furniture at 29.4%, and dining rooms at 14.6%. This indicates the prominence of less-sturdy upholstered furniture in the most visible room, followed by sturdier wooden case goods in bedrooms, and less commonly used dining room furniture. Most retailers feature furniture for all rooms, particularly in the popular total-room array rather than as separate items, for example, sofas as part of a living room set. This encourages home furnishing oriented sales of additional items such as lamps and rugs, a practice known as “stepping up.”