Before The "Last Mile"

March 14, 2017  by Jane Chero in Business Strategy, Industry   

The movement of product from one geographic location to another has always been a critical, but often silent consideration in the structure of the furniture industry.  Even from the beginning when the Mayflower landed in Plymouth there was a furniture maker on board.  This person, responsible for making barrels, was called upon to make the most basic items that made a house more of a home.  We have moved beyond the local craftsman.  

Our focus in this issue is transportation; however, more broadly, it is about logistics.  This involves the process of moving product on a timely basis from one geographic location to another satisfying the demands of each entity from the producer to the retailer to the consumer and, finally, to the landfill when its useful life has come to an end.

As transportation innovation and infrastructure improvement have revolutionized the movement between the raw material source and production, the distance between retailer and consumer has increased.  Now products can be made in the Far East from raw materials that are harvested in the Appalachian Mountains. Then they are returned to the United States and, after being selected by the consumer from the Internet, these products are then shipped from a New England distribution center to Southern California.

Let’s start at the initial stage, the source of the raw materials.   We will begin with the major premise that furniture is made from solid wood.  For many years this translated into hardwood species that were mostly available in the United States.  This included oak, maple, cherry, and pecan.  There were also some of the more exotic imports, such as mahogany.  As the availability of raw materials diminished in the North, producers were forced to haul raw materials further or establish plants closer to the raw material source.  That is how North Carolina became the furniture capital of the world, supplanting Jamestown, New York and Grand Rapids, Michigan.  The economics of moving raw materials north compared to finished products from the South dictated that strategic decision.

One hundred years later the attraction of cheaper labor with offshore manufacturing and a developing transportation system (container ships) led to the consideration of relocating the manufacturing to the Far East beginning in Asia and migrating to other countries driven by the fluctuation in labor costs and tariffs.

The retailer now has to cope with product shipped from thousands of miles instead of hundreds of miles and in transit times of weeks instead of days.  The obvious motivation was lower prices which would translate into additional sales or improved margins.  However, after thirty years the increased margins are questionable and the industry’s share of disposable income has shrunk.  Maybe this was not a good move, but this is what we have.

Without a doubt the retailer must focus on the last mile in moving the product to the consumer.  However, just as important are the thousand + miles that it must be moved before it can be delivered to the consumer.

Over the last thirty years the furniture industry has extended its supply chain from miles to thousands of miles.  The local or even regional craftsmen who produced the product have all but disappeared.  However, I often experience “deja vu” when I visit Amish country where a collective of small manufacturers, each with his own unique skill set, combine to produce an overall product collection.  There was a time when there were manufacturers who were producing only fine chairs.   However, back to reality – or should we dwell a moment?

With this extended supply chain comes increased risk.  The memory of the 2015 dock strike is just that – a memory with all the resolves of not having all vendors as direct importers.  This falls into the category of New Year’s resolutions – made with conviction, but soon forgotten.  (See Home Furnishings Business, April 2015 for a refresher at: hfbusiness.com/Magazine/Past-Issues/April-2015.)

Freight has traditionally been a cost incurred by the retailer, with contracts rendered FOB the plant.  This means the retailer is absorbing the cost for moving the product as well as the responsibility for in-transit damage.  While some manufacturers experimented with quoting delivered prices, the confusion caused by the keystone pricing (2X wholesale) rendered the concept impractical. 

Historically the concentration of manufacturers in North Carolina for case goods and in Mississippi for upholstery placed West Coast retailers at a distinct disadvantage over their East Coast counterparts.  Today the tables have turned with West Coast retailers enjoying a 30 to 40% advantage over East Coast retailers.  However, Midwest retailers incur even more of a disadvantage - 70% to 90%  - when compared to both coasts.  Besides transportation being a substantial cost factor adding 35% to 40% to the off the production line cost (first cost), there is substantial variance driven by the instability of the container pricing.  While Table 1 illustrates a period just prior to a particularly volatile period (Chinese New Year), it demonstrates the point that importing is not for the faint of heart.

“The warehousing and inventory challenges can be especially daunting for small and mid-sized retailers who sell imports because they don’t have the staff or the expertise to monitor inventory levels and product flow”, said Peter Giorgio Jr., president of Global Logistic Solutions.

“With some of my clients, the person who oversees the imports is also the buyer, which kind of makes sense, but they’re busy buying too, and they may not have time to manage the flow and things like that,” Giorgio said. “It’s not that people don’t want to pay attention to it. I’m not sure they have enough time to pay attention to it.”

He said his company targets small and mid-sized retailers because few other logistics providers pay attention to them.

“It’s a double-edge sword because they don’t have the staff; they don’t have the expertise. And because they’re on the smaller side, they’re kind of off the radar of the service providers. So no one is calling on them,” said Giorgio. “Many retailers (who don’t import directly) probably could do some importing, but it’s easier for them to order from the manufacturer’s U.S. warehouse. They pay more, but they can also take it in the quantities that they want.”

Monitoring product flow is especially important in the weeks leading up to Chinese New Year, a two-week period in February where virtually all factories in China and some other parts of Asia shut down so workers can celebrate with family and friends.

But it’s not just that two-week period where production is halted. Giorgio said as many as 20% of factory workers leave a week or two before Chinese New Year, which disrupts production, and another 20% to 30% don’t come back when the holiday period ends. That means up to eight weeks of abnormal production levels.

“It’s a challenge for buyers just to try and get product earlier and earlier every year to protect against production hiccups,” he said. “You probably end up carrying more inventory, especially on your best groups, just to protect yourself. Depending on when the cuttings occur, you may have to start taking that (extra) inventory in early December in some cases.”

Manufacturers can help, he said, by providing realistic lead times, regardless of the season. “If your lead times are wrong, that really messes up your whole situation,” said Giorgio.

Imports, however, are here to stay having more than doubled in the past fifteen years.  The pricing element that adds more than 35% to the product cost that converts to a 70% at the retail level greatly influences the retail strategy.  (Table 2)

From a retailer’s perspective, getting the product to the warehouse needs to be addressed before the last mile. No matter how well the product sells, if it is continually out of stock the results are lost revenue and poor customer service. (Table 3)

Retailers and suppliers enter into a relationship with the best of intentions.  However, many factors can inhibit fulfilling the commitment.  To avoid a breakdown requires a measure of performance against a predetermined goal.  Many retailers actively use a vendor performance system.

The first step in the buying process at Market is a review of current vendor performance.  Nothing emphasizes the requirement more than this barrier before committing to the next buying cycle.  

From the consumer’s perspective it is only natural to want to receive that new furniture that is anticipated to make their home environment change.  However, on a scale of 1 to 5 only slightly more than 20% consider it extremely important while over 50% rank it 4 to 5.  Having the stock and being ready to deliver is a strategic advantage. (Table 4)

Traditional retailers with fully stocked warehouses and well equipped delivery teams should have a strategic advantage when compared to Etailers that must rely on a third party delivery service or lifestyle stores that must wait for delivery from centralized distribution centers. 

The consumer’s expectation is that furniture, when delivered, is ready to use (fully assembled) with a truck and company delivery personnel extending the experience that they had when they made the purchase.  Is it important? Certainly, with only 13% saying it is not important.  The key word is “expectation.”  The consumer never focuses on how their delivery will occur unless the retailer tells him or her.  Again this should be a strategic advantage for the traditional retailer. (Table 5)

Providing a first class delivery service is not inexpensive. As can be seen from Table 6, for the top quartile performers, the cost for all retailers is 3.19%, but, as would be expected, this would decline as the retailer’s volume increases leveling out at the high 2%.  

The good news is that with an efficient delivery operation, two thirds of the expenses can be recouped with delivery charges. For larger retailers a small profit can be generated.  It should be pointed out that these are top quartile performers and many retailers lose a significant amount of their potential profit from inefficient delivery operations.  In addition many of the larger retailers use outside delivery services thus achieving that positive contribution to profitability.  The old adage of sticking to what you are good at (retailing) and leaving the rest to the experts rings true.

What are the key performance indicators in judging a retailer’s performance beyond finances?  As a retailer grows the addition of another delivery crew is a critical decision.  Trading the additional fixed cost against deterioration in customer satisfaction is a difficult trade-off.  The question is how much can a delivery crew accomplish.  On average, each handling employee can deliver $75,000 each month.  The size of the retailer does not create much of an advantage.  (Table 7)

As important as personnel is equipment – how many trucks and what size?  An interesting metric is sales per square foot of truck space. (Table 8)

Moving out with a full load is the key and every warehouse manager has his own solution.  However, every month that square foot of truck bed must average $1,500 out the door.  But whatever you move out the door must delight the customer.  How do you know?  You ask. Many third party providers execute an outstanding consumer package. (Table 9)

The challenge of moving product from the distant manufacturing plant back to the retailer and ultimately to the consumer is significant.  What was at one time a relatively simple process has become fraught with opportunities for increased cost and disappointed customers.

What About the Other Direction?

Without a doubt the furniture industry has a trade deficiency when it comes to furniture.  Although almost doubling in the past fifteen years in terms of total volume, it is just over 10% of imports.  While in the United States many style categories are in demand, much of this production is shipped directly from the offshore plants of American companies.  (Table 10)

The real winner in the export game has been the raw material harvested in the Appalachians.  In 2016 exports of hardwoods grew 9.3% in terms of revenue and 11.1%in terms of board foot.  The major growth countries have been, as would be expected, in China, but surprisingly the United Kingdom and Germany showed increases. (Table 11)

In terms of species growth, cherry and birch lead the way.  It should be noted that the United States enjoys an abundance of healthy hardwoods protected by a significant environmental policy.  In comparison, many countries suffer from deforestation and unhealthy forests. (Table 12)

These facts present an interesting strategic consideration.  As the percentage of solid wood sold in the United States declines, the consumer preference continues to increase.  Would the demand for specific species dictate the relocation of production closer to the raw material source?  Do the math.  We have.

Recycling for Furniture and Mattress? Don’t Bet Against It

One of the thorniest after-the-sale issues has little to do with the availability of qualified drivers, the efficiency of delivery routes or the increased demand for same day and next day delivery. It’s how to get rid of the old furniture or bedding that is being replaced by the merchandise on the delivery truck.

Some retailers will pick up the used stuff – especially if it’s a mattress -- when the new merchandise is delivered, while others urge consumers to arrange for pickup by a non-profit group that sells used furniture such as the Salvation Army, Goodwill Inds., or Habitat for Humanity. And other consumers will give the used goods to a friend or relative, or try to sell it themselves using methods ranging from consignment stores to yard sales to Craigslist ads.

But sadly, those techniques move a relatively small portion of the used furniture and mattresses that consumers replace every year. The rest can be found alongside a lightly traveled street or highway -- illegally dumped there, of course -- or even worse, wind up in a landfill.

Susan Inglis, executive director of the Sustainable Furnishings Council, hopes to see that pattern change someday. She would like nothing better than to see furniture recycling programs established in order to keep the products out of landfills and create jobs for people who would repurpose or reuse them. Plus, it might help industry sales by giving consumers an easier way get rid of their old furniture.

She said she’s keeping an eye on a Scandinavian company that is making MDF out of recycled wood furniture, for example, to see if a similar program would work in the U.S. And she also would like to see the rejuvenation of the re-upholstery business, which would allow consumers to inexpensively re-decorate and re-use existing furniture.

“Something like that could become a profit center for designers,” Inglis said. “We would just need to encourage manufacturers to make more product that could be re-upholstered.”

Statistics compiled by the U.S. Environmental Protection Agency show that 11.1 million tons of furniture and furnishings (including mattresses) were dumped in
municipal landfills in 2011, the latest year for which data is available. That represented 4.4% of all municipal solid waste that year –
a much larger percentage than major
appliances (1.6%), small appliances (0.7%),
or carpet and rugs (1.5%).

The EPA data showed that essentially no furniture was recycled that year, and only 10,000 tons of mattresses – a tiny portion of the total.

But in the past two years, the mattress industry’s own recycling program, dubbed Bye Bye Mattress, has been launched by the Mattress Recycling Council, an arm of the industry trade group, the International Sleep Products Assn.

With only three states participating in the program thus far – California, Connecticut and Rhode Island – Bye Bye Mattress already has diverted one million mattresses weighing nearly 25,000 tons from landfills since May 2015, when Connecticut became the first state to launch the program. California joined in December 2015 and Rhode Island began in May 2016.

“During the initial year of its program, Bye Bye Mattress has significantly increased mattress recycling for communities across the states served. Having surpassed one million units shows that the mattress industry has created a practical solution that is showing real promise,” said Ryan Trainer, president of the Mattress Recycling Council and ISPA. “It is a major milestone, but is also just the beginning. We are still committed to making mattress collection and recycling in these states easier and more efficient for everyone.”

Each participating state passed a mattress recycling law that established a program that’s overseen by the MRC and funded through a recycling fee added to each piece of bedding sold in the state. The fee is used to operate the program by providing containers for collection sites and transportation of mattresses to contracted recyclers for deconstruction.

In Connecticut, consumers pay $9 per piece of bedding, while the fee is $10 per piece in Rhode Island and $11 per piece in California.

The fee is assessed on all mattress purchases in the state, regardless of its size, price or brand name, and regardless of whether the consumer is replacing an existing mattress.

In the participating states, there are 11 recycling facilities that deconstruct mattresses and box springs under contract with the MRC, separating the steel, foam, fiber and wood and selling it to scrap dealers. MRC officials said several of the recycling facilities are run by non-profit organizations who provide jobs for veterans, ex-offenders, homeless people and others who have had difficulty finding work. It enables them to gain skills in areas such as logistics, transportation, deconstruction and administration.

The used bedding is gathered at hundreds of collection points in each state, and in many cases, retailers bring the mattresses to the collection sites. However, Connecticut and Rhode Island retailers can arrange to have it picked up as long as they have at least 50 pieces to discard.

MRC officials said they don’t have a pickup program established yet in California – the logistics are much more complex in such a large state – but one is in the works and will be announced soon.

Consumers also are encouraged to bring used bedding to the collection sites themselves – and the participating state will pay them from $1 to $3 per piece for their trouble.

MRC’s website, ByeByeMattress.com has detailed information about the collection sites and recycling centers in the three participating states, as well as numerous mattress recycling facilities in other states.

Officials said the MRC is trying to urge other states to pass mattress recycling laws, using programs in the three initial participants as a model.

And Now for the Last Mile

There it is! The perfect sofa for the living room she is redecorating.

After long hours of shopping online and/or in retail stores, she’s ready to whip out the credit card or complete the financing application and make a purchase. With any luck, she also will buy a matching loveseat or possibly some occasional tables, lamps or other accessories to go with it.

Then, in a few days -- a little longer if the sofa is a special order, or a little quicker if the retailer offers ultra-fast delivery – her new furniture arrives at her home.

She has only a vague idea what happened between the time she paid for the order and the merchandise appeared at her home – and she may not care – but its arguably the most important part of the sale process. Because if something does go wrong during that time, she will really care what happened, and it could have long-term, negative consequences for the retailer and possibly the manufacturer.

It’s often called final-mile delivery, but that may be a misnomer. The product could easily have traveled thousands of miles before it ever reached the distribution center where it was loaded onto the delivery truck.

And all of it virtually invisible to the consumer.

“Today’s consumers expect an effortless experience with flawless execution,” said Bob Elkins, senior vice president and general manager of Schneider Dedicated Services, the final-mile delivery division of Schneider Transportation. “Retailers and manufacturers oftentimes do not have a second chance to provide a great buying experience.”

In other words, get the delivery right, or be prepared to get torched on social media.

“Home delivery is certainly a big component of the buying experience,” said Elkins. “Just check the online reviews provided by consumers.”

But before any piece of furniture is loaded onto a delivery truck, it probably has been loaded onto the trailer of one or more long-distance carriers and/or cross-docking specialists who hand it from one shipping route to another.

And if it’s an imported piece (which applies to about 75% of all the wood furniture sold in the U.S., but less than half of the upholstery) it was loaded into an ocean cargo vessel in Asia or Europe long before it was ever touched by a domestic furniture carrier. And the domestic carrier may have received it from a drayage company whose trucks pick up merchandise as soon as it is unloaded at the port.

Sound complicated? Yes, it can be. But don’t try to explain it to the consumer, unless she happens to work in the field of logistics. She merely wants her furniture when she wants it, and the retailer will feel the brunt of her wrath if it doesn’t get done.

The challenge is especially being felt in the ultra-competitive long-distance carrier market, whose participants increasingly find themselves squeezed by increasing federal regulations and a decreasing number of qualified drivers.

“Carrier capacity levels have been tightened with the new Hours of Service rules, the shortage of new drivers entering the field, as well as the upcoming federal mandate for electronic logs,” said Stan Froneberger, vice president and general manager of SunBelt Xpress.

SunBelt, which offers both long-distance hauling and last-mile delivery, already has equipped its fleet with electronic logs – well in advance of the government’s December deadline – but the Hours of Service rules have only exacerbated the driver shortage, Froneberger said.

The complex rules, in essence, prevent a trucker from driving more than 11 hours after 10 consecutive hours off-duty. Plus, there are mandatory rest breaks, and after a driver has been on duty 60 hours in a seven-day period or 70 hours in an eight-day period, he must be off duty for at least 34 consecutive hours.

The bottom line, said Froneberger, is that it now requires more drivers and better scheduling – not to mention more time -- to get the furniture from the port or the factory to the retailer’s warehouse.

“Better service always is a goal for shippers and carriers. However, the impact of the Hours of Service regulations as well as driver hiring challenges for carriers are becoming more recognized (by furniture manufacturers),” he said.

Interestingly, he said these challenges give a modest advantage to domestic manufacturers, since their goods simply don’t have to be handled by as many entities as an imported product.

“Some of our leading growth accounts over the past couple of years are those with domestic production, especially in upholstery,” Froneberger said. “The domestic producers are some of the most innovative and customer-driven shippers we have.”

Froneberger and other logistics executives say retailers also are being forced to be more customer-driven as consumer expectations for shipping and delivery have risen right along with the fortunes of Amazon.com, and more recently, home furnishings e-tailers such as Wayfair.

That has led to the widespread practice of next-day delivery, and in some cases, same-day delivery by furniture retailers.

But Rob Davis, national sales manager of last-mile delivery provider Diakon said even Amazon can’t execute next-day delivery of most large furniture pieces, unless the consumer happens to live very close to one of its distribution centers.

“As long as (the furniture retailer) is carrying the inventory, they’re doing pretty much everything next day,” Davis said. “Next day and further out is pretty much the same in terms of the delivery process. You can maximize space on the trucks with no problem.”

Same-day delivery, on the other hand, poses an entirely different set of challenges that only a small number of Diakon clients want to tackle. “The productivity changes dramatically,” Davis said. “No matter what, we have to send a truck and a couple of guys out there to make the delivery. If we can get 15 stops, then we can charge less (per delivery) than if we only have four stops.”

Plus, same-day delivery requires essentially a 24-hour warehouse operation, which also increases the retailer’s costs, he said.

“I think retailers have to ask themselves, ‘Does my customer really want to come into the store at 4 p.m. and then stay up until 12:30 at night to take delivery?’ I don’t think there are many people who do,” said Davis.

He also said there’s usually not the same sense of urgency for the consumer who purchases furniture as the one buying a major appliance, for which Diakon also provides last-mile delivery services.

“If your freezer breaks down and you’re facing a loss of frozen food, you need to replace it right away. But if you’re couch breaks, I’m not sure there’s that same urgency,” said Davis.

But regardless of how quickly the furniture is delivered, Davis and other executives say retailers increasingly are turning to third-party logistics providers to handle last-mile delivery.

“There is a growing realization that experts in delivery of goods – particularly furniture – make a difference,” said Schneider’s Elkins. “Final-mile delivery is an extension of the retailers’ or manufacturers’ brand. We compliment the delivery gap in the consumer’s buying experience and ensure we represent the brand of our customers to their customers.”

Schneider became a major player in furniture transportation last summer when the company acquired Watkins & Shepard and Lodeso, two of the industry’s best-known furniture logistics providers. That deal instantly gave Schneider a huge footprint in the truckload and less-than-truckload transportation of furniture, as well as last-mile delivery of furniture and other oversized goods that can’t go through the UPS and FedEx delivery systems.

“Watkins & Shepard know this market well and have built a strong reputation for providing high-quality, claims-free service,” said Elkins “When combined with the scale and financial resources … Schneider brings, this creates an integrated capability that takes the complexity out of the supply chain for omnichannel retailers and manufacturers. It also provides a superior home delivery experience for consumers of high-value, over-dimensional goods.”

And not only are carriers such as Schneider and SunBelt challenged to find qualified drivers, they’re starting to encounter similar difficulties finding qualified people to operate distribution centers and fill other key logistics posts.

“It’s not the same old ‘warehouse manager’ position that is was a few years ago,” said Bill O’Malley, chief recruiting officer at Connector Team Recruiting, a search firm that targets clients in the furniture, bedding and appliance industries. “Today, you have to have skills in areas like industrial engineering and process improvement.”

O’Malley, who has a background in logistics himself, said positions such as distribution center manager and vice president of logistics have been in high demand in the past four to five years as retailers have evolved into omnichannel operations trying to survive and thrive while butting heads with the likes of Amazon.

“The final mile (delivery) component now makes the distribution center practically a 24/7 operation,” he said. “Next day delivery is a fact of life. At the very least, there are multiple shifts … and other challenges that the old ‘warehouse manager’ never faced.”

He said today’s logistics professionals don’t necessarily need an engineering degree, but some exposure to the subject – including training in Six Sigma principals – would be very valuable to a job candidate.

“The second largest (capital expenditure) in our company – next to rolling stock – is technology such as bar code scanning, on-board computers and other IT areas,” added Froneberger of Sunbelt Xpress. “The associates we are hiring today in operations needs to have a comfort level with these new technologies.”