Everyone thinks that their industry is just, oh so unique! What’s so unique about the office furniture industry?
It’s all in the SKU!
It’s estimated that there are more than two hundred quadrillion permutations and product combinations offered by the top 10 office furniture manufacturers around the world.
There isn’t another business anywhere that offers this range of options and finishes and yet the office furniture industry has rapidly become associated with the term “commodity.” If the numbers don’t make your head hurt, the irony will! The result? Even more innovation and change from the manufacturers.
Traditional furniture dealers find themselves in the middle of this evolving industry and some face an uncertain future. Some things – like demanding customers – won’t be changing any time soon, while other facets of the business are being impacted every day. They include:
• Increased competition, with industry giants going after the same local business as the dealer
• Gradual and sustained downward pressure on margins, both for manufacturers and their aligned distribution channels
• Large contract accounts are starting to drive the business relationship, deciding with whom and how they will do business irrespective of established channels
• The emergence of independent service provider companies with a focus on services
The Commodity Mindset
When these factors combine, it drives the “commodity” mindset, both for suppliers and customers. Let’s examine how we got here.
The traditional full service dealer model consists of 4 key operational divisions:
- Sales
- Design & Specification
- Administration (Order Management, Customer Service, Finance, HR, etc.)
- Operations (Installations, Service, Warehousing, etc.)
Over time, the rise of powerhouse competitive manufacturers has created increased choice in the market, which has resulted in downward pressure on margin. On top of that, the ambition to provide customers with the broadest range of choice in styles, finishes, systems, and solutions only increased detail, which is expensive to produce and drives costs higher. At the dealer level, this meant that every division, from sales to administration, design to operations, had to deal with this increased detail and the associated learning curve, and dealer owners had to absorb these fixed costs. As a result, margins came down at the same time expenses – fixed and variable – mounted.
Add to this situation the fact that large, contract accounts, the “bread and butter” for many local dealers, have begun to centralize procurement, and have started looking to manufacturers to provide solutions that many individual dealers can’t. This has pushed manufacturers into becoming responsible for many tasks traditionally associated with the dealer, thereby risking the channel model and their aligned dealer relationships.
What does all this mean to the dealer?
Ten years ago, a 25% - 30% gross margin would have supported service costs (hopefully leaving some profit dollars left over), but that margin is no longer available. Simply put, the traditional dealer model, for all but a few regional players and their unshakeable relationships, is increasingly unsustainable. Fundamental changes in the way products and services are delivered by the dealer are required.
Firstly, it requires a long, hard look at every aspect of the dealership. What areas are maintained as “Fixed Costs” and which are “Variable Costs”? Each function and role within the company must be examined to determine if it’s a core service or a commodity, and, as a result, if it can be “variableized”. As an example, many dealers have determined that delivery and installation are variable costs and have sought ways to lower costs or outsource those areas. Others have determined that they are core services and have positioned themselves accordingly.
The question is, can other areas, like Sales, Design & Specification, and Administration be moved to a variable cost model as well? At KiSP, we believe the answer to that question is “yes”.
The Variable Aspects of Sales, Design & Specification, and Administration
With little controversy it could be said these functions remain fundamental to the dealer, but there are tasks within these functions that can be variableized.
Fundamental to the roles of sales or design & specification is the learning of all that detail. Months and months of training are required just to bring staff up to speed. The “made-to-order” nature of the industry means even the simplest error in specifying or ordering could wipe out the profit for a dealer for the entire year. And yet, these resources often spend their time and energy on tasks that are not central to their function. Is detail level product knowledge and preparing sales quotations really central to the sales function? Are hours and hours of specification and waiting for renderings by the CAD and design team really a value added task for them? Or would more customer-facing, direct interaction result in higher margin business and longer term, more strategic relationships?
Once these non-core tasks are identified as variable, they can be “shopped.” Are there lower cost alternatives available? Are there partnerships that can be formed that execute those tasks more efficiently and expertly? Can these tasks be outsourced entirely? Key areas that can be transitioned to a variable cost model include:
- Sales quotation and document creation
- Product visualization and renderings (pre-sales)
- Product specification
- Space planning
- CAD production for working drawings
- Non client-facing order management tasks
- Various accounting tasks such as invoicing
With these decisions made, a dealer can focus on determining its true differentiating characteristics, create positioning that communicates that uniqueness, and shape its operations and selling strategy to deliver on that promise.
Market Strategies for the New Dealer Reality
There are three basic strategies for office furniture dealers to survive and thrive in the new industry reality:
- High Volume/Low margin: A strategy of shipping “more boxes” at lower margin. This addresses top line revenue, and increases margin dollars. The hallmarks of this strategy are aggressive pricing, strong corporate branding, and the addition of a few core services like web-based ordering/customer portals. From a manufacturing perspective, it means much more emphasis on programs like “quick ship” and reduced numbers of SKUs
- Service Differentiation: the process by which the dealer discerns and designs a defensible point of differentiation, and shapes its operations around that point. Whether it’s better customer-facing solutions, superior knowledge of product or services, or even project management, it is the element that distinguishes the dealer from the pack of alternatives.
- Business Diversification: it can be full service around furniture and its associated tasks (asset management, for example), or on a product basis, offering architectural solutions like walls or even fixed construction, carpets, audio visual rooms, or non-furniture items like stationery and supplies.
For the bulk of the market, Service Differentiation will become the key factor in determining the dealer’s ability to win business, but it will require focus, training, a critical analysis of dealer operations, and courage to act!
Summary
The North American office furniture dealer model must move to a variable cost model to address the concerns of increased product detail, mounting overhead costs, decreasing margins, and a shift in the contract customer/manufacturer/aligned dealer relationship. To make the transition to this model, the dealer must begin to consider functional areas like sales and design & specification as a source for variableization similar to the way many have re-examined the role of delivery and installation. Finally, market strategies must be employed to position the dealership based on core skills and distinct advantages, and operational and selling strategies must be used to communicate the differentiated position.
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