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February 22, 2005

INNOVATORS

A Nimble Newcomer in the Staid Old Furniture Industry

By VIRGINIA POSTREL

ALLAS WHEN Bob Duncan was studying engineering management at the University of Texas in the mid-1980's, Japanese competition had American businesses terrified. "There was great concern that Japan would eliminate the U.S. manufacturing base just totally," he recalled. To the confident young Mr. Duncan, however, Japanese manufacturing was not a threat but an inspiration. After graduation, Mr. Duncan worked for Andersen Consulting (now Accenture), teaching clients lean manufacturing techniques originally developed in Japan. Within a couple of years, he had an idea for his own company. He decided to do for leather furniture what Japanese companies had done for cars, steel and shipbuilding: shake up a staid, complacent industry by rethinking the manufacturing process. In 1990, with another Andersen consultant, Sanjay Chandra, as his partner, Mr. Duncan set out to turn this concept into a business, the Dallas-based American Leather. Instead of making sofas in big batches, with each step handling a week's worth of material at a time, they would treat each order as a single batch and make it in a few days. Rather than segregating cutting, sewing and upholstering, they would organize the plant in smaller teams, called "cells" or "minifactories," making it easier to spot quality problems and track a single sofa from start to finish. They would apply just-in-time techniques and keep the backlog to a week and a half, compared with the industry's six to eight weeks. With this process, Mr. Duncan figured, their company could give customers quicker turnaround and more choice. If they wanted a sofa in a color other than black, brown or burgundy, they would no longer have to wait months for container ships from Italy. They could pick from dozens of colors and count on delivery in 30 days. But raising money and selling furniture proved much harder than Mr. Duncan, now 41, expected. "At 26, you just don't know," he said. "You assume, Why couldn't you? It just seemed so obvious." American Leather took more than a decade to hit $30 million in sales, not the projected three to five years. But the business was profitable by its second year, and today it is flourishing. "American Leather has literally come from nowhere to be one of the most popular leather companies in the United States," says Jerry Epperson, a furniture analyst with Mann, Armistead & Epperson in Richmond, Va. The furniture company employs 390 people, up from 300 in mid-2003. It expects sales of about $68 million this year, up 15 percent from 2004. Last year's sales marked a 17 percent increase from 2003. After a slight dip in 2004, because of expanding operations, profit margins are as high as ever, said Mr. Chandra, the chief financial officer.

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In January 2004, American Leather opened a $12 million factory and headquarters in the open countryside about 15 miles southwest of downtown Dallas. The plant can handle about $100 million in annual production, and it is built for easy expansion. The company's continuing success comes as the once-complacent industry struggles to survive the shock of low-cost competition from China. Three years ago, a standard leather sofa sold for around $1,300 at a midrange retailer like Rooms to Go. Today, that sofa sells for about $1,000, and, Mr. Chandra said, "there is no bottom" to the prices. Although American Leather's founders never thought prices could drop so far, the company's nimble manufacturing and dedication to innovation have given it a sustained edge. No domestic manufacturer can beat the Chinese on price, but no Chinese furniture maker can deliver a sofa in four weeks. "The fact that you're across the ocean is adding a month to your lead time almost by definition," Mr. Duncan said. Nor do low-cost competitors offer as much choice. Like traditional American companies, Chinese plants run large batches with big backlogs. That maximizes economies of scale but adds weeks to delivery. American Leather feels the pressure, too, but its strategy has never been to compete on price. Rather, it wants to offer enough additional value - in choice, turnaround time, quality and innovative design - to justify a more expensive ticket. The complexity of that mission has grown exponentially. "What I'm most proud of is the fact that we still do ship in two to three weeks," Mr. Duncan said. "In 1992, we had 10 models in the whole company. Every model had the same plastic leg on it. We had virtually no options. We had probably 25 different colors. And we shipped in two to three weeks." Visitors to the factory are often wowed by the laser-based "nesting" system that workers use to lay out patterns around the irregularities of cowhides or by the automated cutting systems that mean every piece is precise and no employee's hands come close to a blade. But what is most impressive about the plant's technology is that the right pieces get assembled into the piece of furniture using minimum time and material. Although production engineering is central to the company's culture and success, technical excellence is not enough. "At the end of the day, you have to sell the stuff," Mr. Duncan said. "You can have the coolest products. You can build it in 20 minutes and deliver anything you want. But if nobody buys it, it's irrelevant. As an engineer, the biggest thing I've learned in the whole process is how hard it is to sell things." In 1997, he and Mr. Chandra brought in Cary R. Benson, now the company's chief marketing officer, as a third partner. That year marked a takeoff point. American Leather made the Inc. 500 list of the nation's fastest growing privately held companies, and marketing innovations became as important to its competitive identity as its manufacturing process.The company began addressing customers, rather than retailers, in its advertising. It adopted the tag line "Seventy styles. Seventy colors. In your home in four weeks." It hired the star furniture designers Vladimir Kagan and Rick Lee to create signature models. It sought innovations, like unique recliner mechanisms, to add to its newly fashionable line. It also built relations with retailers by providing sales tools and training. To give its selection an eye-catching display in stores, it created a "leather wall." The display's samples are big (14 by 12 inches) and hang face-out on removable dowels. The company broke industry custom and arranged the leather not by grade but by color. "The retailers love them," Mr. Epperson, the analyst, said. Each quarter, the company brings 50 to 70 store owners and retail salespeople to Dallas for two days of training called American Leather University, begun in 1999.

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"There are so many manufacturers that don't think about partnering as far as marketing education, and they do," said Connie Stevenson, who with her husband, Gary, owns lan Contemporary Furnishings in Omaha. American Leather has become lan's top vendor. For all its operational and marketing ability, what really distinguishes American Leather is its enthusiasm for continuous improvement and openness to new ideas. This openness contrasts sharply with the traditions of the home furnishing business. Barbara Tiffany, a furniture designer, remembers a North Carolina furniture maker who told her, "Well, if it was good enough for my daddy, it's good enough for me." By contrast, Ms. Tiffany recalled the first time she met Mr. Duncan. She and her husband and business partner, Robert, had finished a series of demoralizing meetings with executives from major furniture companies at the High Point, N.C., furniture market. The couple were trying to license Mr. Tiffany's patented design for a sleeper sofa modeled on a platform bed. The Tiffany 24/7 avoided the sags, gaps and bars that make sofa beds notoriously uncomfortable. This was their second time making the rounds, Ms. Tiffany said, and they were "treated shamefully, embarrassingly." They kept their last appointment, with Mr. Duncan, only because they were already in North Carolina with their sample in tow. They sensed right away that Mr. Duncan was not from the stodgy, insular furniture business they had always known. He looked at the sleeper and said, "O.K., we'll do it." Ms. Tiffany, expecting another rejection, kept talking. Only when he repeated himself did she realize they had made the sale. "He got it," she said. "He got it the minute we showed it to him. He understood the whole thing." | Home | Privacy Policy | Search | Corrections | RSS | Help | Back to Top

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