An Industry in Trouble

By David F. Carr  |  Posted 2003-01-17 Print this article Print

If it's possible for an office chair to create buzz, Herman Miller's Aeron did. But it's still counting on 3-D technology to juice sales.

An Industry in Trouble

Blaming Herman Miller's troubles on the dot-com bubble would be an oversimplification. The office furniture industry in general is suffering, as formerly fast-growing companies in all kinds of industries have cut back in the face of recession—and find themselves with more desks than employees.

The big contract furniture makers—Steelcase, Herman Miller and Haworth—also are under pressure from lower-price manufacturers such as HON Industries, which reported a comparatively modest decline of 12% in sales in the first nine months of this year and a 2.5% drop in its most recent quarter.

Steelcase also has suffered, seeing revenues descend to $3.1 billion in fiscal 2002, down from $4 billion the year before.

But Herman Miller at this point seems to be doing a better job of turning things around.

In the first quarter, it netted $9.8 million or 13 cents per share, despite a 15.5% drop in sales. Miller's second quarter profit was $11.8 million or 16 cents per share, even though sales were down 9.5%. Steelcase is suffering through a four-quarter losing streak, including a loss of $31.1 million or 21 cents per share, with an 11.6% sales decline, in its most recent quarter.

Herman Miller also stands out by some measures of efficiency, such as inventory turns. The rate at which Herman Miller converts inventory to sales in a given year dropped from 27 turns in 2000 to 21 this year, but that's nearly twice the performance of Steelcase, which saw inventory turns drop from 24 to 12 over roughly the same period.

An Industry Primer

The big three contract furniture-makers are headquartered in Western Michigan—Herman Miller in Zeeland; Haworth, a comparably sized private company, in the nearby city of Holland; and Steelcase in Grand Rapids. Their traditional focus is on winning contracts to furnish entire office buildings, where the specification of cubicles, desks and chairs is often part of the architectural planning process. When it works right, the manufacturer wins a long-term relationship with the customer's corporate facilities manager.

Unlike HON, which generally allows any dealer or retailer to sell its products, the contract players demand semi- exclusive relationships aimed at ensuring loyalty and deep product knowledge. Herman Miller dealers are prohibited from selling Steelcase or Haworth, even though they may also represent several smaller manufacturers.

D. J. DePree started Herman Miller in 1928 with money borrowed from his father-in-law, the company's namesake. A son, Max DePree, helped popularize the company's reputation for excellent management with books like Leadership is an Art (DTP, 1990). In particular, Herman Miller is known for promoting employee ownership and systematically rewarding innovation from within.

The current management also emphasizes incentives built around Economic Value Added (EVA), a way of measuring how much more valuable a company has become during a given period.

This metric takes after-tax earnings and deducts the cost of buying equipment or technology versus investing the same amount of capital in bonds, stocks, or other uses. EVA also treats research and development differently than standard accounting, spreading R&D costs over multiple years so companies aren't penalized for investing in the future.

Herman Miller credits EVA with helping guide it to more efficient and profitable operations. The company added $88 million of new economic value in fiscal 2000, a year in which the company earned $140 million. Seemingly propelled by EVA, its stock price rose at an average of 28% per year for five years, as opposed to 2% per year in the early 1990s.

Lately, however, EVA has turned into a particularly harsh judge. While Herman Miller was able to report profits for the first two quarters of its 2003 fiscal year, EVA was -$5.6 million for the first quarter and -$4.3 million for the second quarter. To keep executives from losing heart, the board of directors adapted the incentive program to offer bonuses just for getting the company back to break-even EVA.

Herman Miller also is known for product innovation. In the 1960s, its collaboration with inventor Bob Propst led to the first "open office" panel systems—the forerunners of today's cubicles. Now Herman Miller is one of the leading makers of "systems furniture" in which wall panels and desks feature built-in accommodations for network cabling and electrical wiring.

In the 1990s, much of the company's growth came from exploiting systems of another sort: computer systems to boost sales, communicate with suppliers and schedule factory production.

David F. Carr David F. Carr is the Technology Editor for Baseline Magazine, a Ziff Davis publication focused on information technology and its management, with an emphasis on measurable, bottom-line results. He wrote two of Baseline's cover stories focused on the role of technology in disaster recovery, one focused on the response to the tsunami in Indonesia and another on the City of New Orleans after Hurricane Katrina.David has been the author or co-author of many Baseline Case Dissections on corporate technology successes and failures (such as the role of Kmart's inept supply chain implementation in its decline versus Wal-Mart or the successful use of technology to create new market opportunities for office furniture maker Herman Miller). He has also written about the FAA's halting attempts to modernize air traffic control, and in 2003 he traveled to Sierra Leone and Liberia to report on the role of technology in United Nations peacekeeping.David joined Baseline prior to the launch of the magazine in 2001 and helped define popular elements of the magazine such as Gotcha!, which offers cautionary tales about technology pitfalls and how to avoid them.

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