A Nimble Newcomer in the Staid Old Furniture Industry

American Leather reinvents furniture manufacturing.

The New York Times , February 19, 2005

Slide show with audio commentary from American Leather CEO Bob Duncan

DALLAS--When Bob Duncan was studying engineering management at the University of Texas, back in the mid-1980s, Japanese competition had American businesses terrified. "There was great concern that Japan would eliminate the U.S. manufacturing base just totally," he recalls.

To the confident young engineer, however, Japanese manufacturing was not a threat but an inspiration. After graduation, Mr. Duncan went to work 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.

Instead of making sofas in big batches, with each step handling a week's worth of material at a time, he'd treat each order as a single batch and make it in a few days. Rather than segregating cutting, sewing, and upholstering, he'd organize the plant in smaller teams, called "cells" or "mini-factories," making it easier to spot quality problems and to track a single sofa from start to finish. He'd apply just-in-time techniques and keep the backlog to a week and a half, compared to the industry's normal six to eight weeks.

With this modern manufacturing process, Mr. Duncan figured, he could give customers quicker turnaround and more choice. If they wanted a sofa or chair in something other than standard black, brown, or burgundy, they'd no longer have to wait months for container ships from Italy. They'd be able to pick from dozens of colors and count on delivery within 30 days.

With another Andersen consultant, Sanjay Chandra, as his partner, in 1990 Mr. Duncan set out to turn this concept into a business, Dallas-based American Leather. Raising funds and selling furniture proved a lot harder than the two young engineers expected. "At 26, you just don't know," says Mr. Duncan, now 41 and the company's chief executive. "You assume, Why couldn't you? It just seemed so obvious."

The fledging 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 veteran furniture analyst with Mann, Armistead, & Epperson in Richmond, Virginia.

The company employs 390 people, up from 300 in mid-2003. It expects sales of about $68 million this year, up 15 percent from $59 million in 2004. (Mr. Duncan, always the optimist, says $75 million isn't out of the question.) Last year's sales marked a 17 percent increase over 2003. After a slight dip in 2004, because of expanding operations, profit margins are as high as ever, says Mr. Chandra, the chief financial officer. The company's strong balance sheet has improved each year, he says, and it has financed most of its growth with retained earnings.

"No plans are ever laid out that say, 'We're going to very slowly, over time, build it,'" says Mr. Chandra. "We thought we would go public in three to five years. Here we are at 14 or 15 years, and we don't plan to go public." Even if the partners wanted to issue public stock, he notes, the Sarbanes-Oxley regulations passed after the Enron scandal are too expensive for a small company. "Being a public company in our industry and of this size is not a healthy thing," he says, noting that many companies American Leather's size are trying to go private.

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's current footprint can handle about $100 million in annual production, and it's built for easy expansion to the open acreage behind it. Mr. Chandra expects to need the extra space by 2007 or 2008.

The company's continuing success comes as the once-complacent industry struggles to survive the shock of low-cost competition from huge new plants in China. Three years ago, a standard leather sofa sold for around $1,299 at a mid-range retailer like Rooms To Go. Today, that sofa would sell for $999, while discounters like Wal-Mart and Costco offer even cheaper ones. "There is no bottom" to the prices, says Mr. Chandra.

Although American Leather's founders never expected furniture prices to drop so far, the company's nimble manufacturing systems--and its dedication to continuous innovation--have given it a sustained competitive edge. An American Leather sofa still commands a premium price of $2,499.

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," says Mr. Duncan. Nor do low-cost competitors offer as much choice. Like traditional U.S. operations, Chinese plants run large batches with sizable backlogs. That maximizes economies of scale but adds additional weeks to delivery time. Plus, Chinese manufacturers tend to limit each container load to no more than a couple of models in a couple of different colors, gaining efficiencies by giving up variety.

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, construction 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," says Mr. Duncan, who looks a bit like a young Kevin Costner. "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."

Today, by contrast, the company offers 140 different collections, each of which includes several different furniture pieces--a sofa, loveseat, chair, and ottoman, for example. Customers can choose from 70 colors of leather and 90 colors of Ultrasuede, and on some models they can combine two different colors or even two different materials. Depending on the piece's design, they may also adjust up to eight different variables--how tall the cushions are, what they're filled with, how they're trimmed, what kind of legs are used, whether a sofa includes a sleeper, and so forth.

Those variables create some 700,000 different possible combinations, not including all those color alternatives. Not all those options are equally likely, but the manufacturing system has to be prepared to create and track any possible choice. It also needs to minimize the number of different components it takes to assemble all those choices--to find ways to use the same bolts, for instance, or to standardize patterns without losing design quality. "If we overload this very delicate and sophisticated process," says Mr. Duncan, "then all of a sudden the stuff you were doing really well a month ago you can no longer do well."

Visitors to the factory are often wowed by the laser-based "nesting" system that expert 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. What's most important about the plant's technology, however, is its ability to keep all those possible combinations straight--to make sure that the right pieces get assembled into exactly the piece of furniture that customer has specified, using a minimum of time and material.

As central as production engineering is to the company's culture and success, technical excellence isn't enough. "At the end of the day, you have to sell the stuff," says Mr. Duncan. "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 on Cary 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 central to its competitive identity as its manufacturing process.

The company began talking directly to customers, rather than retailers, in its advertising. It adopted the tag line "Seventy styles. Seventy colors. In your home in four weeks." It hired star furniture designers Vladimir Kagan (famed for his mid-century boomerang and kidney designs) and Rick Lee to create signature models. It went looking for functional innovations, like unique recliner mechanisms, to add to its newly fashionable line.

And it built relations with retailers by providing sales tools and training. To give its selection an eye-catching permanent display in stores, it created a "leather wall." The display's leather samples are big--14 inches by 12 inches--and hang face-out on removable dowels. Three-inch-square swatches are stored in the back, giving customers samples to take home. The company broke industry custom and arranged the leather not by grade but by color. That makes the display both more aesthetically appealing and more useful to shoppers, who tend to care first and foremost about getting just the right hue.

"The retailers love them," says Mr. Epperson, the analyst. Each quarter, the company brings 50 to 70 store owners and retail sales people to Dallas for two days of training called American Leather University, begun 1999. Participants see how the furniture is built and learn about the company and its products. They also get a day of general retail sales training, valuable for selling any line of products.

"There are so many manufacturers that don't think about partnering as far as marketing education, and they do," says Connie Stevenson, who with her husband Gary owns Elan Contemporary Furnishings in Omaha. The store started carrying American Leather products in the company's early days. Within the past five years, it has become Elan's number one vendor.

For all its operational and marketing savvy, what really distinguishes American Leather is its enthusiastic embrace of continuous improvement. Managers combine enthusiasm with analysis and self-criticism, and they're open to people and ideas, regardless of where they come from. The company's new operations manager, Martin Gibson, used to work for a semiconductor-manufacturing equipment company. Its new industrial designer, Andrew Nelson, used to design bottles.

This openness contrasts sharply with the traditions of the U.S. home furnishing business. Furniture designer Barbara Tiffany remembers a North Carolina furniture maker who actually said to her, "Well, if it was good enough for my daddy, it's good enough for me."

By contrast, Ms. Tiffany remembers the first time she met Mr. Duncan. She and her husband and business partner Robert had just finished a series of demoralizing meetings with executives from major furniture companies at the furniture market in High Point, North Carolina. The couple was 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, and, Ms. Tiffany recalls, "We were treated shamefully, embarrassingly." They only kept their last appointment because they were already in North Carolina with their sample in tow.

They knew as soon as they met Mr. Duncan that the "handsome young man" wasn't from the furniture business--at least not the stodgy, insular one they'd always known. He looked at the sleeper and said, "OK, we'll do it." Ms. Tiffany, expecting yet another rejection, kept talking. Only when he repeated himself did she realize they'd made the sale. "He got it. He got it the minute we showed it to him. He understood the whole thing. He understood the value of it. He's been wonderful to work with," she says.

Renamed and re-engineered for the mass market, the Comfort Sleeper now accounts for nearly 20 percent of American Leather's sales. Last April, the company started a new division, American Upholstery, or AU, largely to sell the sleeper in less-expensive microfiber. The Tiffanys' once-scorned design makes up two-thirds of AU's sales. "It's huge," says Mr. Duncan.