Start planning for 2023
Planning can be tricky in a volatile economy. It’s hard to predict what’s going to happen in 2023, but there are a few clues. One of those is the Census Bureau’s tracking of building permits. For the first six months of 2022, single family home permits fell 4.4 percent – but permits for buildings with five or more apartments were up by a whopping 17.1 percent! Those numbers suggest that the market is reacting predictably to Fed-induced hikes in interest rates, along with decreased personal spending power caused by inflation. The trend seems to be away from owning a home, and toward renting.
Where people live can have a profound effect on the cabinet and furniture industry. Rental units typically aren’t outfitted to the same standards as privately owned homes, but there are more of them. So, we may be looking at cabinet demand in 2023 that includes slightly lower quality and somewhat higher quantity.
The higher interest rates behind the housing shift may slow inflation in the long term, but their short-term effect is to make production more costly. Fortunately, customers are emotionally prepared to pay a little more for cabinets when they see other prices around them rising.
As woodworking on the shop floor becomes more automated and less about craft than technology, our offices are going through the same process. Even small shops are looking seriously at ERP (enterprise resource planning) as a management tool, and maybe 2023 is a good time to implement this quantum leap in data collection and use. ERP is basically a way to share information between accounting, sales, purchasing, personnel, and production. It lets a shop owner or manager make much more informed decisions. For example, when a job is being bid, an ERP program might let the boss know whether there’s enough MDF, coatings, or hardware in stock, and the lead time for ordering more. It can reveal the current shelf life of finishing materials and adhesives, or the average waste in nesting. ERP can help the shop schedule around vacations, projects, deadlines, planned maintenance, training and a host of other factors. It can help manage energy use, dust collection, work vehicles, tool locations, and tardiness or absenteeism. An ERP module may be able to track machine performance and upkeep or cooperate with programs that are offered by the machines’ manufacturers. ERP is powerful technology that can tell shop owners just about anything they need to know to make intelligent management decisions.
Another piece of software that may be worth purchasing or updating for 2023 is CRM (customer relationship management), which is often included in an ERP package. This is basically a database that tracks each customer or potential client, and records absolutely everything to do with their account. For example, it will save notes about phone calls, sales visits, past orders, special needs, or new products that specific customers might be open to buying. Depending on how it’s set up, CRM can also flash a red light when there’s a possibility of losing a customer. Some CRM programs can be used to tie into strategized local marketing on social media or other online resources, and even the most basic package will remind salespeople when to make routine sales calls. CRM can also support continuity if a salesperson finds another job or retires because the customer data they collected will be comprehensive, current, and ready for their replacement to use.
There’s another acronym that will affect software planning in 2023 and perhaps more so in subsequent years. SaaS stands for “Software as a Service”, and it basically means that publishers have discovered that renting an access license is a lot more profitable than selling a program. Licensing means that software can be accessed from anywhere on any device, and automatic updates mean everyone in the company is using the latest version. But operating online only, and storing on a cloud, does make data more vulnerable than having everything on a LAN. Plus, those monthly fees can add up to several times the cost of just buying the program.
A volatile economy can be very Darwinian – only the fittest survive. One significant indicator of volatility is gross national product, or GDP. It’s a number that adds up the value of everything that is made in an economy (goods and services). During what came to be called the Great Recession of 2008, GDP shrank by -2.6 percent. In 2009 it rebounded to +2.7 percent growth, and it stayed at about that level until another slide began in 2018. By the end of 2020, America’s gross national product had shrunk by 6.3 percent to an abysmal growth rate of -3.4 percent. In 2021 it soared again to +5.7 percent, or a gain of 9.1 percent. And then in the first two quarters of 2021, it shrank by -2.5 percent. That’s a lot of volatility. The non-partisan Congressional Budget Office (CBO) has predicted a +3.1 percent growth for this year, but it hasn’t hazarded a guess yet for 2023.
One of the most surprising aspects of the current roller-coaster economy is that the federal budget deficit is decreasing. The CBO projects that the deficit will shrink to $1 trillion in 2022 (it was $2.8 trillion last year) and decrease from 12.4 percent of GDP in 2021 to 3.9 percent this year, and to 3.7 percent in 2023. While all that sounds very encouraging, there are a lot of big ‘ifs”, chief among which is the assumption that the Fed raising interest rates will slow down the economy without stalling it. The CBO also says that if nothing changes, the deficit will eventually start growing again.
What does all that mean to a woodshop owner? Well, the only ways to react to fluctuating demand are to outsource or automate. Rising interest rates are making it a little more difficult to do the latter. If a shop is thinking about borrowing to invest in new CNC machining centers and robotics, sooner might be better. Why? Because at the beginning of August, the Bank of England was predicting 13 percent inflation and a long recession across the Atlantic. In North America, the Federal Reserve in New York has suggested that rates for mortgages will climb to 6.7 percent by the end of this year, and plateau just above 8 percent by 2025. Commercial lending rates usually follow suit.
One way to take some of the bite out of loan rates might be to lease equipment, but it’s not a blanket solution. Leasing can be a little more expensive month-to-month, but there are two big advantages. First, there’s no huge downpayment. Second, most equipment leases have a built-in mechanism for updating the machinery during the lease, while purchasing may mean the shop needs to sell a machine before being able to buy a new one.
Shops that already own digital fabrication equipment may wish to check with its manufacturer about upgrades before looking for a commercial loan or a lease to replace it. If the machine body is sound, the controller, spindle, vac system, dust collection, auto loading/unloading, tool-changing and table size might be options for updates. Such improvements can be prioritized and phased in over time to help with the budget.
Another option is to buy used. This rocky economy sometimes causes well-equipped shops to close, and many of its machines are ready to go to work right away or can be refurbished and sold. Some machine manufacturers also stock used machinery from trade-ins.
Data breaching is an issue now for even small businesses that use cloud-based or online accounting. A hacker who accesses a woodshop’s records can gain access to customer data such as debit or credit card information, social security or business tax numbers, phone numbers and other sensitive items including dates of birth or even passwords. There is insurance that can help cover costs associated with informing customers of a breach, and possibly help with legal costs.
Shop owners may also want to explore the possibility of having new customers complete a liability waiver for potential cyber losses. Breaches can happen through infected websites that the shop employees visit, or through phishing emails.
Ransomware, where hackers demand a ransom to release a company’s computer system that they have seized and locked, was prevalent in large corporations but is becoming much more common in smaller businesses. Indications are that this trend will grow in 2023. There is insurance for it, but some policies specifically exclude cyber coverage. The insurance company then sells a separate policy to address those specific risks, so check with your agent. While you’re on the phone, ask about whether an umbrella policy would be a good idea for your specific woodshop.
The shift in housing from single family to multi-unit buildings suggests there may be a need to explore or expand outsourcing next year. That’s because the only ways to increase production in this economy are to add more automation, or to buy in custom components. Adding labor to the shop floor doesn’t seem very doable right now. Even if higher interest rates and inflation start causing layoffs, any newly available help won’t be appropriately skilled, and will need to be trained. That’s expensive, and it takes time.
The global supply chain bottlenecks seem to be abating, and that should help reign in some inflation and make parts and materials more accessible. But if tensions in Taiwan escalate, shipping could get bumpy again as so much of what we use comes from that region.
The Census Bureau (census.gov) publishes a monthly report on the demand for durable goods, and that’s something woodshop buyers might want to check periodically through 2023. It’s a good indication of how demand for large items such as kitchen appliances is trending.
Shops that are using a Just-In-Time (JIT) lean manufacturing system have learned a lot about lead times over the past two or three years. Some have developed a hybrid approach now that includes a reasonable inventory of sensitive items that are critical for production but sometimes hard to source.
Even buying drawer slides can be tricky in a volatile economy,
This article was originally published in the October 2022 issue.