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Reengineering the Furniture Industry in Egypt to Help
Improve its Export Capability: A System Dynamics View
Tarek Al Etr
MBA student, Maastricht School of Management (MSM), Cairo outreach program
hosted by Regional Information Technology Institute (RITI)
Tel: +2 012 316 6200, +2 02 338 0574 Fax: +2 057 334 200
Tamba15@ hotmail.com
Khaled Wahba
Assistant Professor, Systems and Biomedical Engineering Department
Faculty of Engineering, Cairo University
Tel: +2 02 737 6006, Fax: +2 02 739 1380
Khaled.wahba@riti.org
ABSTRACT
The furniture industry around the world is undergoing a period of rapid
globalization. With the rapid globalization of the furniture industry and the
competitive pressures of imports, a nation had to find a way to stay competitive. The
furniture Industry in Egypt experience a lot of weaknesses and constraints that limited
the industry growth and hence its export. Most importantly, are the quality, delivery
delays and others that are rooted fundamentally into the current structure of the
industry.
The objective of the paper is to propose group of policies that might help reengineer
the Egyptian furniture industry. As outcomes of the research, the authors have
suggested two group of policies based on the scale of the furniture manufacturer
using a time framework approach. A system dynamic methodology has been used to
conceptualize the dynamics of the furniture industry in Egypt, and hence propose
macro solutions to the observed problems by the researchers. So, the research follows
a qualitative paradigm that needs quantification in future phases of the research.
Keywords: Fumiture Industry, Developing C ountry, Export, and Reengineering,
Human Resource, Research and Development.
INTRODUCTION
Furniture Industry worldwide
The fumiture industry around the world is undergoing a period of rapid globalization.
It is expected this trend to continue during this decade as larger domestic
manufacturers in highly developed countries continue to import fumiture and
furniture parts in an effort to meet the demand for lower-cost quality products
(Dossenbach, 2002). With the rapid globalization of the furniture industry and the
competitive pressures of imports, a company had to find a way to stay competitive.
Furniture market in the USA
As figure 1 below shows, the trade deficit for the fumiture industry has generally been
growing over the past ten years. Fully a third (34%) of all furniture consumed in the
United States today is imported. China has emerged as the leading low cost producer
of wood products in the world and is taking market share from US and European
manufactures and from other exporting countries around the world. Italy holds firm to
the high-end leather upholstery market as well as to other high styled fumiture.
12000
10000
8000
6000 Bi Imports
Exports
4000
2000
0 :
2000 1998 1996 1994 1992 1990
Figure 1: Us Furniture Trade Balance. (Source: Dossenbach, 2002)
Figure 2 below depicts how the import trend is affecting selected sectors within the
value added wood products industry. Every category shows a trend that indicates a
greater number of US manufacturers, wholesalers, and retailers importing products to
lower their cost through the purchase of finished goods, semi finished goods, or parts.
@ 2000
@ 1998
01996
01994
@ 1992
1990
US$ Million
Product Categories
Figure 2: Major US Furniture & Related Categories. (Dossenbach 2002)
In the furniture industry it is important to remember that quality is not represented by
the amount of work but rather the workmanship employed. So, the customer
satisfaction based on the following criteria:
A quality product that will give no problem.
The products to be priced fairly and represent a value (a reason to buy)
Functionality (not only a piece of art)
Good looking (finish appears perfect)
The furniture Industry in Egypt: Historical background
Egypt has a long history in furniture industry for thousands of years. Manufacturers
had been affected by a multiple of cultures that formulated the industry (catholic,
Islamic, French, and Britain). During the first decades of last century, many foreign
minorities have come to live in Egypt, that attracted some Italian and French furniture
companies to establish the manufacturing projects in Egypt, mainly in Cairo. By
1952, importing furniture to Egypt terminated because of the increased production
and the ammy’s revolution, however the export activities started by the end of the 50s
and during the 60s and mid of 70s targeting the past Soviet Union and the eastem
block. During late 70s, the Egyptian furniture started to show up in the westem
markets. By 80s, Egypt focused on exporting furniture to gulf countries, which
realized an increasing income level and high demand for the fumiture products. On
other side, furniture industry of Egypt gained a serious bad image worldwide in the
90’s, due to different reasons, including quality and delivery delays.
The ministry of trade in Egypt had referred to a decline in GNP of fumiture industry
from 2 billion (93/94) to 1.1 billion Egyptian pounds in 96/97. The united nations
industrial development organization (UNIDO) referred to decreased value added in
the furniture industry from US$ 35,644 in 1985 to US$ 28,156 in 1996, that resulted
in a negative growth rate of value added reached (0.7%).
Dumyat city is considered to be the center of furniture industry in Egypt, it’s
contribution in GNP of fumiture is about 60% (Elmihy, 2002). According to official
statistics (COMDAS), Dumyat city has 25% of the entities working in the field of
fumiture industry.
The Egyptian Furniture Industry Analysis
A sort of analysis for the fumiture industry in Egypt has been done based on an
analytical tool like the SWOT Analysis (dossenbach)
Strengths
¢ There is a large cluster of many workshops in Dumyat that have the basic skills
needed to manufacture hand carvings fumiture
¢ There is abundance of highly skilled carvers and those who can produce inlay and
marquetty.
¢ Level of workers wages is intemationally competitive.
¢ In Dumyat workers are quick to acquire skills of the woodworking business
¢ The know how in producing French reproduction furniture.
Weaknesses
* There is a denial by many stakeholders that there are any problems or constrains.
¢ The fwmiture Industry is very fragmented
¢ There is a resistance to change by many that feel they know best and want to do
things the way their grandfathers did.
¢ The raw materials and supplies used by the industry are inferior compared with
standards.
¢ The productivity levels of both the plants and the labor are far below the
benchmarks in developing countries.
¢ There is neither production scheduling nor control to guarantee on time deliveries
to all customers and many promises are broken.
* There is a lack of attention to the human resources management mainly to
motivate the labor and improve their living conditions.
¢ The management training and skills to run an exporting company are not widely
found (one man show style) (centralized authority) (no managerial positions in the
companies hierarchy) (no marketing managers, production managers, purchases
managers.
* Most of the equipment and methods used for manufacturing fumiture in Dumyat
are old and outdated and incapable of producing a consistently high quality
product in a time limit.
Import tariffs and taxes on raw materials.
Opportunities
* Most of the global manufactures in the industrialized countries are performing
cost effective production through reorganization of its supply chains.
* Countries around the world are struggling to provide their population with ever-
increasing standard of living. So, Egyptian companies can fulfill the requirements
of import customers if they are committed to do what is necessary. The worldwide
indicators are pointing out that in the USA market around 34% of all fumiture are
imported mainly from Canada, China and Italy. So, Egypt has the opportunities to
position itself with the top imports to USA.
¢ There are promising indicators for semi-finished classic handmade fumiture
worldwide.
Threats
* One of the critical threats that Egypt is obviously facing is the GATT agreement
application in 2005. On its application, the 40% taxes on imported fumiture will
be eliminated which will affect negatively the local sales of fumiture.
* The very aggressive global competition in particular, from the very active China
in this field (Dossenbach 2002).
¢ Dossenbach has also indicated in his study that, the very small amount of exports
that have been shipped from Egypt during the past four years were lacking in
quality and customer support from the factory to the degree that repeat business
(orders) is all but non - existent. (Due to dissatisfied customers).
PROBLEM STATEMENT
In year 1991 the export volume of furniture products reached US$ 47 million, while
in year 1998 the figure fall to about US$ 14 million. The fumiture industry in
DUMYAT faces many challenges in order to become a successful exporter. It has
been observed that the current structure of fumiture industry in Egypt is the main
burden for export growth rate.
OBJECTIVE OF THE PAPER
The objective of the paper is to propose a fully new structure for the furniture industry
in Egypt based on the framework of the reengineering process using the system
dynamics approach to create policy decisions that could help Egypt on the long term
to foster its export capabilities.
SYSTEM DYNAMIC MODEL FOR THE FURNITURE
INDUSTRY IN EGYPT
A comprehensive system dynamic model for the furniture industry in Egypt has been
developed. The model includes the main pillars for the industry based on the value
chain approach. Using the value chain model, the authors were able to pinpoint the
potential problems and hence the location, where the value-added can be realized.
Primary activities
Inbound logistics (supply chain for the raw material)
Operations management (production schedules)
Support activities
Marketing strategies
Human resources management
Research and development
Casual loop that reflects the interaction among the critical factors/variables for each
activity is shown in figure 3 and a larger scale in Appendix A.
Figure 3:The causal loop of the furniture industry in Egypt (medium & large scale )
The causal loop shows 6 major loops, (4 positive reinforcing, and 2 negative
balancing). Those loops will describe the origin of the industry problems and its
proposed solutions.
Looking close to the furniture industry in Egypt (in particular Dumyat City), the
researchers are pointing out and based on the above causal loop, that the main reasons
for the problem under study lies under the fact that most of the industry is small
family businesses, inherited through many generations. The owner himself or one of
his sons usually performs managerial practices without educational background.
However, most of them neither have the capabilities to manage or the talent to run the
business in efficient manner. The majority of those depend heavily on gained and
inherited life experience which could find some success in the past, but according to
the dynamic changes in the global aspects of trade and competition, that will be a very
old fashion.
SYSTEM DYNAMIC MODEL AND PROPOSED POLICIES
Based on the above analysis and supported by the studies performed by Doessenbach,
2002 and Elmehy 2002, a reengineering process is proposed through applying some
policies suggested below that can be based on the size of the existing manufacturers.
The policies have been sub-divided into two groups. The first group was designed for
the medium and large-scale manufacturers, that already exporting based on enhancing
the managerial hierarchy of the manufacturing units. The second group designed in
specific for the small-scaled workshops, a 4 phase Reengineering process policy.
The main problems facing medium scale manufacturing while proceeding some
export activities are Delivery delay, low quality, and low productivity.
The proposed policies are illustrated in each loop in a colored box and its dynamic
effects shows how each policy can help dealing with the industry problems, while at
the end of this part, the proposed policies are listed in details according to a time
horizon.
The reinforcing positive feedback loops include the following:
Loop R1: Capacity Maximization
That loop figures the reasons of delivery delay problem. In case of increased order
tate this will develop a backlog, which will increase the desired production.
Obviously this will place a continuous pressure on the production schedule and then
the labors will work overtime which later on decreases the labor energy and hence
productivity rate will fall to reinforce the problem of delivery delay. Figure 4; explain
the dynamics of the R1 loop.
4a bhipment rats
delivery ai
z productivity rate
: sana ‘\ sin
force
4. backlog energy level|
+
aera al ye iff
omental eA schedule
esi ressure
production ba Hi labor
motivation
sar
Figure 4: R1capacity maximization loop
In short run, a financial packages is to be offered to labor in order to esteem their
efforts and fuel the energy level during over times and pressured schedules.
Some marketing efforts should be done to stimulate orders that generate revenues. In
the long run, a complete human resource program should be applied to take care of
developing social life of labor, which will affect positively the productivity.
Loop R2: Wasting Time
This loop describes how the exhausting labors could negatively affect the quality and
the productivity rate by increasing the defect rate. Figure 4 illustrates the reinforcin g
R2 loop.
productivity| quality
energy level
‘wages premium
2 and benefits
f +
Schedule labor: ea
pressure motivation
”
Figure 5: R2 wasting time loop
In short term, a simple form of production management techniques could be applied
to control the quality and find out defected parts in early stages so the rework process
is easier.
Also financial compensation can play its main role in motivating labor.
Loop R3; Motivation Machine
This loop focuses on how labor motivation could be a success factor in the industry
through leverage the labor energy level, which could contribute in solving the
delivery delay and quality problems. Doing so, more revenues and profits can be
generated to compensate profit/wage premium distributed on the long-term.
revenues
at a
shipment raté =
profits
e \ +
__ wages premium
productivity and benefits
+
oe
labor
tivati
energy level su ee
- “— Ea
=p
Figure 6: R3 motivation machine loop
This loop is the corner stone in solving the main problem of the furniture industry
since that industry is a traditional one based on labor and hand made production
techniques.
Loop R4: Investment Efficienc
This loop shows how important, investing in capital assets/machines will decreasing
the time needed to produce one unit, which in tum increases the productivity rate and
reduce cost per unit.
shipment rat revenues
bie
:
profits
productivity|
Capital +
7 efficiency +
- investment
rate.
time per unit} yo
- [depreciation]
S|, Bee
assests.
rate
Figure 7: R4 investment efficiency
In the medium term, a portion of the revenues could be invested in purchasing capital
assets and machinery, these assets participate in leveraging the productivity by saving
time devoted for each piece.
The Balancing negative feedback loops
B1: Industry Image
To build the industry image, it is obvious that customer satisfaction plays a very
critical role. So, theloop shows how to manage the variables/factors that affect the
customer satisfaction (quality, delivery delay, prices and product features).
product
features
ra
customer
satisfaction
raw maternal,
+ + - price cost
delivery delay +b
real 7
NN cost per unit|
backlog
Figure 8: B1 furniture industry image loop
In the medium term, supply chain management could decrease the cost per unit
through large volume purchases of raw material
In the long mun, research and development is a must to innovate new designs and add
more features and improve quality to increase customer satisfaction.
B2: Career Path
This lo op illustrates a medium-term policy with delay, to expand production capacity
by hiring skilled labor. Generation of professional staff capable of handling training
and education courses will increase the pool of skilled labor. This loop also acts as an
attractive factor to the industry.
shipment rat¢
Figure 9: B2 career pat
+
jassimilation ratq
2
backlog + skilled labo:
__—— force
retirment rate
professional
staff tnskilled +
4 labor _|——s pool of +
rs skilled labor}
a
training & —
& technical courses hiring rate
desired +
production
In the long tem, training courses might be held to generate skilled labor to be
involved in the production process in the future. This policy will help to eliminate the
shortage problem of skilled labor and give chance for further and further of capacity
expansion.
Proposed Policies in Details for Large and Medium Size Manufacturers
Short-Term Policies
Production management techniques
The researchers do suggest introducing the world-class production management
techniques that will help to solve the backlog problem, delivery delay, and the
increased defect rate, through job design and production. This will decrease time per
unit and cost, which generate more profit to finance the medium and long term plans.
Financial Package/Compensation
In this study it is recommended to apply incentive methods to motivate labors. This
will leverage energy level and productivity rate as well to meet the requested orders
and overcome backlog problem. This policy will help a fumiture company; on the
short run, to produce efficiently and within time constraints on the conditions of the
commitment, skill, and quality of its labor force. Labor whose compensation is tied to
profit sharing or the company stock often work harder and longer than those on
straight salaries.
It would be then obvious, that the more profitable the company, the higher the wages
and benefits it can pay, the greater the career opportunities and job security for the
labor.
Another way to motivate the labors is the goal setting that causes labor to compare
their present performance with that required achieving the goal. In contrary, labors
with undefined goals are prone to work slowly, perform poorly, and exhibit a lack of
interest.
Marketing strategies
On the level of marketing strategies the authors are suggesting the following policies
as a part of the short-term policy:
¢ Investing a huge figure in promoting unfinished hand made furniture to specific
potential countries (ITALY, USA).
¢ Participate in the intemational exhibitions for furniture
¢ Establish sales offices to support customers and maintain a feedback
information system for customer requirements and complains.
¢ That will stimulate the order rate, which generate more revenues and increase
the growth rate of exports.
Although the short-term policies will solve the problems (actually its symptoms), it
would have been of importance to design the policy in the medium as well as the long
term that the long-term solution is the main and major concem of the Egyptian
government and the private sector.
Medium-Term Policies
Supply chain management efficiency
So, the researchers suggesting introduce the supply chain management concept that
will help control the purchasing process of raw material in terms of quality and cost.
Investment rate
The study has pointed out that the current technological status is poor, so increase the
capital assets by acquiring new machinery to maintain standard quality and reducing
time per unit to increase productivity and overcome any possible delivery delay as
order rate increases. One of the very important and critical factors that affect this
industry is the painting process, so acquiring painting machinery to modemize the
whole production process will add value to exported fumiture.
Long-Term Policies
Human resources management
It’s one of the key issues of concern since the furniture industry in Egypt is labor
intensive and the skilled labor is the only competitive advantage the industry owes in
the hand made fumiture category. HR management could help developing both the
work and living conditions of labor, which increase labor commitment and loyalty
and motivate labor.
Research and development
To maintain the expected market share in the forthcoming, the Research and
Development activities should be realized. This should include technology transfer,
use the state of the art manufacturing facilities, and teach management and
supervisory skills. To establish design centers, that encourage inventing new design
and features and to enhance the quality.
Training and education program
In order to build a pool of skilled labor and protect the traditional industry to vanish
over time, training courses should be organized and supervised by the assimilated
professional staff.
The problem for the small-scale manufacturer stem from the fragmented structure and
inability to handle any export activities
As mentioned above, one of the weaknesses in the fumiture industry in Egypt that it is
fragmented (see figure 10), so the main methodology of the reengineering process is
to group hundreds of small workshops under the umbrella of small number of large
scale manufacturing plants.
100% 4
90% +
80% 7
70% +
60% 4
% 50%4
40% J
30% 7
20% 7
10% 4 7”
4 |
os " B Industry in Egypt
S A So
= x g é OF urniture Industry in
& ££ § $F Egypt
& g OF urniture Industry in
Dumyat
Figure 10: Industry Segmentation. (Elmihy 2002)
The proposed policy is a 4 phase Reengineering process, suggested as follows:
1 phase: Form Modern Manufacturing Plants for Different Product Categories
The researchers believe the reengineering process is to start as every 20 to 30 small
workshops form a manufacturing plant. Every group of workshops will participate by
a percentage according to his financial ability in the initial investment costs. Each
plant is specializing in one specific product category to achieve the economies of
scale principles .g. a plant for cabinets, one for tables, other for chairs and so on).
Each plant equipped with new machinery; such as lumber drying, lumber and
plywood cutting, and finishing.
That would enable small independent workshops to produce fumiture using such
modem technology. These workshops would share equipment to reduce the capital
requirements.
Workshops in each plant will earn revenue according to their output every month, and
plant profits is distributed on workshops every 6 months according to the share in the
initial investment and bonuses is given to workshops of higher production rates.
The researchers suggest the production of that phase to be directed to the local market
as an experimental period.
Phase 2: Build an Export and Marketing department
Each plant has to build a department that handle the sales and marketing of the
products of that plant world wide, and promoting exports in all intemational furniture
exhibition and even rent showrooms in some countries. Export sales will generate
revenues to cover the 3% phase.
Phase 3: Create Technical department
Each plant should form a technical and production department to manage the
operations in the manufacturing plant, transfer the latest design, and support
engineering aids,. Also it would carry out research and development, use the state of
the art manufacturing facilities, supply chain and inventory management, and run a
world-class furniture manufacturing operations.
Phase 4: Create Human Resources Management Department
The main objective of this department is to develop the living conditions and work
conditions of the workers in each plant, and deliver social services. Also it can handle
medical insurance system to workers, entertainment programs, retirement procedures,
assimilation standards, compensation package, retention, reward system, banking time
off system.
Also this department would provide training and technical courses to the workers in
the plant as well as to the workers outside the industry in order to build a pool of
skilled workers.
CONCLUSION
The furniture industry in Dumyat and in Egypt faces many challenges in order to be
successful exporter, however the stakeholders have an opportunity to meet all these
challenges. Dumyat has the resources to become a global player, the authors believe
that Egypt could be so if all stakeholders collaborate more and support the proposed
policies to make them real.
Short-term, to Long-term policies have been proposed using the System Dynamics
Approach for the medium- as well as for the large-sized manufacturers. On the other
side, the 4 phase proposed reengineering policy for the small workshops will enlarge
their scale by the grouping shape and then the same policies if needed could be
applied.
REFERENCES
Byras, Lloyd L. and Rue, Leslie W. 2000. Human Resource Management. 6” ed.
Irwin McGraw-Hill.
Hellriegel, D. S., John W. and Woodman, R., 1998. Organizational Behavior. gh
edition. South Westem College Publishing.
Forrester. Jay W. 1990. Principles of systems, Pegasus.
Sterman, J. D. 2000. Business dynamics - Systems, Thinking and modeling fora
complex world. Irwin McGraw-Hill.
POLITEC, Sep2001 PSDP Cairo, Euro -Mediterranean partnership, market
investigation and inward buyers program (Italy)
Elmihy, T. , “furiture industry sector in Dumyat, an overview, workshop, role
of community level services in supporting export opportunities to fumiture industry
sector in Dumyat, public administration and research & consultation center” (in
Arabic)
Dossenbach, T.F., Jan 2002, “paper: The Dumyat furniture manufacturing sector,
Global competitiveness: constrains, potential, and opportunities,”
APPENDIX A
The Causal Loop of the Furniture Industry in Egypt
(Medium and large scale manufacturing plants)
expected order rate
retirement rate” i te + igen R +
unskilled labor wasted tine f Tige 4,
; o™S @) defect rate AE nF arias a
end deprecation rate
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