The problems of production

By William Baugh William E. Baugh & Associates

cate that 1985 will be no better in housing starts than 1984. Since 1946 our industry has assumed that we were in an automatic growth escalator, bringing us a selfdeceiving cycle of continuous market expansion and undetected erosion of historical markets.

There are three conditions which usually guarantee this cycle:

(1) The belief that growth is assured by our expanding and more affluent population.

(2) The belief that there are no substitutes for the industry's major product.

(3) Too much faith in mass production and in the advantages of rapidly declining costs as output rises.

The enticements of full mass production have been so powerful that for many years top management has told their sales departments, "You get rid of it, we'll worry about profits."

In such an environment wood products dealers and wholesalers no longer have an incentive to stock unneeded inventory or to establish long term commitments as price volatility due to over production has created risk far beyond reward.

As a result, wood products inventorying at the point of use, which in the past helped stabilize markets, has been reduced to levels of immediate use, creating short cycles of pricing "boom or bust."

Next year will probably generate 1,450,000 starts with a lower mix of single family units, thereby consum-

Story at a Glance

Gontinuous market expansion cycle deceivang. . .over Produc. tion has meant lowered incen. tive for inventory, commitments...increased home improvement activity...management ingenuity essential.

ing less material in total. Some mills will continue to be preoccupied with lowering unit cost by over-producing, causing periods of price weakness. Position taking by buyers will be done on a basis of reducing risk by reducing acquisition cost, which starts the marketing chaos all over again and causes the deterioration of inventory values.

When this problem is linked to high borrowing costs, it becomes evident that running your business will require even more concentration on management of assets such as inventory and receivables and an effort to understand asset turnovers as a means to offset profitability problems due to low margins.

The home improvement market will continue to grow, thus offsetting some of the slackening demand in the new housing sector. The inclination is growing for homeowners to remodel or improve their present housing rather than "trade up" into new housing, except in areas of rapid population shifts.

It is anticipated that the demand for business and consumer loans will have to compete with federal deficit financing needs thus causing interest rates to rise in 1985.

The general outlook for the first half of 1985 is not one of optimism. Dealers will not have any great desire

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