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Just Say No to Unprofitable Business
Accurate Costing, Creative Tactics, Customer Education Counter Low-Ball Prices

By Rick LeBlanc
Date Posted: 8/1/2004

When Jimmy Wilson of Bay Wood Products in Loxley, Ala., got a call from a regular wooden box customer several months ago, he experienced a scenario that is all too common to wood pallet and container companies. The customer had received a dramatically lower price quoted from another supplier.

            The competing pallet and container supplier was located closer to the customer’s plant and was offering prices that were 15% cheaper across the board -- 20% lower on one container in particular.

            “It has plywood panels and Number 2 S4S pine,” Jimmy explained. “Well, you know what that market has done in the last eight months. It’s soaring through the atmosphere.”

            Jimmy had already been keeping his customer informed about the plywood market, explaining that it was in tight supply and priced high. “Make sure that this guy can support you,” Jimmy warned his customer.

            He further suggested that the customer obtain information on the other company’s financial strength and the reliability of its suppliers. Because the box needed to be made with heat-treated lumber, he advised the customer to ask if the other supplier was certified to provide heat-treated pallets and containers.

            Bay Wood lost the account. “These are high dollar boxes, so when you take off 15 percent, it is a big number that gets your attention,” Jimmy observed.

            Downward pricing pressure continues to plague the pallet industry even though costs are headed in the opposite direction. It is a dilemma that pallet companies face on a regular basis, noted Monte Lowe, owner of Preferred Pallets in Cookeville, Tenn.

            “I can take the Pallet Profile Weekly to a customer,” Monte explained, “and say, ‘Look, here is a copy from 2000 and a copy from 2004.’ I can say, ‘Here is the price in 2000, and here is the price in 2004. Now, here is the difference in the price of wood between the two. Now let’s go to your situation. How’s your insurance been affected since the year 2000? How’s your labor been affected since the year 2000? Let’s go down the line. I grant you that you can buy the pallet cheaper somewhere else, but I plan on being in business a little longer than that.’”

            Start-up pallet suppliers are thought to be one of the key factors in price erosion. “A lot of these fellows are in and out of the market before I even know they are there, but I see the results,” Monte said. “That’s the thing. I see the results.”

            “People need to be aware of what their costs are and how costs are affected by volume,” Monte suggested. Newcomers may not include important variable costs, such as labor, depreciation, and others. “It’s just common sense costing. The entry (into the pallet business) is easy, and what I guess is that these people have a tendency to hurt our industry by setting prices well below where they need to be.”

            One area where new entrants make costing errors is in calculating wood waste, according to Jimmy. “The ones I’ve dealt with don’t have enough information, and I think the one thing they tend to underestimate is how much waste they are going to have. New or recycled, you are going to generate a certain amount of waste.”

            There are two price-cost issues related to wood waste, Jimmy noted. First, newcomers do not realize how much waste they are going to generate and have to get rid of. Second, they do not understand how to figure that waste into their costs of doing business and the subsequent price of the pallet.

            Pallet suppliers work with low-grade lumber, Jimmy noted, and some parts of it cannot be used and must be disposed of in some way. “You’re paying for it coming in, and if you don’t figure it into your material costs going out, the next thing you know you’re in the hole.”

            As an affiliate of WNC Pallet & Forest Products Co. Inc., Bay Wood Products uses that company’s well developed approach to product costing. For example, a monthly inventory is taken of all lumber in the yard in order to help control costs. “After inventory there is a 30 minute to an hour exercise each month I go through,” said Jimmy. “We take averages and say, ‘Here’s what our operating cost was, here’s what our lumber cost was, and here is where our price should be.’” Bay Wood tracks its labor and depreciation costs by department and also uses a profit and loss statement.

            While inexperienced costing by start-up pallet companies may be the cause of unsustainably low pricing, another factor is that a newcomer may have minimal overhead compared to larger, more established pallet suppliers, noted Clarence Leising, author of Pallet Head – A Manual for Pallet Recycling.

            For pallet companies operating as legitimate businesses, overhead typically amounts to about 60 cents on a recycled pallet, according to Clarence. “They (newcomers) eliminate that. They don’t have the facilities, the heat, the lights, the phones. You’ve got two people working out of a two-car garage with minimal overhead. They actually include it in with their house bill, so they don’t really have an office cost.”

            Established pallet suppliers attempt to counter lower prices from entrepreneurs with a variety of measures. One tactic is to emphasize the company’s reliability and pallet quality. “You’ve got to sell service,” Clarence said.

            Diversified services and value-added services and products are other approaches used by established pallet companies.

            Monte looks to by-pass the purchasing agent and head right to the back dock. He asks questions, such as ‘What are your needs’ and ‘What can I do to assist you.’ “Actually, I go in and see what they might consider outsourcing,” he said. “ ‘Hey, I can build these crates for you. I can clean up this product for you.’ I try to look at all the things we possibly can do for them.”

            Educating customers is another tactic. “We have (low-ball pricing) that happens from time to time,” Jimmy said. “We try to educate customers so that they ask the right questions.”

            In spite of educating customers to ask the right questions about competitors, though, a big enough price cut -- as in the case of the commercial box customer mentioned above -- can entice a purchasing agent to change suppliers.

            “ ‘I can do it better, cheaper,’ ” Monte paraphrased the low-ball price approach. “What purchasing agent doesn’t love to hear those words?”

            Sometimes, the best solution to competitors who offer low-ball prices is a creative one. Start-up pallet companies usually are starved for cash, noted Clarence. “My method is to buy the pallets from them,” he said, “and do the resale. There are one or two guys working in a garage, and they want to make $600 or $700  a week. Buy them out. They are only going to get $4 for the pallet, and we’re reselling them for $5.15 or $5.20. Give him the $4. If they are going to sell them for that, just buy them from them.”

            Clarence believes that an established pallet company can win over the competitor every time because his biggest problem is cash flow. “I’m going to pay cash on delivery,” he said, “and that’s the sweetest deal around. You have to know the art of the deal.”

            “I’m going to give him the same money he’s getting now, but he doesn’t have to wait 90 days,” Clarence added. “That makes the offer good, and then he’s off your back.”

            When an established pallet business is faced with competitive price pressure, the decision often comes down to matching the other company’s price or walking away from the business.

            Bay Wood relies on a refined costing process to closely analyze its prices for an important account that it wants to keep.

            Faced with stiff price competition, too many companies will back down and cut prices. “When you lower your pricing,” Clarence said, “all you’re doing is keeping your bodies going, and that’s not what we want to do. We want to turn a profit.”

            The biggest problem with regard to pricing is that some people do not know how to say no, said Clarence. “Saying no is the simplest thing,” he observed. “I had the same problem when I first started in sales eight years ago. You want to make the sale so bad that you’ll give the house away. The company wants to keep its employees working so bad that they give the house away. They’ve got to say no.”

            When it comes to taking unprofitable business, Jimmy would rather go fishing than lose money.

            As for the box customer that bolted for the 15% price cut, Bay Wood recently received two price quote requests from the former customer, indicating some apparent dissatisfaction with the low-ball supplier. For this account, common sense seems to have prevailed.

            In summary, the bottom line is indeed the bottom line: pallet suppliers must know their precise costs and be willing to explore creative solutions in the face of detrimental low-ball pricing by start-up competitors.

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