Surviving and Thriving During a Recession
Surviving a Recession: Dr. Brindley supplies ideas for surviving and even thriving in today’s economic environment; several industry people contributed ideas to bring industry suggestions to this perspective.
By Ed Brindley
Date Posted: 7/1/2008
One of the most common themes in discussions with pallet people has been how to deal with the slowing economy. While recessions are not boom times, they can present opportunities and should be taken in stride.
Some of the greatest American companies got their start or experienced a major reorientation during a time of economic peril. This includes United Parcel Service, General Motors, Microsoft and Hewlett-Packard. Downturns can lead to a bright future if a company makes the right moves and sticks to a well-thought-out business plan.
All companies share some fundamental needs and operate according to certain fundamental laws of economics. This article covers some insights from leading pallet companies as well as general business experts on how to weather the tough times ahead and to come out the other end a better company.
Recessions Are Nothing New
It might seem trite to remind my friends that we have been here before because anyone who has been around for a while knows this to be true. Remember the recession of the early 1980s? It was the worst recession our country has experienced since the depression of the 1930s. Pallet production had been on a steady annual rise of about 7-8% since the industry started around WWII. Then in the early 1980s, it dropped off the edge of the table when it nosedived around 25%.
The pallet industry struggled through a period of inflation and rising gasoline prices. Then, the industry rebounded to continue its solid growth through the 1980s.
Many of the things that helped good pallet suppliers survive those days are equally true today. Some of the operational details may be different, but the basic principles are similar. The biggest difference between companies that survive and even thrive and those that don’t is their long range business plan and its execution.
Smart companies have to figure out how to provide service to customers and how to efficiently manufacture products that their customers need. Much of this requires planning, knowing your costs, adjusting successfully to customer changes, and knowing when to take business at cheaper prices.
The more professional your company’s products and services are, the better position you are in to survive any slowdown.
Tom Abbruzzese of AB’s Pallet in Hopedale, Mass. shared some ideas on adjusting to the current market problems. Tom said, “Be proactive in meeting and working with your accounts. Surviving in a recession is no secret. Most pallet people have been through it before. You need to work with accounts to get to know them so that you can have professional conversations. Reasonable requests and needs are more likely to be accepted by both sides if a good relationship has been built.”
One thing you shouldn’t do is cut down on your direct contact with your customer. How do you know if your customer is happy unless you are regularly in contact with the key decision makers? Now is the time to increase your person-to-person contact. Your sales staff should be working the phones and doing whatever is necessary to build the relationship with major clients.
Living through slow times is primarily a function of how you dealt with customers during the good times. Building high quality pallets and containers, supplying good delivery and pickup services, having efficient manufacturing practices to keep costs low, and treating customers professionally – these are the kinds of things that a pallet company needs to develop during normal business times.
You might be wondering what could be good about a downturn. There are some benefits that you can exploit. Downturns are actually a great time to sign up new accounts. Doors that previously were closed could open as companies look for ways to save money. Low cost or efficient producers are likely to see opportunities where others are concerned about survival.
Companies may be more willing to barter or enter into alliances in bad times that they wouldn’t have otherwise considered. Look for deals from auctions as some underperforming operations go out of business. Now may be the time to buy a new piece of equipment you need due to generous tax breaks included in the recent economic stimulus bill passed by Congress. Check with your accountant to see if the numbers work out in your favor.
Expanding During a Recession
During the serious recession of the early 80s, Potomac Supply Corp., one of the leading sawmills and pallet companies in the country, went through a major expansion. They were taking advantage of the lull period to improve efficiencies and get ready to make money when the market turned.
At the recent Richmond EXPO, Bill Hendrix of Brewco, a company that manufactures saws for the sawmill and pallet industries stated, “During a slow time we see some industry leaders expand their physical plants so they can take advantage of the markets when conditions turn.” During a slow period it is not unusual for established machinery companies to handle some major projects for industry leaders. They have more flexibility to work with customers during slow periods as well.
Several people at the Richmond Show commented that the John Rock name appeared frequently around the show grounds. So, I called John Rock and talked with Penn Cooper who handles its purchasing. Penn said, “When you spend on the right equipment, you can be more competitive and reduce costs in a difficult environment.”
John Rock has a philosophy of constantly improving and upgrading. It typically sells nailing machines sometime after they hit about four years in service. Penn added, “To constantly upgrade production efficiency, you need the best equipment you can get.”
Many people say you need to pull in your horns when things are slow. Certainly if you interpret this as meaning to not spend money loosely, I totally agree. If you interpret it as meaning to put your plans to progress on moth balls, I suggest that you reconsider your options. You might be missing a real opportunity. Apparently quite a few pallet people agree with this statement because most pallet machinery exhibitors at the recent Richmond EXPO shared with me that they had a good show. The pallet industry is still interested in buying the right machinery and pushing ahead into the future; however it does require some temperance in attitude.
Tom said, “When times are good, people want to lend you money. Borrow money when times are good for lower interest rates and better terms. When things are good, refinance if you can get it back fast enough. Put aside some money during the good times and you will be able to ride through rough periods. Also pay down debt when possible during better cash flow times.”
Diversify Product Lines
One way of standing out as a supplier and increasing both business and profit is to offer better or different products. While it is true that differentiating yourself in the pallet supplier arena is more difficult than it may be in many industries, it can still be done.
Many pallet companies are setup to produce odd sized pallets, containers, or pallets that utilize unique designs. This kind of product may require more emphasis on marketing and extra hand-holding, but it may be more profitable and survive a slow economy better. If you are going to focus on high volume markets, whether manufacturing or recycling pallets, you need to focus heavily on production efficiency.
You have heard it said that there is nothing new under the sun. While there is some truth here, it also camouflages opportunities. One of the ways that pallet people have injected profitable opportunities into their business mix over the years is to provide a special service to customers. Over the last few years, heat treating pallets has been the most common add-on service. First movers experienced the highest benefit. It now appears that the market has stabilized somewhat with prices dropping for this service in many markets. This trend is likely to continue, especially if heat treatment becomes required for domestic transit.
The possibility of manufacturing Europallets has surfaced over the last year. The EPAL leadership reported a heavy interest level at the recent Richmond Expo; they indicate that several major U.S. pallet manufacturers are working to become the first registered Europallet manufacturer in the U.S. Many Europallets are shipped out of the U.S. even though a dependable supply of new Europallets has not been available. Some people believe that the demand for Europallets is out there as an opportunity. A major point to be made is that we are increasingly becoming involved in a global market.
Transportation and reverse logistics function now look like some of the greatest opportunities to differentiate your company. This includes retrieval, recovery and disposal of things beyond just the typical wooden pallet.
Is there a way to increase your customer base in the mainstream pallet market during a recession? The answer to this question is always yes if you work hard enough on developing new customers at competitive prices, maybe highly competitive prices. A good friend once shared an idea that might be worth considering. If you go after a high volume account, your pencil is going to have to be sharp. In addition, you might be putting a target on your back by encouraging others to come aggressively after your major accounts.
But you might be able to increase your business profitably in smaller steps by going after major accounts but only looking for a portion of their demand. Picking up several loads a month spread over multiple customers may help you get more business and do so without drawing unnecessary attention to your presence. Every large pallet using company might find it valuable to have more than one supplier.
You don’t have to ask a pallet supplier twice if he is familiar with the problems associated with raising prices, or sometimes even maintaining prices. When you have an opportunity to quote, do you quote high enough to cover higher fuel, nail, and lumber costs?
Tom suggested, “If you are asked to quote and your business is in jeopardy, you might bid a break-even price to stay in business until the economy turns around. You may have to do this if you do not feel there is another choice that will give you the business and your cash flow is anxious for the dollars.”
Knowing when to raise prices to recover higher costs and when not to, or when to hold it and when to fold it, is a function of many factors. The most important thing is to have good customer relationships and trust. If your customers know you have a track record of being fair and dependable, they are more likely to listen and understand. Keep in mind that they have businesses to run as well and sometimes their options are limited. They may want to listen, so give them every reason to do so.
Some customers will immediately throw out the low and high bids because they are concerned whether or not unusually low bids are capable of delivering. In unstable conditions, a buyer should be suspicious of guaranteed long-term prices. How can a supplier guarantee prices and also guarantee he can follow through?
Distinguish yourself and convince customers of your worth. This is the challenge of any business in any industry. Tom had some suggestions, “Recyclers can distinguish themselves with better equipment to serve their customers. Man your phones with a pleasant live person who speaks good English. Take your major accounts out to lunch; look and act professionally. We have used power point presentations with customers to show them the equipment investments we have made to benefit both efficiency and quality.”
Tom continued, “One way of improving cash flow is to accept credit cards; probably 80% of my accounts pay with credit cards. This way you are not chasing an account for 60 to 90 days. They probably took a discount in spite of the fact that they did not qualify for one.”
Poor cash flow is one of the common things that can sink an otherwise successful pallet company. You have to plan for the times when customers might be slow in paying or when you may get stuck with accounts that you cannot collect. Keeping a good tab on your ledger is a must. One tip to consider is to offer a discount to some customers who pay up front. They save money while you get quick cash. You wouldn’t want to do this with every customer or else you face significantly eroding your margins. But a few good customers might be just the trick to start the cash pouring in your door.
Solidify your relationship with your banker and other sources of funding. This should be toward the top of your to-do list. You want to know that you have the money available just in case you need it to stay afloat.
Pass Through Higher Costs
Every business knows that it has to make money with its services and products. This requires knowing enough about your costs so that you know what you need to charge. Take an objective look at all of your costs. Most pallet companies have at least an idea of what the major costs are, but many do not thoroughly understand the smaller expenses that can add up over time. Establish a program to track costs, including every expense on your ledger. This is a good idea in any market, but established costing facts can be particularly valuable when adjusting to a changing environment.
Tom stated, “People who have been around for a long time typically have their costs down to the penny. Younger companies have an idea of what their costs are but may not have enough experience to know what some of their costs really are.”
Sam McAdow of Buckeye Diamond Logistics said, “In a commodity industry the key is to be a low cost producer. In a slow economy, one has to practice cost containment. It is often better to keep the business from a cash flow point of view even though your accountant may say that you are technically losing money at that time. Keeping business until economic conditions improve can be a key element during a slow economy.”
Aside from knowing your costs and establishing trust relationships with your customers, you need trustworthy information about what is going on in the industry. If you are experiencing higher lumber costs, how do you justify that to your customers? Convincing them that you cannot continue to absorb higher lumber costs may not be easy.
Most pallet users know very little about lumber markets, and what they think they know typically relates to the higher-grade lumber markets, not the lower-grade pallet lumber markets. Our Pallet Profile Weekly and Recycle Record reports provide information that directly relates to our industry. They have proven useful over the years when pallet companies need an impartial source to present the truth about the pallet industry and its lumber sources. Our staff is also working on a number of special reports that will be available later this summer including a human resources study and a nail report.
In case you have not been keeping up lately, it looks as if low-grade pallet hardwood prices might move higher this summer. Yes, on top of higher nail costs, higher fuel costs, and gradually increasing overhead, higher hardwood lumber prices might be right around the corner. Over the years, many pallet manufacturers have acknowledged that the surest way to be successful when trying to increase pallet prices is in a rising lumber market. Higher lumber prices have an industry-wide impact, which means that all surviving pallet companies have to eventually start quoting higher prices.
The key point is that when a pallet customer talks with potential new suppliers and hears that they too are raising prices, they are more likely to stay with their current suppliers and accept their higher prices. Many pallet companies use a fuel surcharge to help offset higher fuel costs. Your customers are probably shipping out 25 to 30 trucks for every truck of pallets you ship them. They are acutely aware of risings fuel prices; there is probably nothing out there they will understand any better than raising prices enough to cover fuel increases. One problem with surcharges is that they generally only cover part of your fuel consumption. Most companies only charge a surcharge on delivery to the customer location not the inbound cost. Consider this factor as you quote on new orders and work with clients on price increases.
Beyond passing on higher fuel costs, now is probably the time to revisit your drivers’ habits. This includes rethinking transportation routes, reducing driving speeds, maximizing back haul opportunities and looking for ways to conserve fuel. Maybe you can give each driver a portion of any fuel savings that you realize.
Even when you can make a good case for raising prices to cover higher costs, many buyers will try to call your bluff. They probably have other potential suppliers who may or may not be willing to supply at your past prices. This is where knowing your customers well and having an established strong relationship is important. It probably will not help you get something that is unreasonable, but most good business people today are just trying to get prices that are fair and realistic.
Remember that you are not going to get what you do not request. The key is to know your customers, provide products and services they can count on, and work with them over time.
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