Leadership Roundtable: Industry Voices Sound off on Critical Issues and Ways to Prepare for the Future
Leadership Roundtable: A group of industry leaders discuss key concerns including the lumber market madness, raw material shortages, labor problems, increasing customer expectations and mold on pallets. Learn what is on the mind of these key leaders and what they see for the future.
By Chaille Brindley
Date Posted: 5/1/2014
One of the objectives of the Pallet Enterprise over the coming year is to include more reader input to reflect a wider diversity of voices and insights. This article is the first in a new series to hold discussions with key industry leaders on important topics. The group of participants will change over time. But in the first two articles, the participants include a variety of companies across the country including both pallet manufacturers and recyclers.
These leaders discussed key questions that they are facing right now, the changes taking place in the raw material markets as well as how customer expectations are evolving. Special thanks goes out to the people who were part of this discussion. The panel includes: Jimmy Wilson of Bay Wood Products, Bill Schneider of Remmey – The Pallet Co., Jim Kesting of Madison County Wood Products, Steve Mazza of Bettaway Pallet Systems, Mike Hachtman of reLogisitics Services and Howe Wallace of PalletOne.
You can join the discussion by asking some of these same questions at your organization and posting your thoughts on the Pallet Enterprise Facebook page at www.facebook.com/palletenterprise.
Pallet Enterprise: What is the one key management question that all pallet companies should be asking themselves right now?
Jimmy Wilson: What is the future of our wood market and what are we going to do going forward? I am sure the guys on the recycle side are thinking the same thing about cores.
Bill Schneider: Is your pricing where it needs to be? Forget about where you think it should be or even where your customer wants it to be. Is your pricing where it needs to be to keep up with all these increased costs attacking us from all different sides? It could be lumber issues, freight issues, core acquisition pricing or rising insurance rates. Those factors all need to be measured and rolled into your pricing calculations. Pallet companies need to be willing to pull apart their pricing formula and reconsider all of the factors that go into their pricing strategy.
Jim Kesting: How do we take care of our current customer base? And that question gets back to our raw material supply and where is it going to come from in the future. If business is going to pick up, which it seems to be doing to some degree, how are we going to take care of potential customers’ needs? The other thing that we are facing right now, how do we keep up with price increases that are coming so fast? In the past, we used to be able to take orders two, three, four months out. Now we can take the orders, but the price is what it is at the time of delivery. Things have changed from that stand point.
Of course, you have to be on top of your pricing and understand that. But I think a more serious issue is securing our raw material supply. We are a somewhat integrated company so we produce a lot of our own material. This has helped us tremendously. But it is that 25% on the outside that we are trying to get right now that is near impossible to find. We need to be looking at putting on more logging crews or something to secure our own raw material base rather than depend on it from somebody else. We are making those changes, and you must have price increases in order to be able to do that because you can easily spend half a million dollars in equipment outfitting a logging crew. And you can’t put a $10 per hour guy in a really expensive piece of logging equipment. The industry is going to face increased expenses, and we have to make that initial investment to get that type of equipment.
Steve Mazza: From a management stand point, my companies are looking at the future, and the number one question that they are asking is where is our labor force coming from and where are they going? Number two, how are we going to keep up with technology? We are going into a situation now that is no longer about relationship building. Now all the transactions are electronic. Companies are using online, third party bid processes. We are living in a digital world, and how do we meet those demands with an older generation in most pallet companies? My companies are looking at bringing in the younger generation because they are more adept at using technology.
Mike Hachtman: My key question right now is where are we going to get low-skilled, affordable labor going forward? We are already starting to see a problem with that in Texas today. We effectively have no unemployment in Texas. We have seen constant pressure and recently have moved our beginning wages up 50 cents to $1 per hour just to start people. As the economy starts to get better, the low-skilled labor that we all rely upon is going to become harder and harder to find. Secondly, somebody in Washington D.C. is going to do something about immigration reform. And when that happens, what does that mean as far as the available labor pool? It likely means that employers will be required to use the E-Verify process and that tightens up the workforce even more.
Pallet Enterprise: How have customer expectations changed the most over the past 2-3 years? What changes do you see coming in the near future when it comes to customer patterns and expectations?
Jimmy Wilson: There are a lot of things when you talk about customer expectations, and I gathered my people together and discussed these questions yesterday. So here is what we have found, vendor consolidation is a big one where large customers are reducing their customer base. A major chemical company did this a number of years ago. It went from almost 100 vendors down to two. Customer quality expectations have increased at every company that we go into. Customers have shorter lead times, and they want us to inventory for them. Customers expect vendor managed inventories. And this is a big one everybody is asking for right now, they all want longer payment terms. They want to go from net 15, net 30 to net 45, net 60, or more. This major chemical company when it recently solicited business wanted net 120 day terms, which made me sick to my stomach.
With increased costs, our demand for cash has risen. Will banks cover that as raw material, labor and overhead costs go up? Consequently, we are having to carry more money. And I don’t know what the banks’ deal is going to be in the next four to five years, but I am sure it will have a big impact. This is especially true as interest rates rise.
The other thing we are being asked to do is to provide on-site services for the new pallet buyers. I know that this is something that pallet recyclers have done in the past. Now, customers are asking us to provide those services too.
Jim Kesting: Customer expectations are definitely greater than the past. They don’t want any mold. They don’t want any loose sawdust. They want drier pallets. They have less space in their warehouse and consequently they want smaller orders, which means you have to carry the inventory for them. They want extended terms and many are insisting on contracts.
Years ago we used to ship on flatbeds. Now we do a lot of van shipments. These are things that we have all been facing for numerous years. And we have been making changes to accommodate our customers. Any time you make these sort of changes, there is a price involved. You need to make sure that you are pricing your stuff correctly. Although you can’t be everything to everybody, we all try.
Howe Wallace: The two things recently that customers have been asking for is cleaner pallets and longer terms. Why some customers think that we are an industry that can finance large corporations that’s crazy. But that is what they ask all the time. Just-in-time, smaller loads, storing customer inventory requests have become what you have to do to play at this point. And that has been the case for a while.
It seems like we have to do a call a week discussing extended terms with customers. We have to explain why it doesn’t suit us and have been pressing back on that point. And customer response has been okay especially if we are the incumbent. Companies certainly ask for extended terms if you are going into a new deal. I think it kind of falls under the situation of if you don’t ask you won’t get it. When customers ask for things like 120 day terms, we explain our limitations to handle those requests.
Bill Schneider: To Howe’s point, one of the things that these big companies are forcing upon us is that they are all starting out with the premise that quality and service are assumed. They think we are all the same cookie cutter manufacturer or supplier when we are all very dynamic and have our own fortes and niches. Customers unjustly compare your company to lower cost suppliers that do not have anywhere near the resources or capabilities that you have.
Pallet Enterprise: Given recent tightness in both core and lumber supplies, what things need to change in the industry to help pallet companies remain competitive in this tough market dynamic?
Howe Wallace: The hardwood industry is going to have to add capacity. But that is easier said than done. At this point, we have had such a reduction in capacity during the Great Recession. The pine side of the world is led by big companies. During the slump, they took some time to add capacity. They added capacity that limits what is available for pallets, which seems to be their goal all the time. But you didn’t see this same thing happen with hardwoods. There has been no gain in hardwood capacity to speak of over the last four to five years. And now the market has caught back up.
Until somebody adds capacity, I think material will continue to be scarce. Capacity includes the ability to saw wood as well as logging infrastructure. Somebody is going to have to do something there. And I don’t know when it is going to happen.
Mike Hachtman: Howe don’t you think if demand is outstretching supply and money is to be made that extra capacity will come at some point? Won’t somebody dust off an old sawmill or add a new line if money is to be made?
Howe Wallace: I do think that will happen at some point. I am a free market guy. And supply and demand will have its day. It isn’t necessarily going to help you next week though. Also, I think that there are fundamental changes that the industry is going through. It is a world economy now. I think a fundamental shift has occurred that it won’t ever be like it was five years ago.
People talk about getting back to what’s normal. The new normal in terms of wood supply is going to be different than what we experienced in the past. And nobody is really certain what that is going to be.
Jimmy Wilson: What I am seeing down in the Southeast is that the pine mills have all put money into their infrastructure. Consequently, today they are more ready to produce as we see the increase in demands. Whereas in the hardwood industry, we had a lot of companies leave the industry that will never come back. We lost a lot of loggers and logging capacity.
Right now, the workers are going to go where it is easier to get more work. Of course, pine is a lot easier to log than hardwood. It is easier on the equipment. It is easier to get in and out of those forests.
I sat in on a meeting last year with four companies that had invested heavily in southern pine mills in Alabama. This included representatives from Plum Creek, Coastal, Roy O Martin and Westervelt. They all said the shift from Canada to the southern part of the United States is taking place because of the beetle kill situation out on the West Coast. Those guys are pumping money into sawmills in the Southeast. Personally, I think we are going to see more Southern Yellow Pine being used in pallets. It helps solve some of the problems, such as mold and capacity concerns.
Jim Kesting: Our supply chain includes loggers, sawmills, remanufacturing operations, pallet manufacturers, sales and brokers. These can be independent businesses, or they can be totally integrated. The breakdown most seems to be in the logging end of it. There are just not enough logs for sawmills to process. And it seems that we are going to have to continue with higher prices until the supply improves.
My company is trying to secure its own destiny by being more fully integrated. This includes hiring our own logging crews. But the problem is that logging has been a dying industry. The equipment is expensive. It requires higher cost labor to run this equipment. It can be very dangerous. The industry is having to come up with more expensive equipment that is safer to operate in the woods. In order to be able to make those commitments, it takes money to do those things. You have to be able to show money on your bottom line to cover those costs and get the bankers to fund those infrastructure developments. This is why pallet prices need to maintain to get people interested in supplying us material again.
Editors’s Note: This is the first half of a two part series from a conference call held with industry leaders in April. For the second half of the discussion, look for it in the June issue of Pallet Enterprise. Thanks to all the participants for sharing their candid insights.
Do you want reprints or a copyright license for this article? Click here
Research and connect with suppliers mentioned in this article using our FREE ZIP Online service.
Industry Leaders Discuss Key Concerns