It wasn't that long ago that the lumber industry was wondering if the good times would

ever end. True to its history, about a year ago our industry starting slowing down and now is in the middle of what now appears to be a regular adjustment that occurs every 8-10 years.

One important question is if a sawmill increases production efficiencies, identifies new markets or develops new products, why do we regularly have these slowdowns? This article reviews what factors have occurred since the last economic slowdown in 1991 and suggests what a mill manager can do at his facility to stay competitive.

Unlike other slowdowns, this time period has not seen a deep drop in housing starts, housing re-sales or large increases in unemployment. In fact, housing has stayed at record levels and unemployment is only at 4.5%. What has occurred during the 1990s that may have slowed down the lumber markets? We have seen fundamental changes in our markets and the products entering our markets that will affect how we conduct business in the future.

A number of important events occurred during the 1990s that will have a large impact on how we run our businesses. The first of these occurred in 1974 with the results entering our markets in the early 1990s. In 1974 the Chilean government passed a law that paid for the forestation of Radiata pine in central and southern Chile. This law was passed to assist with the high levels of unemployment at the time in Chile, and producing lumber from the material was a secondary benefit. Radiata pine harvested from Chile since has made strong inroads in our country in a number of markets.

Other important events during the decade of the 1990s were the recessions in Japan and Malaysia. They resulted in poor markets for lumber in Japan and made Malaysian wood products more competitive. In the 1990s we also enacted NAFTA, which still remains uncertain on the impact on lumber markets. The European Union was formed in 1993, and the Softwood Lumber Agreement between the U.S. and Canada expired this year.

Along with these changes, a number of new countries entered our markets with lumber. From Russia to New Zealand, the U.S. became the major market for wood products. According to the Foreign Agricultural Organization (FAO) of the United Nations, the U. S. consumes six times the world's average of industrial round wood (1.5 cubic meters per person vs. .26 cubic meters per person). We use almost twice the average of the developed nations and 17 times as much as developing nations. In other words, if countries are looking for markets for wood products, they will look at the U.S. A strong U.S. dollar also has impacted our trade of wood products. We currently are exporting 1 billion feet less than we did in 1991 and importing over 10 billion feet more. The later part of the decade saw a shift in furniture manufacturing to the East, with China now becoming a major player in this market. The 1990s became the decade that the wood products industry became international. It is truly a global industry, and competition is from every corner of the world.

The U.S. also saw a major shift in the distribution of wood products, with the ‘big box’ retailers becoming a major outlet for wood. With the repair and remodeling market being the largest for solid wood, their buying power has had great impacts on lumber markets. This has been recently demonstrated with their statements on preferences for certified lumber products.

Finally, there have been a number of large corporate mergers in the late 1990s. As companies look to capture market share, there are only a few ways they can do it. They can develop a new product or service which is not in the market, they can take their products to new markets, they can steal it from the competition (our daily competitive environment), or they can buy market share. This method not only opens new markets for the purchasing company, but it also temporarily reduces the competition within that market.

The 1990s also saw rapid growth of substitute products in traditional wood markets.

Wood I-joists have replaced solid sawn joists for housing construction. In southern California, I-joists now represent over 70% of joists in new homes. Other forms of engineered wood (composite) products have continued to capture traditional secondary wood products markets. Veneer wrapping of finger-jointed material or composites have entered hardwood markets during this decade.

Wood recycling is extending our forest resource but also impacting traditional markets. Dr. Robert Bush of Virginia Tech recently completed a material use study in the pallet industry. The study found that in 1999 over 4 billion feet of pallet material was recycled; this represented 40% of all pallet lumber used that year.

The plastic and steel industries started aggressive, targeted campaigns toward the wood industry during this decade. Wood-plastic composites are capturing market share in the outdoor wood market. A recent article in Wood Markets stated that wood substitutes represented 10% or 7 billion feet equivalent in 1999 and is growing at a rate of 20% annually.

If we sum the total amount of wood from increased imports (10 billion bf), recycling of pallets alone (4 billion bf), substitute products (7 billion bf) and increased softwood/hardwood production (3 billion bf), there is an increase of over 20 billion feet of products in the U.S. markets during the 1990s. This results in downward pressure on prices and demand for solid wood.

So what is a sawmill to do in these markets? Successful organizations always focus on what they control. A local sawmill has little control over these 20 billion plus feet that have entered the market. However, they do control their relationship with their customers, sales force and employees.

From the customer's viewpoint, offering the right product at a reasonable price creates value. You can create more value for the customer by increasing the product offering or reducing the price.

The product a sawmill offers is much more than lumber. The product includes lumber plus its quality, the delivery, any guarantee, proper color or sorting, correct dimensions, good credit terms, any technical support, the firm's reputation, sales support that you may offer, a commitment to the customer during good and bad times, the customer relationship, and employee satisfaction. This is known as the total product offering.

During the 1990s, I feel that many of these factors have become expected by the customer, and it is more difficult to differentiate a company's product offering based upon the items of quality through technical support. I believe in this decade that differentiation will focus upon the firm's reputation, sales/customer support, commitment, relationships and employee satisfaction.

To understand the customer relationship, sawmills should contact those 25% of customers that represent 75% of their revenue. They need to understand their success factors with these good accounts and develop a strategy that can be applied to the next 50% of their accounts that generate the rest of their revenue. Regular communication is necessary with good customers to understand the challenges and opportunities they are facing.

Finally, managers need to take a very thorough look at the last 25% of their accounts, decide if they are worthy of keeping, and spend very little effort and money on them. These are the accounts you want your competitors to have. These are the accounts that always have a claim and nothing is right, and you spend much more time handling their problems than it is worth.

Nobody is closer to your customers than your sales force. These individuals carry your message and create the impression of your sawmill to those who buy your lumber. Yet, salespeople are often torn among many duties that do not directly result in spending more time building your customer's business and the relationship you want to establish with them. In evaluating the work that your salespeople do, the mill manager must take into account all the activities of the salespeople and not just sales. Performance of salespeople should be measured by not only lumber sold, but by new account generation, new ideas, new products, customer satisfaction, selling excess inventories, working with manufacturing locations and building long-term customer relationships. Some organizations have stopped calling them salespeople and started calling them "business development specialists." This changes their focus from selling to developing your business. Salespeople need to delegate all non-selling activities and spend more time in front of customers. I believe this is an area where the Internet and e-commerce can greatly impact performance.

Finally, your sawmill workforce will determine your success in the coming years. Many individuals can purchase machinery, buy logs and produce lumber. But a highly trained and motivated workforce can generate ideas, produce an outstanding product and create a company where people want to be productive. If the sawmill owner is not capitalizing on the most important asset the company has, then these are a few suggestions to involve employees more in the company.

A manager needs to have regular communication and ask for employee input. These are the people closest to the product, and they see where improvements can be made. A manager should let employees know when the company receives a compliment or a complaint from a customer. The mill should provide training or educational opportunities so employees can improve themselves. Employees should see an opportunity to grow within the organization. If an employee comes up with a good idea, they should be rewarded. This could be financially or a trip to see how the customer implements the new product or service. Customers should have the opportunity to visit with employees during mill visits to share their perspective with employees. And managers should be accessible to employees when needed. The theory of Management by Wandering Around (MBWA) should be implemented so the manager is visible to everyone.

It has been the purpose of this article to share how we got to the current slowdown in lumber markets, that during the 1990s there has been a fundamental shift in the amount and type of competition that have entered traditional lumber markets, and what a sawmill manager can do at his mill to improve their performance. I believe that the answer will be in a mill's relationship with its customers, how it manages is sales force and, finally, its employee satisfaction.