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Recyclers Must Have A Plan For Success And Must Follow It
Here is a management plan that enables recyclers to start with one or two workers and expand to 15, 20 or more, maintaining the same profit margin.
By Clarence Leising
Date Posted: 11/13/2001
Remember when you first opened your pallet shop? You were lean and mean, and you were making money. As your business grew, you hired more people and bought more equipment. Now you are not quite as lean, and you are not making the profits you thought you would. What happened?
Without realizing it, your quality has slipped, your inventory has gotten disorganized, and you are not as profitable as you thought you would be by now. What you need is a simple, step-by-step plan to help you prevent this from happening.
I am going to give you a plan that will show you how to begin with one or two people, expand your way to 15 or 20 or more, and maintain the same profit margin that you had in the beginning.
When you started, you had one person whose only job was to inventory the pallets coming in and keep tracks of the pallets going out. This is a job that does not directly produce income, but it is a position that nevertheless will easily pay for itself by keeping everything going.
A person doing this job well will maintain good quality and inventory control. He will always know how many pallets are coming in and going out. He will make sure the pallets are sorted by size and wood thickness. He will decide which pallets get torn apart and which ones do not. He will be able to do all these things because in the beginning you will be that person.
In your production department, you start with a one-man sort-and-repair work station. This system consists of two stackers, one lead board remover, a power nailing tool, some rollers to bring the pallets in, and some rollers to take the scrap out, and a scrap box for boards. This equipment will cost you about $20,000 to purchase and install.
You will need one other worker to run your pallet dismantler and cut boards and stringers down to size. He can drive the forklift, too, and do whatever else may be required to support the one-man production operation.
Your job will be sorting the incoming pallets, controlling quality and inventory, and managing the other men. So counting yourself, you start with three workers.
One man in the production department, using the equipment listed above, should produce about 375 pallets per day to sell, plus this system gets you a free sort of scrap material. The beauty of this system is that it is affordable, will generate a nice income, and can be easily expanded as your business grows.
Your production level should be a minimum of 125 pallets per worker. Remember this ratio: 125 pallets per person. Maintaining this level of production is the key to maintaining profitability.
The next step is to expand from your one-man production system to a two-man system. You can use the same two stackers, but you will need more rollers. Adding rollers will enable you to send your grade A pallets one way and your grade B pallets another. Adding another production worker should enable your business to produce about 750 pallets per day, and you still get a free sort.
Your business grows some more, and it is time to expand again. You decide to move up to a four-man production system. You can continue to use your dead rollers and two stackers, but now you will need to add a conveyor. You still get free sorting by adding someone to handle quality control. Put this man on the end to sort pallets into grade A and grade B. He also can sort the pallets that will be dismantled into two main categories, those over 40 inches and those under 40 inches, and by thickness of wood. This system now will produce 1,500 pallets per day.
Your business continues to grow, and you want to expand further. Add a lead board remover and work table for each production person. In addition to using a conveyor to take all the pallets to one place, you add a conveyor to move all your scrap to one place. Now you have four stackers. All the finished pallets move on the conveyor to the person responsible for quality control, and he sorts them as described above. Now you add another person at the sort station to plate damaged stringers.
Let’s review. In stage one, your production department has one person working with two stackers and a lead board remover, producing 375 pallets per day. At stage two, two people working with two stackers, two lead board removers and dead rollers produce 750 pallets per day. In stage three, four people with a conveyor system — a fifth person handles quality control — produce 1,500 pallets per day. At the next stage you have eight people doing pallet repairs — and two people sorting and plating — and producing 3,000 pallets per day.
Why add a person to do plating? Remember, your goal is to produce as many grade A pallets as possible because that’s where the money is. By having a person plating stringers, your production-to-person ratio will drop slightly. You will make up the difference, though, because you will be getting a high quality sort on the pallets going to the dismantler. By sorting these pallets as you go, they will be organized according to size and thickness of wood when you put them in your yard.
If you do not sort these pallets in advance, your yard quickly will become an unorganized mass of different pallets. When you get incoming pallets to be dismantled, the people in your wood department should stop what they are doing and sort them then and there. And what happens to the ones that they decide not to dismantle? Somebody has to take them back out into the yard, creating more confusion and adding another step to the process. If your wood department is sorting pallets, they are not producing any wood, but quality control in your wood department is just as critical as quality control in your production department.
The key is constant quality control, sorting, and inventory control — regardless of how many people or how much equipment you have. When recyclers start out small, they are efficient. You do not waste wood, materials or labor. With one or two people, quality control and inventory control are not difficult to maintain.
Recyclers seem to develop problems when they have seven, eight or more employees. This is when most people go wrong. They decide they need some more manpower, so they hire a new person or two or three. Those additional people may be necessary, even vital to the operation, but you have to be careful. There is a law of physics that can be applied to business: for every action, there is an equal and opposite reaction. When you add an employee in a non-income-producing job, you must increase overall production at the same time or you will begin to lose control. If you get away from the ratio of 125 pallets per person, you will suddenly find that production levels do not cover the cost of labor. Before you know it, your labor force has doubled, but your profits have not doubled.
If you think that I am making up some of this, let me tell you about a conversation I had with a pallet shop owner during a recent visit. It went something like this.
‘I notice that you have a lot of 24-inch stringers out in the yard. Do you have a customer for a 24 incher?’
The owner said, ‘Yeah I do. He buys 300 pallets a month.’
He will need 900 stringers each month to fill that order. I looked around the yard and quickly determined that he had almost 20,000 24-inch stringers in the yard — enough for more than 18 months. We went over to the chop saw station, and guess what? They were cutting more 24-inch stringers! There was an obvious communication failure. No one knew how many 24-inch stringers were in the yard, and no one told the men running the chop saw to stop cutting 24-inch stringers.
You have probably heard the expression, ‘people don’t plan to fail, they fail to plan.’ That is exactly what many company owners and managers do: they fail to plan. Every decision you make must be tied to production and sales.
If you expand following the plan that I described above, when you reach that final stage you will still be operating efficiently and profitably. You will still have good quality control and good inventory control. You should be twice as profitable with two people than you were with one person, twice as profitable with four people as you were with two people, and twice as profitable with eight people as you were with four people. These profit levels are achievable, but you have to have a plan, and you have to follow the plan.
If you fail to plan or follow a plan, you will lose control. You will go from making a 20% profit on $2 million of annual sales to making 8% on $5 million of annual sales. You will scratch your head and ask yourself, ‘How did this happen?’ The answer is that you increased labor but did not increase sales and production. You could not afford to operate like that in the beginning. Why do you think you can afford to do it now? More importantly, how can you afford to do it now?
I have tried to describe how all the different pieces of the puzzle must fit together for a successful recycling business. To maintain the profit level you want, you must control your quality and inventory, no matter how big or how small your shop is. I hope this information will be helpful to you.
In the future, I will take a closer look at the role that the wood department and yard play in the overall recycling operation. Later, we will look at the whole puzzle from a management perspective.
(Editor’s Note: Clarence Leising worked in management positions for pallet recycling companies in the Northeast for 25 years and currently is a sales representative and recycling specialist for Bronco Pallet Systems Inc.; he may be contacted by calling (800) 990-7872.)