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Lessons Learned from the Demise of Good Companies
Pallet Enterprise founder, Ed Brindley, reviews some key lessons from failed pallet and lumber companies and how you can avoid the same fate
By Edward C. Brindley, Jr.
Date Posted: 2/2/2015
The older I get, the fewer people I recognize at industry gatherings. Some might think this is due to my memory. But the reality is that the pallet and lumber industries look a lot different than they did 10-15 years ago. Second and third generations are taking over. And some of the good companies from years past are no longer in business.
This has stopped to give me pause. So many good companies have come and gone in this industry. Truly, if you can survive long-term in this competitive shark tank, you have to be doing something right and be a bit lucky too. As I think about the companies that have come and gone, there are some trends but no one reason why they went out of business. I guess at the core, the issue was that the company failed to adapt in some way to its changing marketplace or did not prepare adequately for the future.
Maybe by considering what led to the downfall of various companies in the past, those in the industry now can avoid a similar fate.
No Backup Plan
One of the most common reasons that pallet and lumber companies do not continue is that the founder or key leader runs out of steam, and the company does not have a sufficient succession plan in place. The company and its top leader fails to name, empower and train new top leadership. Just because somebody is your son or daughter, that doesn’t mean they are the right person to run your company. Your son or daughter may be better qualified for a different job or may desire to work in another industry. Maybe, there are key employees who you can tap to take over as you fade to the background.
But every company needs to be training up the next generation. This should be part of your culture not something you do at the last minute. I was fortunate that my boys both had complimentary talents and wanted to work in the business. They have both been learning on the job for a long time. So who are you raising up to take over some or all of what you do?
Customer Shifts/Changing Demographics
Pallet production is tied closely to manufacturing and distribution facilities, and as the overall economy has evolved so too have your customers. Sometimes this means an entire sector moves offshore or changes how it uses or acquires pallets. One or two of these and you can survive. But a lot of shifting in your customer base and one day you can look around and be forced to ask, “Where have all my customers gone?” It’s not that they have jumped to a competitor for ten cents difference per pallet, it is that the companies are no longer there or needing pallets in the quantities that they once did.
The way you avoid becoming a victim of customer drift is to diversify your customer base. No one customer should be more than 5-10% of your total book of business. The only exception may be facilities you open for a customer that is tied to a long-term business contract. One of the best pallet plants on the East Coast went out of business because it decided to service a few large customers, and when those customers went away, it failed to adapt.
Beyond having a diverse mixture of customers, you need to serve a variety of sectors. This will help insulate you from the inevitable ups and downs that hit all sectors.
Also, you should look for good customer sectors that are growing and have favorable long-term trends in their favor. And as soon as you detect customer drift, react to find something better. This might even include moving your plant to a different city or location.
Failing to Innovate or Keep Up with Technology
Some plants just get old, and the company fails to upgrade facilities. This is more common with sawmill and wood remanufacturing facilities because the pallet industry has had fewer major technological developments over that same period. But your equipment may be getting in the way of improved production.
Or maybe your equipment is not setup to process the type of wood that is more commonly available today. For example, a number of companies have added sawmills capable of processing both very large and very small logs. This gives the facility the ability to adapt faster to market conditions. So is it time to upgrade your facility? Only you know the answer. But if you haven’t changed your processes much in 5-10 years. You may need to rethink some things.
Supply Problems – Where’s the Beef?
Years ago, Wendy’s fast food chain ran a commercial where an old lady asked, “Where’s the beef?” She was looking at a puny hamburger and wanted to know where the meat went. Given the competitive market for cores and lumber right now, you might be thinking the same thing when it comes to servicing your customers.
Some companies have struggled to maintain their markets because they have not moved to where the lumber and used pallets are. Keeping up with changing supply patterns may require you to move or develop facilities in markets where cores are more available. For example, if you are a recycler with multiple locations in a state or region, putting a focus on a facility in a market with lots of cores seems like a no brainer even though there will be more competition in that city.
Trying to Grow Too Fast – The Debt Bubble/Financing
While you want to upgrade and have state-of-the-art technology, this comes at a price. And companies that grow too fast may become victims of their own success when the economy turns south and market prices drop. You need to make sure that your expansion is measured and can be sustained even if your business drops of by 20% or more.
Having a good, stable relationship with your lender is key. You may be able to get better terms from a new bank. But you will lose all the history and goodwill. Plus, if you have a new bank, it could be seeking your business for the wrong reasons. Some pallet and lumber companies sit on very valuable real estate holdings. Read the fine print in your loans very carefully to make sure that the terms are fair and close to what you had with your previous lender. If a bank can call the loan at any time, your creditors could actually become your biggest liability.
I have seen stable companies that were forced out of business in this new lending environment because the bank really just wanted to grab the assets and sell them off for a profit. So I think it is best to develop a long-term relationship with a lender and stay put.
Forgetting What Made You Successful in the First Place
Some companies grow so much that they lose the personal touch and focus that made them successful. And if that happens, you can easily lose your relationships. Yes, this business is about keeping prices competitive. But good companies also look for the type of people they want as supplier partners. How well do you know your customers? How integrated have you made your service with customer operations? You want to make it very difficult for customers to jump to a competitor because you are so hard to replace and that people like doing business with you.
The key to this area is to have corporate values and truly make them part of your culture. Don’t just put them on the wall, live by them and encourage your employees to do the same.
It’s Just Not Fun Any More – Losing Your Passion
Sometimes, you just lose heart. The thing that made your business so fun years ago is gone. Startups are a sexy thrill ride, but competing in a mature market is not for the faint of heart. I will never forget when one friend explained why she was selling her company at auction. She said, “Ed, my job is no longer fun. And it’s just not worth the hassle. The market is too saturated with little guys that are making it hard for the middle-sized players.”
My friend could have sold her business as a whole, but she was just fed up and wanted out. Years of being squeezed in the middle between suppliers and customers had left her tired. I guess she didn’t want to sell her headaches to somebody else.
If you lose your passion and reason for being in business in the first place, you need to get out and let others try. Is there easy money to be made in the pallet and sawmill industry any more? I think everyone knows the answer is no. But it can be rewarding if you make your business about something bigger than just making money or having a job.
Your motivation may be providing a product that makes the American dream possible because without it our economy comes to a standstill. Or maybe your business does a lot for its employees so you view it as a way to bless all the families that you support through stable work. Or possibly, your company does some philanthropic work. You may enjoy building a business that helps provide for and educate your family on your core values. Whatever you find to motivate you, never lose sight of that.
My purpose is found every time I hear from readers who tell us how much the Enterprise or one of our other products means to them. Even though I left the college classroom years ago, I never stopped being a teacher. It’s just that my class is lot bigger and never formally meets in one place. May your business flourish as you think about and prepare for the future.