Weathering the Economic Doldrums

The economy continues to struggle to leave behind the recession of last year. Although there are bright spots, most notably the housing industry, the manufacturing industry has not yet fully recovered.

Some pallet companies have been impacted more than others by the economic doldrums. A few pallet suppliers are thriving; most others are struggling to be profitable in a time when activity and sales are slumping. Unfortunately far too many pallet suppliers are struggling just to survive.

We contacted several pallet companies and asked the owners if their business had been affected by the slow-down in the economy. If the answer was yes, we wanted to know what specific actions they have taken in response. We asked them to write about their experience.

This article provides the views and thoughts of several pallet company owners who have led their businesses through these difficult times. A special thanks to our pallet industry friends for sharing with us.

Garnett Wood Products has been providing pallets to a diverse group of customers for over 37 years. During this time, we have managed to survive and prosper through all types of market conditions. Years ago the boom-and-bust cycles of the pallet industry were commonplace, driven by supply and demand for new hardwood pallets. In the past few years, however, the demand for new pallets has slowed as their reconditioned counterparts have taken a larger share of the market.

Realizing this market shift and its progressive impact upon the needs of our customers, we began marketing reconditioned pallets some years ago. With that in mind, our increasing sale of reconditioned pallets has balanced out the flagging demand for new pallets in our marketing area. And our marketing area and market coverage has steadily increased as our sales staff increases.

We have also done our best to diversify our customer base to encompass as large a cross-section of the economy as possible. Our goal, which is to have no more than 5% of our pallet sales with any single customer, allows us to preclude by customer diversity the gigantic downturn in sales that could result if our sales were concentrated in any of the industries or customers that are in deep recession.

In addition, since Garnett Wood Products’ inception 37 years ago, our focus has always been to provide the best customer service available. The competitiveness of the current market situation has merely intensified that focus. In fact, the bulk of the training time for our sales professionals is spent learning how to take care of our customers. It is our position that customers coming in contact with Garnett Wood Products must have the most positive experience that we can provide and we do all the ‘little things’ possible to make that happen.

One of those ‘little things’ we do is use the Pallet Design System (PDS) to help communicate with both current and potential customers. PDS allows us to design custom pallets for any customer’s needs and, more importantly, allows us to create updated PDS specifications for the many customers who do not maintain current pallet specifications.

Finally, at Garnett, we are working as a team to control our operating costs because maintaining our position as a low-cost producer is essential to our capability to compete and prosper in the current pallet marketing environment. We can’t predict when market conditions will become more positive, but we can guarantee that we will continue to respond to the changing needs of our customers. We strive to do all the ‘little things’ correctly as we provide unsurpassed customer service, to be a low-cost producer now and in the future, and to market those attributes aggressively to our current and potential customers.

Anacortes, Wash.

Here is my perspective from the Northwest. Immediately after 9/11, we saw a definite slowdown for approximately one month. With most of our suppliers, we have an interactive relationship as a value-added pallet provider. What we saw was a shift toward the smarter use of recycled pallets and less reliance on new pallets.

We were able to accommodate these customers by getting involved in cost conscious buying patterns. This had the result of allowing us to maintain steady levels of business throughout the year.

The recent West Coast dock strike did interrupt some of our business, but customers impacted by the possible strike anticipated its effect and got orders out ahead of time. While the agriculture and fishery business has its normal cycles, business here is not weighted heavily on manufacturing. Consumer based activity is a major part of our business base.

Looking back, we have sort of held our own and were not drastically impacted negatively during the past year.

As a major supplier of hardwood pallets in the Mid-Atlantic region, we have to constantly balance all aspects of our business to stay efficient, manufacture well made products, and provide the delivery and followthrough that is expected by so many customers. We have a few customers who will pay a little extra for quality and service, but for the most part they have become expected items in the marketplace. To survive today you have to deal with a strong dose of the attitude — “if it works, fine; if it breaks, it’s your problem.”

The last few years we have worked to keep the manpower in both our offices and plants to a minimum. We have invested in machinery and services for production improvement, not such things as ergonomics. We have had to survive with ever shrinking margins. The name of the game has been to “maintain as much business as we can on lower margins.”

Now, suddenly we are faced with a tight lumber market. The last several weeks we have seen hardwood go up $20 to $30 per thousand. Unfortunately pallet prices do not provide any slack to cover higher lumber costs. The lumber market had been transparent until lately; it did not move downward when pallet prices were being driven lower. The sawmill ranks are shrinking because they have had a hard time making a living as well. Now we are starting to see some pallet plant thinning.

In time we will have to see some sanity return to margins for both sawmills and pallet companies. Scragg mills may become more attractive as sources of pallet hardwoods, as they often do in a tight lumber market.

It looks like surviving this winter is going to require moving hardwood pallet prices higher to cover higher lumber costs. Margins have been squeezed down to the lowest levels in history. Just look at last month’s financial statement. It leaves little other option.

Getting a full night’s sleep has not been easy in this troubled economy. I’ m sure not alone in watching profits, margins and customers slip away. Everyone I speak with talks about fighting for every order.

I remember the first big event. Four large customers announced major layoffs the same day. Our sales were off 30% in less than a week! Panic sets in, but your brain goes to work and an action plan is formalized. “Control costs, control labor, and protect your customer base!”

Communication has been key to maintaining my sanity — communicating with customers, managers, and employees. Sometimes it has been anyone who would listen!

Customer loyalty is not the same. The difference of a nickel in price can lose a customer you have had for years. All of the times you got your customer out of trouble — the Saturday, all the services we have given away — are not enough anymore.

In the past, if we did not get a call from our customer on his “normal” day to order, it just meant that he got busy. Now that absent phone call more likely means that you lost a customer.

We have put every one of our customers on a call list. We no longer wait for orders. We call every customer — even the one we have shipped to every Wednesday for the last three years.

The question of the day is, “Are we still on track?” We take nothing for granted.

The economy is always what drives business in every direction. When it does better, we do better. But we do even better if we know how to take advantage of a strong economy and know how to manage it wisely. But we all get hurt when it gets hurt. It hits like a hurricane, not considering the needs of a particular person.

Our company is small, up to 18 to 20 employees. We have our good times and our hard times. But lately, with the sad performance of the economy, we have had some difficult times. We have had to take the undesirable measure of laying off people. In the ten years that we have been in business, we never had to do that until now.

Things usually start picking up when the “season” starts, but this year things seem to be going very slow. Our customers are starting to shop around for lower prices because budgets are being cut all over. Because of this, we have had to lower prices to levels that are lower than usual. We have strived to increase sales to help cover a reduced margin. Sales are up about 10%, while profit margins have dropped about 11%. This makes it more and more difficult to make any money.

We have had to make changes on all fronts. We have had to delay the consideration of equipment purchases. This decision has prevented us from advancing in ways that we are ready for, restricting our production efficiency. Everything has a cause and effect to it. In this instance, because we have not been able to become more efficient, we have not been able to recover lost profits due to lower prices. Of course, it has kept us from increasing our profit margins as well.

Like everybody in the pallet industry, we are looking toward tomorrow with the hope of seeing a stronger demand.