One thing I have noticed attending industry meetings over the last several years, brokers are everywhere.
Increasingly, pallet customers are looking to brokers and national management companies to help run their pallet programs. As a result, more pallet business is being brokered than ever before.
Brokers have always been part of the pallet industry. But they have grown in prominence over the last 5-10 years. Some pallet companies have 50% or more of their business coming through brokerage relationships. Some pallet manufacturers or recyclers would rather not have to deal with all the concerns raised by customers. They want to just focus on the production-side of the business. It used to just be the Amish who didn’t have a phone or fax machine that relied so heavily on brokers. But now even companies with sales teams and websites are finding more business through brokers. Why is this happening? Is this a smart strategy for a pallet company to deploy?
Let’s look at these questions. So, why is so much business being brokered today? The first primary driver is shifting customer attitudes. Many big pallet buyers used to rely on purchasing departments to manage a group of 10-20 pallet suppliers. Now, many are moving more toward a process where they have a handful or maybe even one company manage their entire program. These companies may do some of the business themselves and broker the rest. Others exclusively manage and broker the business.
The idea is that pallet users want one or two major contacts not 20 to 30. By brokering the business, management companies can look for the best price, delivery schedules and transportation routes without having to be tied to one company. Instead of pallet purchasing residing with local distribution centers or logistics departments, in most cases it has been consolidated in a central management structure. This also favors brokers or national management companies.
Secondly, more pallet buyers are pushing for more generous payment terms. In other words, they are taking longer to pay and using the pallet industry to cover this cost. But most local pallet companies don’t have big pockets to float this cash flow. That’s where brokers or national pallet providers can pay faster and roll factoring costs into their business models. I don’t know why pallet guys are acting like the bank for Fortune 500 companies, but that’s up to each provider to decide. One reason why some pallet companies like to work with a broker is because they usually get paid faster. The downside is you are getting paid less for your pallets than if you supplied them direct to the customer.
The third major driver is that national companies can develop and mine data to find the most optimal pallet network for each client. This is a service that smaller, local providers usually cannot do. But they could if they collaborated as part of a network. Data will become an increasingly more important part of the pallet industry landscape as customers want JIT delivery, low pricing and efficient networks. See the article in this issue about the tension between lean management and more robust inventory practices after recent shortfalls due to the pandemic.
Does it make sense for pallet companies to work with brokers or national management providers? This isn’t a simple yes or no decision process. If your company wants to focus primarily on the product and the service, you may find that dealing with customer service and sales is a big distraction. At the same time, you don’t own those customer relationships, the broker/pallet management company does. Honestly, you might never own those relationships if pallet buyers opt for a more national strategy. So, in some ways it may be a moot point. If you don’t work with the broker, your competitor likely will.
One strategy is to have your own sales staff but to work with national providers/brokers to augment those accounts that you manage. This gives you the ability to control your destiny a bit while playing in the national accounts game through your partners. However, if you broker most of your business, you can cut out the costs related to sales and marketing. Those costs now lie with the broker/national management company. And if you do a good job supplying and delivering pallets, you will always have somebody who wants your services/products.
If you are thinking about selling your business in the next 5-10 years, having your own customer file is a big part of what you have to sell. Sure, you are selling the operations, equipment, and ongoing expertise, but you can get more for your business if you have well-established, entrenched relationships. That is one pitfall if you rely too much on outside sales.
Honestly, some pallet companies are not sophisticated enough to handle the customer interactions that bigger companies are demanding. It all comes down to what kind of business you want to develop, what your expertise is and how you want to differentiate yourself in the market. There is no one right answer when it comes to the broker question. But you do need to consider the impact of the changing brokerage landscape on the future of your business. Planning for the future requires more than just taking orders today.
Smart companies are developing their own strategy when it comes to growth, brokers and responding to customer trends. The right broker/national management partner can help you learn quickly how to adapt and be ready for the future. But it could be a challenge in the future if somebody else is adding their margins to your products.
Sure, these management companies contend they are able to more efficiently manage a national program and save costs while adding benefits to both pallet users and pallet companies. And there appears to be some truth to those assertions. All I am saying is that you need to have a strategy when it comes to the shifting national management focus. Otherwise, you may wake up in the next few years and realize that the ground has shifted under your feet.
