About two years ago, I wrote a piece for our Penn State WoodPro website called "The Best of Times, the Worst of Times." The gist of that piece was that even though economic indicators are trumpeting the robust health of the US forest products industry, the underlying reality is that the industry is getting smaller, and that is not good. I concluded the piece with this statement…
The health of the US wood products industry can't be judged just by short-term profit statements; it must be judged by the total throughput of all resources utilized for and by the industry. All the machines, all the plants, and yes, all the employees. If our wood industry leaders can't get us back on track to increasing the total throughput of these resources in America, the names of our American wood products companies may become no more than placeholders for prosperity in other parts of the world. And ultimately, even the placeholder may no longer be needed.
Obviously, I was thinking about names like Pennsylvania House furniture. We had just lost Pennsylvania House when I wrote that piece. You can still buy Pennsylvania House furniture, but it's made in China instead of Lewisburg PA. That kind of thing helps the parent company's stock price, but it hurts the US economy and our wood products industry.
It's not pleasant to be a purveyor of gloom and doom. But neither is it pleasant to be an owner, manager, or employee of a company in the midst of layoffs, re-organizations, or plant shutdowns. I worked for a company that had 106 operations when I started with it in 1999, and had 60 when I left in 2002. Hopefully, that wasn't a measure of my contribution to the company. But, I was one of those tasked with trying to save those operations that were on the bubble; a few survived, most didn't. Through those experiences, I gained a perspective that a lot of effort can be wasted on actions that don't really have a chance to save the operation, while the only real critical success factors tend to go ignored. I've tried to encapsulate those factors into three areas of focus - people, products, and process.
Let's look at the people factor first. I think the people involved in the wood products business are the greatest people in the world. I take it personally when I see wood workers taken advantage of, or mistreated, improperly trained, or worst of all, improperly managed.
The worst, and most harmful manifestation of bad management on the operation is under-estimating, under-developing, and under-utilizing the folks out on the mill floor. Many of our employees have high school educations at best, and they usually do have a hard time seeing the "big picture" from the point of view of a more broadly-educated person. But that doesn't mean that they can't become the best person at what they do. And that's what the essence of management is…getting each employee to consistently perform at that master's level of competence.
Now, some people never will perform at that level, no matter what you do. The other end of the spectrum of mismanagement of people is to hang on to underachievers too long, letting them suck the life out of the operation. They can do that, and they will, given enough time. They have to be shown the door, so that the real workers can thrive.
Those that are left have to be given the right tools, the right co-workers, the right incentive, and a way to have their voices heard. Having worked on the line myself, I know how much my morale shot up whenever I was given new, improved tool that increased my productivity. It increased my interest in the job, it increased the breadth of my experience, and it gave me that feeling that the bosses were interested in my work.
The right co-workers are also essential to employee productivity. Studies prove that the number one reason people leave jobs is because they don't like the people they work with. Now, personality clashes are inevitable. But what you can focus on as a manager is matching skill sets so that complementary teams are out there on the plant floor. We all work better when our teammates have strengths in areas that cover our weaknesses. And there is one area of weakness that we just don't cover very well in our industry, and it leads to a lot of frustration. Our industry is notorious for hiring very few engineers. In today's world, we can't afford to try to operate without them. If you're a small company, you may have to rely on engineers from equipment vendors to help you out on a project basis. That isn't great, but sometimes it's the best you can do. But I'm here to tell you, that if I had a manufacturing company of twenty-five people, at least one of them would be a degreed engineer.
When I interviewed at Penn State, someone asked me what I thought my biggest contribution to the wood industry of Pennsylvania could be. I told them, that if I could be helpful in getting 100 industrial engineers hired into the industry, my contribution would have been huge, because the industry would be completely different in ten years. You may not be familiar with what industrial engineers do. They are most commonly known for doing time-motion and efficiency studies, but that is just part of the picture. Industrial engineers are trained to be systems thinkers, and they are trained on the tools necessary to analyze a process as a system. Now by virtue of being a manager, you are a systems thinker to some degree, but you may not have access to mathematical, statistical, and computerized tools to give you precise answers to any improvements you or your employees may think of. That's why the industrial engineer is such an asset to your company, and to any team he works with in the plant. He's the person that can put ideas in motion, can give them legs, and can tweak them, because almost any good idea needs a little tweaking to work just right.
Most wood products companies that do have engineers on staff have mechanical or electrical engineers. They are useful and necessary for making most modern machines systems work…but the industrial engineer is the person who is going to be able to tell you if that functioning system is working as it should be. There's a big difference there, and the difference can be tallied up in real dollars. If you don't think the total value produced by your company is equal to the sum of the resources you've invested in, an industrial engineer may be the only piece that's missing. If you're really interested in optimizing the performance of your operational systems, your next hire ought to be an industrial engineer.
One last word of advice on that. When you hire that IE, if he or she is a good one, you'll be promoting them into line management within a few years. When you do, be sure you go out that day and hire another IE to fill that empty staff engineering position. You may think that it's unnecessary, that you can kill two birds with one stone. But my experience is that once an engineer is promoted to a line position, they tend to relax their engineering rigor and start to rely more on their intuition. Now, being systems thinkers, that intuition combined with their project engineering experience means that their intuition should be pretty reliable. But with time, and especially as the process changes, that intuition can fail the best of us, sometimes with disastrous consequences. That's why it's always good to have that next up-and-coming project engineer "crunching the numbers" on every idea that comes up.
Employee motivation is another issue. The thing employees complain about the most, but really motivates them the least, is pay. A person making $50 an hour isn't necessarily more motivated than the $8/hour guy out back. It really all boils down to - how interested is this person in their job? How much do they care about getting better, personally, and making the plant run better? A few people never really care…you need to get rid of them as fast as you can find a replacement. But don't assume they don't care just because they aren't performing. Bring them into a quiet place and ask them what they think about their job. And really listen to what they say. Nine times out of ten, they're just plain bored with what they do.
Challenge them. Give them more responsibility, and hold them to a higher level of expectation. Cross-train them on other jobs, and rotate folks during the shift. Add two minutes to each break, or add another short break near the end of the shift. Clear out a big area in the back and add some ping-pong tables or basketball hoops. The pop in productivity you gain from a few minutes of stimulation will more than make up for the extra few minutes the line is shut down.
The other component that employees need to feel empowered is a voice. Not the voice you're thinking of, the one that complains every time raises are handed out. I'm talking about the daily voice that brings life into the production process. How many times in my career have I seen a process improvement been implemented, only to have someone walk up to me and say, " I suggested that twenty years ago, but nobody listened to me back then…" Hey, pitch out those crazy suggestion boxes if you have them, forget about quality circles…. get your whole management team out there talking to the employees, every day. Integrate your administrative functions with your plant teams. If you have a supervisor or manager that never breaks a sweat, because he's sitting in an air-conditioned office all day, time to change his job description. This all goes back to making your company an aggregation of competitive, thinking teams that seek out change, instead of fighting it. This is certainly the first definite truism in survival of the fittest; those who change the fastest will run the farthest.
Let's switch gears now to talk about products.
Any discussion of products has to begin with our customers. And those customers are different groups of people, depending on which sector of the wood industry you're in.
Sawmillers have at least four completely different customer groups, all wanting a different product. There are timber trusts and developers interested in buying the land, log buyers wanting the raw material, rough lumber customers wanting a green or rough raw material, and finished lumber customers wanting a really nice product, custom graded and custom packaged if possible. The problem here is that these customers are competing interests, and your business is deciding how to partition those opportunities to optimize the interests of the company while not driving away each of the competing interests, because the value of each opportunity changes with time. For instance, the trend is for larger public lumber producers to divest themselves of their land holdings, because the timber trusts and developers all seem to have longer-term investment strategies than a manufacturing concern can afford. In fact, the public companies are being forced by their shareholders to divest the land holdings. The combination of slashed capital gains taxes on forest sales, a code that gives nonintegrated timberland owners a tax advantage and healthy land demand makes it difficult for large companies to justify holding their timberland.
Now privately-held hardwood companies are seemingly in a different position. No one is pushing them to sell off the family timberland. It seems to make sense to hold onto the forest as a captive source of raw material, one that will support the business through down years in the lumber markets. But it is healthy to periodically question the value of land ownership. Right now, for instance, it is a seller's market, because timber trusts and pension funds are potential buyers, and they have deep pockets. Do you know the net present value on your land ownership investment, after taxes, for the next thirty years? Is it as high as you could realize through your ongoing processing operations? The timber will probably always be there (unless you sell it to developers); if the volume of it decreases significantly, the remaining timber will have so much value you'll be forced to bring your wood in from cheaper sources anyway. So on the one hand, major revenue from a land sale could be your investment springboard to technological and market dominance. However, the alternative is becoming a log and biomass provider to the world's market…That business is lucrative now and will become more so in the future. If your operation is consuming wood at a lower cost than the world's market could bear, you may be in the wrong business. Ultimately, though, that depends on how competitive your conversion operations are.
Secondary wood products producers have a similar problem, but defined by different opportunities. Many bring in green lumber and dry it in-house; in that case, the dry lumber market is always an alternative to in-house value-added operations that must be considered. Of course, you can't play the lumber market daily and ship off lumber that was earmarked for today's run in the mill. But what you can do is perform a weekly or monthly analysis of profit potential of your raw material in the lumber market and compare it to your operating margin for that period. Do that long enough and a strategy will define itself for you, and you'll be able to adjust your operating tactics accordingly.
Another product opportunity that we've all struggled with for the last ten years or so is that of the certified green product. We all had the right to expect that an investment in certified products would yield a premium in the marketplace…it hasn't. But what is happening is that the growing availability of certified green products is raising the ante for some significant market opportunities. More and more government, school, and hospital projects are being designed to some level of LEED certification. In fact, the Association for the Advancement of Sustainability in Higher Education has passed a new policy for green campus construction, stipulating that all new U.S. campus construction must be built to at least LEED Silver specifications, and the new draft version of that standard calls for at least 5% of all materials used on a job to be certified "biobased" product. This is a trend that will spill over into primary and secondary education, and eventually to home construction in the advanced countries of the world. Home Depot announced in May that it has begun offering Eco Options labeled products and by 2009 at least 12% of their product offerings will be in green-certified products. Right now, certified wood is the most obvious option we have to play the game. And it is providing the bullet point on the LEED checklist that architects can call for. If you're in the wood business for the long run, you have to realize that certified wood is in your future , and the sooner you have it, the better positioned you're going to be for the long haul.
Another product that will make or break your operation over the next few years is one that you've dealt with somewhat incidentally as long as you've been in business…energy. And that product will help us transition to the final category I'd like to address tonight…Process.
About three to four years ago I was researching the concept of lean production in the wood products industry. We were interested in defining the trade-offs that occur when a wood products company tries to lean its operation through reduced inventories, shortened cycle times, and pull-based scheduling of production. We collected data from more than 20 different wood products companies, and developed a statistical relationship between the resource consumption of an operation and the amount of physical products that operation is able to produce. The resulting metric we produced we came to call a company's Lean Index. By producing this model and Index, we hoped to be able to reduce the twenty or so metrics commonly referred to by Lean gurus down to the most critical few, whose impact could be analyzed on a company by company and operation by operation basis.
Well, we found out a lot of different things from that data, but the most significant finding was the most surprising. That was, that energy consumption of an operation is the single most significant indicator of leanness of an operation, based on its ratio of product output to all resources used to produce that output. Now, that didn't mesh with most consulting on lean production techniques, because energy is rarely ever considered or mentioned in most Lean Production training programs. Yet our study confirmed the fact that the single largest difference between similar companies, when measuring the input/output ratios, is energy consumption. And we all know how expensive that difference can be.
But there is another facet of energy that goes beyond just trying to use less of it. Biomass energy production is more and more becoming viewed as a realistic substitute for fossil-based energy production. The USDA published a strategy in 2005 that called for a target of one billion dry tons of biomass to be converted to energy across the country. Included in that one billion tons are estimates that 368 million dry tons a year could come from US forests, which by the way is only half of what they said was actually unused each year in the forest. Now that's a lot of wood. How much? Well, for example, I've calculated that a very conservative number of 6 million tons of biomass could be sustainably harvested just from the "low-use wood" portion of the Pennsylvania forests every year. That's enough wood to generate 6 million mega-watt hours of electricity, 300 million 40-lb bags of wood pellets, or 540 million gallons of ethanol. On a broader scale, the 600 million dry tons that USDA says is left in the woods every year could produce the BTU equivalent of 1.675 billion barrels of oil, about one-fourth of our country's annual usage.
At this point, naysayers are pointing to the logistical difficulty of bringing low-use wood to conversion facilities, the technological challenges of converting wood to ethanol or biodiesel, and the borderline economics of both. But those borderline economics are based on the current price of oil. As China and India, in particular, grow to consume more and more of the world's oil supply, the price of oil has to climb, and be subject to more international tensions. The attractiveness of locally-controlled energy resources and the resulting level of energy self-sufficiency mean that the best renewable energy alternative will come out a winner. And for a bunch of reasons I won't go into in this report, wood might well be a dark horse winner of that competition.
And guess who controls the wood? The wood products industry, for the most part. From now on, you should not view yourself as a wood products company, you should view yourself as a converter of woody biomass to alternative products. That mix of alternative products should be strategically evaluated each year, and investments should be made to optimize energy usage and production, or to sell the raw material into energy converting markets. That way, as your wood "by-products" such as lumber, cabinets, and pallets, leave your mill, they will be gravy to your bottom line on top of your energy-conversion margins.
The next major investment you may want to make is one that puts you into the bioenergy conversion business in a serious way. If you have dry wood waste as a by-product, consider investing in a pelletization process. Right now, energy brokers from as far away as Eastern Europe are scrounging for as many railcars of pellets a week that they can find. Pellet stove retailers are providing pellets on allocation to their customers only, supply is that tight. If you're bedding down chickens with potential wood pellets, you're giving your energy niche away to the chicken farmer. If you're drying lumber with worn-out kilns, retrofit them or replace them with newer technology. Consider upgrading your boiler capacity. Consider investing in a small co-generation unit…there are units that are designed and installed for as little as a half to ten megawatts, that provide heat and electricity to your plant and the excess electricity is sold back onto the grid. Look into the technology for converting your waste biomass to methanol, biodiesel or wood gas and running your truck fleet, loaders and forklifts with it. And most of all, track your raw material flows by btu value, and always be aware of where those btu's will bring the most value. Track them on the weekly and monthly basis just as I suggested for the lumber sales option earlier, and use that data to quantify your opportunity to deliver energy products to the growing world-wide energy marketplace.
There is another aspect of process that no competitive wood products company will ignore. That is logistics, the process of moving materials, resources, and products to their required location at the optimal time. The science of logistics is in my opinion the number one competitive differentiation between companies ; this differentiation created the birth of a whole industry, the package delivery industry. UPS and Fedex were created because they recognized that existing postal and trucking delivery was not adequate to the needs of customers.
Logistics in the manufacturing supply chain is another step complicated, because raw material delivery and production scheduling has to be figured into the logistical problem. And lumber logistics is yet complicated to another degree, because of the uncertainty of specific grade lumber production and kiln drying times to target. Historically, our industry has operated logistically on a "wait and see" basis…that is, when am I going to get my product? "Wait and see" or in industry vernacular, "Probably the week of…" Ten years ago I ridiculed a Home Depot purchasing agent when he asked, "Why can't we get lumber on a daily schedule, like all our other products?" Now we finally recognize that logistical synchronization is possibly our biggest competitive advantage against competing importers.
When you get to the point that you can schedule daily delivery to your high-volume cabinet or furniture accounts, you'll have created a new opportunity for those companies to further lean their own operations. How you do that is a real challenge, one that should be one of the first projects you assign to your new industrial engineer. I'm not saying it's going to be easy, but I'm also not ridiculing the idea as I was ten years ago. My strategy for survival is to thrive on those opportunities that seem too difficult to everyone else.
I suggest to you, the way to survive is to thrive . Don't justify your mistakes, learn from them, teach their lessons to your employees, and move on. We're usually too quick to defend "operational expediency" that results in bad outcomes. Visionary leaders will be around 30 years from now, and their vision will be based on long-term commitment, not on short-term short-cuts. Focus on growing future leaders of your business, not on the business itself. Grow quality product lines, not product volumes at the expense of margins. Be a learning organization, not a "lean mean machine." "Do more with less" is the exhortation of the captain on a sinking ship. Don't settle for doing more with less; do a lot more with a little more.
Your mission from here on is not to hunker down to survive the nuclear winter of Chinese wood manufacturing. Ronald Reagan once said, "If history teaches anything, it teaches us that self-delusion in the face of unpleasant facts is folly." Let's learn together how to thrive in this global business environment. If you and your employees are thriving in the daily operation of the business, you won't be held down. Thriving means that every employee is learning and contributing daily, and that supervisors and managers work side-by-side with line workers. Thriving means that the best people are sought out and brought into your company. Thriving means that you enjoy daily conversations with your employees, not just weekly or monthly meetings. Thriving means that you're making products that people are screaming for, not products that fill your back forty. Thriving means that you're growing into a larger concept of your business, one that not only meets the wood products needs of a growing populace, but one that helps this world of ours keep churning by providing renewable, environmentally friendly energy. Thriving means that your company is visibly improving, every year, in every way... Thriving is surviving, and it's a lot more fun.