"Every tree needs to be pruned."–Chris Rader, consultant
It's a common dilemma for dealers: what to do with customers that squawk for too much service or have fallen behind on payments. At a time when lumberyard executives are scrambling for every dollar they can get, when is the pushy or nonpaying customer no longer worth the effort?
In other words, when should dealers "fire" a customer?
"Most of my customers subjectively fire their customers when the level of trust dilutes considerably," says Chris Rader, president of Lafayette, La.-based Rader Solutions, a management information, education, and training consultancy for the construction supply industry. For Rader, the move is warranted when a contractor no longer returns calls, is consistently late paying bills, lies about delivery quantities or quality, and begins to create chaos within a dealer's organization.
"It becomes a simple business decision," says Eric Ziedrich, president of Healdsburg Lumber Co. in Healdsburg, Calif., and chairman of the Lumber Association of California and Nevada. "If that relationship creates too great a level of strife with our business and personnel, at some point you just make the decision to cut bait.
"In some cases, it's been quite liberating," he adds.
Sometimes Healdsburg Lumber parts ways with a customer because of unreasonable expectations. A customer may demand impossibly rapid-response deliveries or cause such high levels of stress that other customers' needs get ignored. In other cases, a customer that is not necessarily loyal puts a dealer through a bidding war to get his business.
"If you are losing money in the relationship, it should be easier to make the decision in tough times," Ziedrich says. "Anyone who is not a profitable relationship might need to go."
Tindell's Lumber and Building Materials, a Knoxville, Tenn.-based dealer, takes a close look at the sales data it collects from all customers. It pays particular attention to the gross profit made from a customer in comparison to its total purchases. The information is stored within a data warehouse, broken down into spreadsheets with the purchase history of each customer, and reviewed at least twice a year.
"It allows us to identify our problems and try to fix them," says Tindell's president Johan van Tilburg. Along with non-payments and frequent customer returns, Tindell's looks at the product mix it sells to customers that may be dragging down profits. In most cases, Tindell's will meet with the customer in an attempt to direct the contractor toward different buying habits.
"Any supplier-customer relationship has to be a two-way street. You have to tell them 'I need to make money, and you are not giving me the opportunity to make money,' " van Tilburg says. In situations where the customer refuses to budge, Tindell's gives it enough time to set up a line of credit with another supplier, then shows the pro the door.
In 2007, while accounting for a small percentage of Tindell's overall customer base, van Tilburg notes, the Knoxville dealer did cease selling to at least 12 customers.
Healdsburg primarily caters to custom remodelers and custom builders that require a higher level of expertise and service on the dealer's part and don't want to part ways with that relationship. But when the relationship becomes strained, Healdsburg will meet with customers to try to iron out problems.
"What pushes us to the wall is a high level of unreasonable demands without the willingness to pay for the level of service or the level of price," Ziedrich says. "There's no question that it's hard to let go in these times, but it's certainly an easier decision for those who pay attention to the bottom line."
Bill Hofius, senior vice president of Norcross, Ga.-based Ply Mart, calls it the 80/20 scenario: a customer might give you 20% of your business but take up 80% of your time. "Some pains are being tolerated now," Hofius notes, given the economic doldrums. But last year, the dealer split with at least a dozen customers, including some builders that demanded lower prices for materials already delivered.
"Some builders are being abusive about it. We're already down there; if you don't like our prices, you can go elsewhere," Hofius says. "I can park the truck and lock the door and make more money than if I deliver the materials. There was no 5% to give them, and we were netting 1% if we were doing anything right."
Dealers have found themselves firing contractors after reviewing a customer's margins, along with its ability to pay on time and all the costs associated with the business–for delivery, salespeople, restocking, and rebate, to mention a few–and discovering they were on the losing end.
"We have to make our living providing good products and good service," says Berlin Meyers Jr., co-owner of Berlin G. Meyers Lumber Corp. in Summerville, S.C.. "When you get one or two of them squeezing you to death–they want low prices but are consuming so much of your time and energy–they need to go."
First Line of Defense
A solid background check is not only a good defense but also a good offense, according to Meyers. "The best way to deal with some of these guys is to never get hooked up with them in first place," he says. Meyers Lumber has found that when a customer is looking for a new supplier, there is usually a reason–namely, the previous yard the pro dealt with got tired of dealing with it.
"They all have a great line: we want better service," Meyers explains. "You have to look awfully hard when you have guys like that coming to you, because once they are your customer–wow!"
For instance, a contractor may stipulate that it wants deliveries composed in a certain manner, such as trim broken down for each separate room on a project. While Meyers Lumber is willing to tackle the task, it comes with a price. "If someone is willing to pay for that, those are the guys you hang on to," Meyers says.
But when the dealer finds it's making 15 to 20 trips to a jobsite instead of a half dozen, where there's smoke, there's fire. "The squeaky wheel gets the grease, but they are taking away from your good customers," Meyers says. "You have to turn them loose."
At Meyers, that's usually handled by pricing the contractor out. When asked why the price on materials and delivery may go up, the reply is the extra service requires a higher ticket.
Although Sunnyvale Lumber of Sunnyvale, Calif., does not dismiss a lot of customers, it did close nearly 20 accounts last year, primarily for nonpayment. "We only stop doing business with someone if they don't pay on time," says Rick Roberts, CEO of Sunnyvale Lumber. "I tell my employees that this is not a hobby, this is how we earn our daily bread, and we don't fire a customer just because they are a pain in the ass."
However, Sunnyvale does not mind charging its most difficult customers a higher price. The philosophy is that the customer might go elsewhere, but if they are willing to pay for the extra effort they require, then Sunnyvale is willing to sell to them.
Given the rising credit crunch, the dealer will also sit down with builders to find a compromise and extend credit terms. But Sunnyvale is finding itself collecting more money through legal channels than it has in past years.
"Basically, your collections start at the credit desk. If you're doing your job upfront, it cuts down on the problem situations," says Bill Bates, vice president of R.P. Johnson & Son in Andover, N.H.
It's not unusual for the dealer to conduct background checks on competitors, especially when a new customer walks in the door and does not list one of R.P. Johnson's competitors as a supplier.
"Nine out of 10 times, the story is they didn't pay," Bates says.
And if the customer does list a competitor, Bates puts in a call anyway. Between 2001 and 2004, Bates says R.P. Johnson did not lose a penny or receive a single bad check, but two accounts did go bad in 2005, including a bankruptcy.
"I can do business with just about anyone out there. If he has terrible credit, we will talk with him, sit down and go over his credit file," Bates says. That does not mean the contractor will receive a credit account, however. Rather, R.P. Johnson will require the pro to open a cash account or a drawdown account.
Once a check is received and validated, the contractor will still receive the discount offered by R.P. Johnson, but the company has also avoided a nonpaying customer.
"I explain to them, 'We are running a business and can't afford to call you every day to get our money,' " Bates says. "If you find yourself having to call someone for payments, we shut them off and throw them on to the cash contractor account." The process lets R.P. Johnson keep the customer's business as it lessens its exposure to a loss.
As early as the latter half of 2006, Wayne Briggs, president and CEO of Crane Johnson Lumber, could see the smoke on the horizon. The Fargo, N.D.-based dealer noticed payments being stretched beyond 60 days and into 90 days.
You don't need to wait until things turn sour to take steps. When those times arise, R.P. Johnson turns the matter over to its attorney.
A customer that failed to pay resulted in an asset search that turned up several properties. Liens were placed on the properties, and the customer was forced to place a rental property on the market. "We are still doing business with that customer," says Bates. "When the property sells, we will get paid right away."
Likewise, Crane Johnson has found itself filing pre-liens, which includes an intent to file lien notice 40 days after the first day of a delivery.
"We are starting to get past the concept that a lien is a bad thing. It's becoming more common," Briggs says. "You can't afford this much time and resources chasing accounts."
Profitable dealers have profitable contractors buying from them. At the same time, they take a good look at future customers and push the marginal risk to their competitors. In cases where the dealer does not fire an overdemanding or risky customer, it could bring down the ship.
"People want to be associated with winning companies, and by firing the problem contractors, the dealer will continue to gain winning companies as customers," Rader says.