Saturday, August 22, 2009

Supplier Consolidation Squeezes Jobber

J is a broker between envelope manufacturers and mail-houses. Those direct mail things you get in the mail, those batches of coupons you get in your mail box. That’s an example of what he does. He’s 62, he’s been doing this all his adult life.

Being a broker—other terms are jobber or middleman—requires a unique kind of business expertise. It’s a business dependent on relationships, but you need more than one supplier. In the case of the envelope manufacturers, J did business with three and having three suppliers means better pricing and service—your suppliers always know they are in competition. You are never caught short, if an unseen occurrence takes place, you always have another trusted supplier.

His three suppliers were in New Jersey, Long Island and Pennsylvania, all within an easy driving distance for the periodical face-time. It’s a business that requires the best price and timing. The broker has to make sure the envelopes are manufactured and delivered to the mail-house on time.

In March, the envelope manufacturers in Long Island and New Jersey closed. According to J, these two long term suppliers—with on he had a relationship with since 1980—could not weather the slow economy. The announcements were sudden. Of course, J-‘s business has suffered, the number of direct mail deals has not increased, but he was holding his own and still has enough business to justify more than one envelope manufacturer. “Now, I have to find other suppliers, but they are all in the Midwest. The other supplier I’m using, in Pennsylvania is the last envelope manufacturer in the Northeast.”

What’s the problem? Of course, the folks in the Long Island and New Jersey Plants lost their jobs but the ones in the Midwest have kept theirs. Although there is more distance now for delivery of the envelopes, Midwest plants tend to be more competitively price to start with, so the few extra hours of driving time for the trucks isn’t a factor. Extra cost or time for a project is minimal if not non-existent. The problem is trust. He now has to develop new relationships, try new plants for projects and hope they can do the job because if it is not done right, he will be the one who loses the business. “I can no longer drive to the plants to talk to the people in person, make sure everything is working as promised. This business is also very close-knit, and I don’t want the owner of one plant tell his brother in law who is a broker about a project and have the brother in law go to one of my clients and under-cut me.”

Then there’s the new development he is seeing. In any industry it is not unheard of for a large company to buy out competitors, certainly a common scenario in this economy. When this happens in industries often written about in Business Week it’s called mergers. J- tells me, “the big guys are buying out competitors, and they’re destroying the equipment. They’re not just shutting down the factory. They used to sell off the equipment, maybe bring in new equipment if they wanted to operate a second factory. Now, the big companies, they can handle a loss and extra expenditures where the little guys can’t. When times get better, they will be the only source. So, in three years, five years, they will control the prices.”

At the end of Middle Age, J remains ripe with vim and vigor, works out with a trainer three times a week. He wanted to retire before he turned 70. “Business is about as slow it has been, you have to work twice as hard for every dollar. Now, in five years, when I’ll be ready to start hanging it up, take off and travel the world, and the economy is hopefully better, the prices will be higher and there will be no way to compete for a better deal.”

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