September/October 1995
Some predict an industry trend toward megaprocessors controlling the bulk of recyclables in North America. While this might seem a threat to the Industry’s smaller players, these recyclers have developed strategies that play to the advantages of small size.
By Eileen Zagone
Eileen Zagone is editorial associate of Scrap Processing and Recycling
Northwestern Recycling Inc. is expanding yet again.
The regional scrap giant just announced it is purchasing three smaller processing operations to add to its existing I1 plants, making it one of the largest recycling companies in the country. And according to the CEO , the company plans to expand its empire further in the coming year by acquiring four more small processors it has been eyeing.
Northwestern Recycling is fictional, but its story could be real. All across the country, more and more scrap recycling companies are buying—or being bought out by-other operations, creating large and powerful industry forces.
Sounds like a trend, right? Perhaps, but despite the apparent move toward huge national scrap conglomerates, the industry is still full of smaller recycling companies that are not only surviving, but thriving.
That's certainly an accomplishment in today's business climate. Much has changed since the formative days of the scrap business, when smaller operations were just about the only operations—the days before environmental safety, and other governmental regulations altered the industrial landscape, pushing recycling companies to expand their staffs and invest in all kinds of compliance mechanisms. Add to this the multitude of technological and equipment advancements that may have made some aspects of processing easier and more profitable, but have also produced a vastly more capital-intensive industry. And there have also been substantial changes in how and where scrap is bought and sold, making commodity market knowledge increasingly vital for every industry participant.
So, just how do smaller scrap companies manage to prosper in a business that has grown ever-more complex? Here are some answers.
Making More of Less
Chief among the challenges smaller processors face is how to stretch limited resources.
Smaller companies have many of the same goals and responsibilities as larger processors and frequently must bear the same burdens, but they have fewer employees with which to deal with these issues. In fact, notes Ronald S. Riebman, president of Penn-Del Metal recycling Corp. (Wilmington, Del.), the management at smaller companies is often made up of just one or two people who must be able to juggle everything from keeping abreast of the latest market prices and OSHA regulations, to operating equipment and dealing with customers—tasks that a larger company would likely spread among several employees. "It's difficult trying to wear 12 different hats each day," he says.
But though it may be difficult, being willing and able to pitch in wherever they're needed is the main strategy executives at smaller recycling firms identify as key to their success. As Stan Litman, president of Texas Recycling/Surplus Inc. (Dallas), puts it, "You have to be a jack-of-all-trades." For instance, he notes, although he and his two sons each has a primary area of responsibility in the business, they "all drive forklifts and can also borrow money from the bank."
Dan Heirshberg, president of Desert Metals Recycling Inc. (Tucson), offers a similar take on this challenge. Heirshberg founded the company with his wife Judy six years ago, and the two were later joined by his brother-in-law, but Desert Metals has just five other employees. "So by necessity we do just as much physical work as the other employees," he explains, noting that they also directly oversee every other aspect of the business. When asked how he juggles these various tasks, Heirshberg replies, "I just do it."
Of course, there are times when, despite their willingness to do it all, small-business owners simply don't have the know-how to handle a particular issue. In such cases, many turn to consultants to help them keep up-to-snuff on critical topics such as environmental compliance, legal actions, and transportation matters.
In this industry based on relationships, some also turn to each other or to larger firms in the business for guidance. Kenneth Swenson, president of Swenson Metal Inc. (Spanish Fork, Utah), for one, emphasizes the importance of "rubbing shoulders with the big guys"—an opportunity he is afforded on a regular basis as a frequent attendee at local and national industry gatherings. But large firms aren't the only ones that can help smaller companies like his, he says. "You can get a lot of advice and information from talking to others in the business, no matter what their size." Participating in association activities can also benefit smaller scrap companies by helping them boost their reputation and presence, he ads.
Heirshberg, too, has found value in learning from his peers and notes that he aims to spend some time in the next year visiting other scrap facilities and learning how they run their businesses efficiently, in the hopes of learning some tricks he can emulate at his facility.
Still, even with a little help from outsiders, coping with limited resources can be frustrating. On the flip side, however, is the comfort that comes with having greater control over the business than larger operations with complex management structures. Explains Swenson: "One advantage of remaining smaller is that you stay in control and make your own decisions. In so many big companies, the right hand doesn’t know what the left hand is doing, and a company can grow right out of business by growing too big too fast.
Frank Giglia Jr., vice president of Allied Scrap Processors Inc. ( Lakeland, Fla.), echoes this thought, noting that, as owners who are on-site every day, he and his partners can make immediate decisions as issues come up. "With a broader management structure, it takes too much time to make a decision. And if you have more than one facility, the decision-making process is complicated further."
Many executives at smaller processing companies so value the personal control they have over their businesses, in fact, that the say they wouldn't be willing to sacrifice it for business expansion.
Streamlining for Efficiency
In addition to making due with fewer people, smaller scrap businesses often also face the challenge of operating with a lot less equipment than larger recyclers for the simple reason that they tend to have less funds available for machinery purchases. And that can certainly put them at a competitive disadvantage. Paul Brenner, president of Brenner Recycling (Hazleton, Pa.) and a third-generation recycler, notes that even though his firm could be considered on the verge of being medium-sized, it still loses some deals because it doesn't have tons of equipment. "The industry has changed so much in the last 20 years," he laments, "especially in the cost of equipment. Nothing is cheap in this business."
And borrowing money to finance equipment is a move many smaller companies steer clear of. "In this business, margins are small enough that I just don't think many smaller processors have an extra 10 percent to pay in interest to the bank," says Swenson. Plus, some smaller companies report, banks are frequently reluctant to lend them money.
One way many smaller firms are countering their equipment limitations is by focusing on ways to increase efficiency. While this is a strategy businesses of all sizes aim for, this goal seems especially vital to operations with minimal machinery.
In pushing for better efficiency, these processors are focusing primarily on minimizing handling of materials. "In this business, no matter what size you are, you are dealing with the flow of material and you have to find out how to make it flow best," says Giglia. Riebman agrees, explaining that whenever possible, Penn-Del tries to put scrap directly into containers, which eliminates the need for extra storage space. "We also try to keep it moving rather rapidly through the yard," he adds, "so we don't have money tied up in inventory."
There is a downside to this tactic. By moving scrap quickly through its plant, a firm may lose out on opportunities to time its sales based on commodity market changes, but, then again, most smaller scrap companies are not interested in being market speculators.
Service With a Smile
What smaller processors may lack in personnel and equipment, they frequently make up for in terms of service. In fact, since smaller companies tend to handle smaller volumes than their larger counterparts and therefore often can't compete on pricing, many say customer service is the one area that can set them apart from their larger competitors. As Litman puts it, 'The best way to compete is through superior personal service."
The one catch is that personal service can't happen without a customer service oriented staff—however small. Thus, finding and keeping personnel who can relate to customers can be even more crucial to the success of a smaller company than a larger one. "It's important to invest in people,” says Swanson. “It’s hard to provide good service if you’re constantly replacing your work force.” Other owners of smaller scrap processing facilities echo this sentiment, stating that trusted, reliable employees are crucial to ensuring superior service.
So do customers notice the personal service difference? "Absolutely," says Heirshberg, who notes that Desert Metals, like many smaller recyclers, has a lot of customers that are small businesses, and they appreciate the individual attention the scrap firm can offer. Heirshberg, therefore, prides himself on having an operation that puts his customers instantly at ease. "We always have a smile on our faces and a good staff that not only makes everyone feel comfortable coming here, but also offers quick service," he explains.
As part of this service strategy, many smaller processors handle accounts that may not be profitable enough to interest the bigger industry players. And they are often willing to offer these and other customers extra attention. For instance, Desert Metals is willing to pick up with its own fleet of trucks a partial load of scrap from a good customer without a pickup charge. “We have to concentrate on competing on things other than price, and prompt service is the best way to do this," Heirshberg explains.
Another way some smaller processors serve their customers is by buying a broader variety of scrap than those larger competitors that seek more homogenous or specialized loads. As Riebman puts it, "We take a little bit of everything to please our customers. We'll take whatever they've got as long as we can do it without hurting our business."
This generalization strategy has benefited some smaller processors in ways beyond increased competitiveness. In the case of Penn-Del, for instance, the variety of scrap that the company accepts has fostered business expansion into the usables market. And diversifying into usables has helped cushion Penn-Del's scrap business during those inevitable economic downtimes, Riebman says. "It is comforting to know we are not 100-percent dependent on the scrap market to keep the business going," he adds.
Another company that has found great success in expanding with a "side" business is Midland Iron & Steel Corp. (Moline, Ill.), which added paper recycling to its business capabilities in the mid-1980s after its largest ferrous scrap supplier closed. Today, notes Marty Davis, the firm's president, the paper side of the business accounts for about 60 percent of Midland 's profits and the company is no longer a small operation. "Paper has been a godsend," he exclaims.
More recently, Midland diversified into processing scrap wood pallets, but Davis says this isn't necessarily a business all smaller scrap firms should consider. In fact, his advice to other companies seeking to expand through related business ventures goes like this: "Make sure your diversification is congruent with the businesses in your area, and try to stick with your strengths."
Looking Ahead
Though faced with increasing competition and challenges that require them to spread themselves thin, smaller processors are a resilient lot, as seen in the myriad strategies they've developed to remain competitive. And while companies like the fictitious Northwestern Recycling may continue to burgeon by buying up other operations, the owners of today's smaller scrap businesses predict there will continue to be a place for them in the industry.
If anything, forecasts Swenson, "over the next 10 years, what there is not going to be a lot of are the medium-sized firms." These mid-sized firms, he predicts, will be the targets of buyouts and will bear the brunt of formidable industry pressures that smaller processors are better able to avoid.
Others predict that industry growth along the lines of Northwestern Recycling may be a thing of the past anyway because of a reluctance to inherit others' environmental problems. "It's harder today to expand than ever before, what with the phenomenal indirect cost of regulations and buying property," says Swenson. "The logistics of expanding to other yards are not always practical or affordable."
Some predict an industry trend toward megaprocessors controlling the bulk of recyclables in North America. While this might seem a threat to the Industry’s smaller players, these recyclers have developed strategies that play to the advantages of small size.