World views of Dr. L. Allan Austin

Pallet Pool Insider: The Right Stuff – Starting a New Industry Pallet Pool
February 10, 2011

Former CHEP employee muses about ingredients needed to build an successful white wood pool.

By Andrew Mosqueda
Date Posted: 4/1/2010

The pallet rental industry is a multi-billion dollar global business dominated by one company, Brambles the parent company of CHEP USA. Pallet rental has changed the way that many users think about pallets. It has proven a lucrative business for years as CHEP has reported hundreds of millions of dollars in profits. Yet competitors have had a difficult time repeating CHEP’s success. This column looks at various components of pallet pooling to see what it would take for independent, white wood suppliers in the United States to develop a truly competitive option.

Over the years, CHEP has spawned a number of competitors, including PECO Pallets and iGPS. PECO Pallets is a 48×40 wood block pallet and iGPS is a plastic 48×40 pallet. Despite the obvious differences in invoice and reporting techniques, the basic rental pallet business model is the same. This consists of a single company managing the system for customers. There are other models such as EPAL in Europe and the CPC (Canadian Pallet Council) in Canada that bring together individual pallet manufacturing and recycling companies along with end users to create a network.

Stan Bowes, President of EPAL, said that one of the biggest benefits of the EPAL system is that its open approach allows partners to keep more of the profit developed by the pool instead of shifting that money, responsibility, and ownership to one management company. Bowes says that partners are free to join the system at any level from producing to repairing pallets at volumes ranging from the hundreds to the millions. It all depends on the abilities and business interests of individual participants. Additionally, partners can negotiate with one another, meaning if they are not happy with a supplier they can change. The point of the system is to maximize profits for the partners, and not just EPAL.

If a company wanted to start up a new pallet company which business model would be the best? There are many things to consider before taking the next step to a regional or national pallet provider. The article will cover a few of the top considerations including the reporting, system evolution, distributor network, inventory management, pallet design, and logistics.

Reporting

This is the one thing that every rental pallet company has in common. When it comes to reporting, the pallet is not just a pallet, it is an asset. As with any industry, assets are tracked for financial reasons. There are several ways to develop a reporting system. Online reporting tools, Electronic Data Interchange (EDI), and Excel-based reporting are designed to receive your customers name, address, city, state, zip, PO number, and pallet quantity.

Large pallet rental companies request customer lists from pallet users to match up its customers with that of the pallet user. This information is used to optimize the pallet network. CHEP uses a SAP system in tandem with Microsoft Biztalk and SQL servers. iGPS has RFID tags embedded into its plastic pallet and offers comparable services.

Developing a reporting system for a regional pallet rental system does not have to be as complicated. But it does need to be created to keep the impact on the customer in mind. Consider that you are starting at a severe disadvantage in terms of technology, inventory, and logistics network. How would you implement a reporting system that your customer would accept? Keep in mind that if you are looking at a regional system, your customers will more than likely be working with one of the three major pallet rental companies and may not want to take on the additional operational and administrative burden of a new supplier.

Program management is often a point of contention for many suppliers. It can require a lot of work to reconcile invoices and manage a pooled pallet program, especially if you tend to lose a lot of pallets.

Aside from the reporting aspect, pallet recyclers tend to deal with many of the elements of a pallet rental model to some degree.

One similarity of all pallet rental programs is that it requires a shipper to manage its compliance within the program and use of rental assets. Your responsibility is to manage the pallet program, give the rental company sales leads, and train your administration and warehouse personnel on the proper use of a rental pallet. There can be significant financial consequences if you are not successful in the management of the program.

Whether you choose a regional or national model, customer burden will be a major component to the sale of your program. It is time for a pallet program evolution. This is one area where the major companies are vulnerable. A new approach could look at every aspect of a rental pallet system and find a better way to do it. If you are going to go down this road, my advice is not to follow iGPS and PECO by adding yet another pallet rental company based on the original.

Pallet Evolution

What does a pallet evolution look like? You must first take the market’s points of contention in order to get a seat at the table. Points like program management, quality, and inventory will be the areas you need to convince potential customers to move from a proven reliable vendor.

Any time large corporations make a change within their supply chain, a risk assessment must be performed to determine the potential of supply chain interruption. If a production line goes down at a bottling company because the pallet vendor cannot meet demand, it could cost the company thousands of dollars per hour. The cost to manufacture pallets is significant and slow organic growth gives your competition the opportunity to keep you in a niche market. There is nothing wrong with a niche market if your intention is to be satisfied with limited growth.

I have focused on the importance of joint ventures to share cost and give you a competitive chance. Working with pallet recyclers will help you meet inventory demand and logistic concerns. There are many pallet options now available, including wood, plastic, steel, and corrugate. All types of pallets have a place in the supply chain and can meet corporation’s operational requirements. Beyond pallet design is program management. No matter how well and impressive your technology is, if the customer is managing your business and inventory there is no difference between you and the established rental pallet companies.

The question is why should a corporation risk going with an unproven system rather than sticking with the “devil” they know? The answer is program management. I believe the biggest misconception is that rental pallet customers loose pallets and are never found. Any pallet recycler will tell you that the majority of CHEP pallets are recovered when they are mixed with whitewood cores. They are then separated and returned to CHEP where they are inspected and reintegrated into the system. Since they were not picked up from a CHEP customer, they were considered lost and the company that they were originally issued to is financially responsible. Essentially it is an accounting error that either side can track. A company entering the market needs to develop an accounting system that reduces customer responsibility, but tracks pallet inventory. If a pallet user does not have to give up its customer base and manage a pallet inventory system,  it would be attractive to potential customers.

There are many funded companies entering the pallet market, and all have great ideas to evolve the supply chain through pallet management. Here are a few ideas of mine:

1. Set up a franchise “type” of system

a. Partner companies need to have “skin” in the game.

b. Fee to join the network

c. Bylaws will address continuity, look and quality of pallet

d. Franchisees work with pallet recyclers to manage assets.

2. Strategic Pallet Management sites, similar to CHEP’s Total Pallet Management approach

3. Equipment to track inbound pallets at Operation Centers

a. Do not need to have customer base match

b. RFID/WiFi reader to determine when pallet was issued and in what region.

c. Allows you to keep track of how many pallets are out in field and how many turns each pallet does per year.

d. No reporting by the customer, just order and ship. The rental pallet company manages its inventory, not the customer.

Developing Customer & Distributor Network

When considering asset management, defining the scope of your territory will be necessary to identify areas where your assets can be shipped out of network and essentially lost. If your intention is to start a regional pallet rental company you should consider creating joint ventures with other medium to large pallet companies.

Your delivery radius is critical to your operations. Typically, your delivery radius should be about 150 mile radius. If your territory includes a region that includes several states, your delivery and asset recovery radius might be more than 150 miles. The strategic location of your facilities or network partners is critical because transportation costs can easily kill a pooled system.

Who will your customers be? That is the question that will determine where you will focus capital and resources. As a pallet dealer you might be able to use current customers to run a Beta Test to work out the kinks. The trick is not to get the shippers, but the distributors to recognize you as a legitimate pallet rental company. Pallet rental programs are time consuming and require special handling for distributors.

Distribution centers are now dealing with three national pallet rental companies. Most do not accept all three, but some do accept at least two. Each of these programs comes with its own reporting and reconciliation process. Distribution centers man-hours and resources are consumed by the program, but the benefits are perceived to be worth the sacrifice.

Pallet Inventory

Pallet inventory is the biggest advantage CHEP USA has over competition. It is now estimated CHEP has over 80 million pallets in the United States. This is a key element for customer retention and defending against competition. A company considering starting up a rental pallet business must address how it will sell customers on a significantly smaller inventory. Additionally, building critical mass is a must to make any pooled system work over time. With 90% market share of the rental business, I don’t think a start up will be able to compete one-on-one with CHEP using the same business model as the original. The CPC and EPAL models are an example of how an organization can compete with CHEP through innovation, but those approaches depend on cooperation among many pallet recyclers, which is never easy.

A major obstacle can be keeping appropriate inventory in the right place at the right time. Inaccurate forecasting can cost a rental pallet company hundreds of thousands of dollars per year. In the case of CHEP, they are responsible for keeping adequate inventory in multiple regions and market sectors. If they are off by even 10%, there would be tremendous transportation costs to ship empty pallets. Seasonal industries, such as agriculture, present a problem in forecasting because of the multiple variables like weather, water availability, acreage, and size of the fruit. All of these factors affect commodity per acre, and in turn, pallets per season.

Joint ventures with multiple companies will allow you to keep an inventory in regions with unpredictable variables and the ability to react without over or under supplying. A single carrier or broker carrier will allow for discounts in transportation. Shipments from one region to another through front/backhauls and reverse logistics will keep the trucks running and benefit all.

Spec the Pallet Design

There are a number of factors that must be considered when designing the optimum pallet for a system. This includes the style, footprint size, strength requirements, number and placement of deckboards, species of lumber used, etc. While it is expensive to build a new pallet, it is expensive to maintain them too. There are many factors to consider such as transportation, availability, and operations that will play a direct role in meeting demand.

If you have limited resources, and by limited I mean less than $100 million, pallet design will play a big part in your operational overhead. You have to get the design right the first time because any expenditures to change the design after launch, as has happened with iGPS, could sink a new pooling initiative.

Here’s how the basic math worked at CHEP. CHEP managers estimate the life of the pallet is 13.3 years and at a capital cost of $20 and $5 revenue per issue and 3.5 turns per year, the payback is 4.2 years.

Logistics

The general rule on transportation delivery radius for a load of pallets is 150 miles. Pallet sales are often called a pennies game, meaning you can lose or win a bid within pennies. From that perspective, transportation takes a good portion of the profits. If you are receiving a load on a 53’ flatbed you should be able to receive 604 standard sized pallets. The transportation company is charging you $1.75 per mile, including fuel surcharge at 150 miles. Your transportation cost will be $262.50 for the delivery, which equates to $.43 per pallet added to your cost. If you choose to not create joint ventures with other pallet companies who can offset cost, your delivery radius can more than double. This would mean that you could end up paying up to $1.00 per pallet just in transportation cost.

No matter which direction you go, how you develop your logistics profile will make a direct impact on your operational success. Some options are obvious, like reverse logistics, brokers, logistics companies, proper use of equipment and available lanes.

Reverse logistics is a term over used and hardly used to its full potential. Working with transportation companies on backhauls will save you money, but working with your customers on cost saving logistic opportunities can make all the difference. For example; Exel, a division of Deutsche Post DHL, manages much of the merchandise returned to the Distribution Centers for Wal-Mart stores. If a pallet company purchasing damaged/core pallets from Wal-Mart delivers merchandise from a store while picking up core pallets, preferential pricing can be obtained for transportation and core price.

Merchandise return management is an area of business that large retailers are paying more attention to these days. Your regional network of carriers and partners can help enhance your customers operations, making your bid more attractive. This is just one example of using logistics to offset transportation cost. Other areas would be using logistic companies with networks already in place.

Some companies that could provide options to your logistics concerns are LeanLogistics, Exel, Railex, and companies like William Bolthouse Farms. LeanLogistics is a division of CHEP that provides a network of carriers, backed with technology for real time tracking and information. LeanLogistics offers a single source for transportation and a single data base that leads to carrier friendly business practices.

LeanLogistics controls rates, routes, usage, and contract negotiations. It is an option to maximize your logistics issues and reduce transportation overhead. Beyond just warehousing, Exel has a transportation division that provides competitive rates as well.

Another strategy is to team with a company that has its own logistics network. William Bolthouse Farms in Bakersfield Calif. is one of the largest carrot growers in the world. It also produces a line of juices and salad dressings. Bolthouse has a warehouse in Hodgkins Ill. that receives shipments from their Bakersfield Calif. via rail and truck shipments. Bolthouse has a closed loop with BNSF Railroad that allows it to ship its products at a reasonable time and rate. Negotiating a deal with companies with similar logistics networks can help reduce overhead and forge a stronger relationship with your customer.

These of course are high level ideas, but the conversation has to start somewhere. Brambles has a winning rental pallet formula that others have tried to duplicate. To build a rental pallet business and be competitive you need to throw the Rental Pallet’s for Dummies book away and start from scratch. New technology, pallet design, creative business model and smart logistics are all you need to succeed…good luck!

Andrew Mosqueda is a former Inventory Project Manager and Customer Service Rep for CHEP USA. He has extensive experience with pallet rental and recycling programs for major shippers. Andrew can be reached at mosqueda.andrew@gmail.com.

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