Pallet Problems

Stephen DeAngelis

August 13, 2012

Last December I wrote a blog about pallets and assumed it would be the last time I discussed the subject (see Pallets and the Supply Chain). In that post, I noted that there were three big pallet pool providers, CHEP, a unit of Sydney-based Brambles Ltd., PECO Pallet Inc. of Yonkers, New York, and iGPS, headquartered in Orlando, Florida. A new pallet pool called 9BLOC is set to compete with the big three in the United States. [“Pallets: Industry introduces a new pallet pool,” by Bob Trebilcock, Modern Materials Handling, 3 July 2012] Trebilcock reports:

“9BLOC, a new pallet pool run by members of the pallet industry, may soon be in the offing. Created as a response to third party pallet pools operated by CHEP, PECO and iGPS, the pool from Pallet Logistics & Unit-Load Solutions will offer a block pallet designed to meet the Costco specification in a rent, lease or purchase model. That means that pallet users can choose from a variety of models, ranging from a per trip rental to outright ownership of their own managed pool. The benefit to pallet producers, recyclers and distributors is an opportunity to retain current customers using stringer pallets who may be considering a shift to a block or leased pallet as a result of the Costco specification or the shortage of cores. The benefit to pallet users, according to John Swenby, a member of the 9BLOC, development team, is ‘the power of choice. Now, you can choose to rent, lease or purchase your own pallet inventory, based on your needs, from the 9BLOC participating pallet maker you select.’ According to Swenby, the National Wooden Pallet & Container Association had been discussing the idea of a national pallet pool for years.”

Unless you are involved in logistics and have to deal with pallets, you might be asking yourself why another pallet pool provider is necessary. In an accompanying article, Trebilcock notes that anyone who has tried recently to purchase a truck-load of cores (the industry term for a used 48 X 40 wooden pallet, the most common shipping platform in North America) has found that a shortage of pallets currently exists. [“Pallets: A core problem,” Modern Materials Handling, 3 July 2012] That shortage has undoubtedly contributed to the impetus behind 9BLOC. Swenby told Trebilcock, “Within the industry, we have been asking what can we do to compete with the big pallet pooling guys. If you look around the globe, Europe has EPAL and Canada has the CPC. We don’t have anything like this in the US.” According to Trebilcock, the idea for 9BLOC began in the fall of 2010, “about the time Costco announced its plans to convert to a block pallet.” Costco requires the use of block pallets because they believe they are more durable than stringer board pallets.

According to Trebilcock, at the time Costco made the change, CHEP and PECO offered block pallets in their pools but most US pallet manufacturers were making stringer pallets. He reports that manufacturers realized that “to stay in that game” they had to respond. Swenby told Trebilcock, “I think there are other major retailers out there who are looking at the Costco model but have not switched to a block pallet because there wasn’t a pooling business model that worked for them. We decided to spend a few months to see what the industry is thinking.” Trebilcock continues:

“Out of those discussions came the formation of Pallet Logistics & Unit Load Solutions, Inc., a not-for-profit organization that will oversee the operation of the pool, about a year ago. A collaboration of companies that represent the entire product supply chain, the group will work together to provide a pool of high-quality wood block pallets that are manufactured and repaired to an industry-wide standard along with a software asset-tracking solution to manage the pool. An independent third party inspection service will conduct routine inspections of participating suppliers to assess quality standards. ‘There are several thousand pallet manufacturers located around the US,’ says Swenby. ‘If there are 500 of them with 100 trailers and 100 employees to manufacture, distribute and repair pallets, that’s a lot of scale. We can use our network to serve customers who are already working with us, but have a need to go to a block pallet.'”

Returning to Trebilcock’s article about the shortage of pallets, he notes that most of that shortage relates to lower grade stringer pallets, which are cheaper than “new hardwood pallets – known as white wood pallets.” He continues:

“Not only are cores in short supply, the prices that pallet operations pay for used pallets that are repaired for the cores market are going through the roof. That is driving up the cost of shipping a load of finished goods, especially for manufacturers who can’t charge their end customer for the pallet. ‘The volume of cores available to us is down 25% from 2008,’ says John Swenby, the president of Paltech Enterprises, a large pallet operation serving Iowa, Illinois, Indiana, Missouri and Arkansas. ‘We have fewer cores to repair and sell.’ Meanwhile, Swenby says the cost of raw cores for repair has increased about 33% in the last year, especially in urban areas. ‘Prices are especially high in Chicago, where there’s a lot of competition for pallets,’ Swenby says. ‘In Iowa and other rural areas, we haven’t seen as many problems because there isn’t as much competition.’ While every pallet market is unique, the shortage of cores was confirmed by conversations with the National Wooden Pallet & Container Association and pallet makers in other regions.”

Trebilcock indicates that a number of factors have come together to create the shortage. He explains, “[The cause of the current shortage] appears to be a confluence of events related to what happened in the pallet market during the recession.” The first contributing factor had to do with the fact demand for new pallets decreased during the recession. Since new pallets are “used to replenish and maintain the quality of the pool of cores,” the lack of new pallets meant “there were simply fewer new pallets to freshen up the pool.” The next contributing factor was “increased exports.” Trebilcock explains:

“Over the last few years, pallet manufacturers saw an uptick in the demand for heat-treated new and used pallets for export shipment. As Swenby points out, that’s great for business, but pallets shipped out of the country don’t come back, further depleting the pool.”

With demand for pallets depressed during the recession, Trebilcock notes that many cores were “put to other uses.” He writes:

“From 2008 to 2010, there was a dramatic drop in manufacturing. With fewer people shipping product, pallet repair operations like Swenby’s were sitting on pallets that were costing money as they sat in inventory. ‘I had a bunch of lesser quality number 2 pallets that I used to make remanufactured number 1’s because they were worth more,’ says Swenby. ‘I know of other manufacturers that ground them up and sold them for mulch or boiler fuel to generate cash flow.'”

Trebilcock calls the next contributing factor the “The Costco effect.” He explains, “Costco’s decision 18 months ago to only accept block pallets like those used in pallet pools has also resulted in the production of fewer new stringer pallets.” Trebilcock indicates that final contributing factor can be traced to the pallet industry’s attempt to cuts costs. He explains:

“In one sense, the pallet industry is a victim of its own success with the Pallet Design System. The pallet design software program has enabled pallet manufacturers to design less expensive pallets that get the job done, especially for customers shipping one way. By removing lumber from the pallet, however, the new designs simply don’t last as long once they hit the used market. ‘PDS has been fantastic for pallet users,’ says Swenby. ‘But, it’s contributing to a shortage of cores in the used market.'”

Trebilcock believes that pallet manufacturers will gear up to meet the shortage, but until they do, he says that “shippers have a few options.” To make his point, he lists those options:

Buy new: If you are a manufacturer who passes on the cost of the pallet to your customer, that may be a tough sell. But with the delta between new and quality used pallets shrinking, new pallets may be an option. What’s more, that will improve the pool of used pallets in the long run.

Switch to a pallet pool: Costco’s move to block pallets was a boon to the Big Three pallet pool operators. Whether or not the core shortage has been a similar boon is difficult to guage – CHEP did not return calls. Anecdotally, however, Modern has heard of several leading CPG manufacturers that are considering a switch to pooled pallets. That comes with its own set of challenges. They include the fact that a pooled pallet is heavier than a used 48 X 40 and that some customers will not stock pile pooled pallets for return.

Consider an alternative pallet: Niche solutions like presswood and corrugated pallets aren’t appropriate for every application, but they are cost effective when they work.

Consider a combo pallet: All hardwood pallets have been the defacto standard for new pallets, especially east of the Mississippi, for as long as there have been pallets. However, some manufacturers are now offering pallets newly manufactured pallets from a mix of used components and new lumber as well as a mix of softwood decking and hardwood runners. The lumber for either configuration is readily available and the cost is less than a new whitewood pallet.

Create a pool: Some shippers that don’t want to participate in a third party pool but who can control their distribution are creating their own managed pools. If you’re shipping within a 100 to 200 mile radius of your plant and can get the pallets back, a private pool may make sense. For manufacturers shipping across country, the freight may be prohibitive.”

To tie his two articles together, Trebilcock notes that “9BLOC, a new consortium of pallet manufacturers may provide an answer to this issue.” As I noted in my first post about pallets, despite their ubiquity, most people unconnected with the supply chain never give them a second thought. If the current pallet shortage persists, a lot more people will begin thinking about them.