More Than Pallets

The pallet pooling industry is a multi-billion dollar global business dominated by one company, Brambles the parent company of CHEP USA.  From that enterprise, two other pallet pooling companies were spawn, 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 has one element that is the same, all models are self-managed.  There are other models such as EPAL and PALNET that have presented alternatives to the Rental Pallet model and keep much of the same benefits.   The EPAL and PALNET business models focus on individual Pallet Recycler Companies, bringing them together to create a network.  The objective is to give the business owners the tools to directly compete against the vast resources of CHEP, iGPS and PECO.  If a company wanted to start up a new pallet company which business model would be the best for that company? There are many things to consider before taking the next step to a regional or national pallet provider.  The purpose of this article is to give you some information to consider before choosing which business model is best for you. 

Rental Pallet Business Models

In this article we are covering two business models; the Rental Pallet and the PALNET and EPAL models.  The actual Rental Pallet model is not complicated, but the application of the program is.  The largest Rental Pallet Company is CHEP USA and is often viewed as the most complicated.  There are several elements that make up the model of a Rental Pallet Company.  One of the main elements that make the Rental Pallet Company different is the inventory management aspect.  The pallet must be viewed as an asset, something which your company owns and must be accounted for.  This will determine the success of your company and how you are going to justify to your investors that their money is in safe hands.  Other elements are the scope of your territory, pallet design, transportation and logistics, reporting, operations, and administration.  Each of these areas is equally important in the design and implementation of your Rental Pallet Program.

When determining your business model, numbers are everything.  A couple of numbers to factor are Return On Capital Investment (ROCI), Earnings Before Interest, Tax and Amortization (EBITA), Damage Ratio, Damage Rate, On-time Delivery Rate, Load Failure Rate.          

 Mark Your Territory

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.  Asset recovery is a major consideration and one that all Pallet Rental Companies must contend with.   Your delivery radius is critical to your operations.  Typically, your delivery radius should be about 150 square miles.  If your territory includes a region that includes several states your delivery and asset recovery radius might be more than 150 miles.  For example, if your base of operations is in Los Angeles California and regional territory is defined as California, Arizona, Nevada, Utah, and Oregon, logistics and operations are factors that has a direct affect on your ROCI.     

Identify regional shippers/receivers

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 requires special handling for distributors.  Distributors are required to follow agreed guidelines when working with Rental Pallet Companies.  Some concessions would be pallet handling protocols.  Misuse of the pallet such as, bulldozing, double stacking, using to hold garbage cans, or used for any other purpose other than what is intended is prohibited.  Typically, the DC will receive a Rental Pallet loaded with product from a vendor.  The pallet is processed and racked, at which point warehouse personnel will “pick” orders from merchandise on the Rental Pallet.  When the pallet is emptied, warehouse personnel is instructed to stack in a predetermined area until a full load is gathered, typically 570 pallets.  The pallets are to be kept separate from “whitewood” pallets.  The Pallet Rental Company picks up their painted pallet and a pallet recycler purchases and collects the whitewood pallets.    

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 their 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, the business model and strategy must address how they will sell the brand with a significantly smaller inventory.  With 90 percent of the market share a start up will not be able to compete one on one with CHEP using the same business model as the original.  The PALNET and EPAL models are an example of how an organization can compete with the Mighty Blue, but depends on cooperation of many pallet recyclers. 

Joint Ventures

A joint venture is a when two or more businesses enter a legal agreement to create a business partnership whereas both parties contribute equity and expenses, and share revenue.  A joint venture is a reasonable solution to the inventory issue.  The obvious partnerships would be with multiple medium to large size pallet recyclers with excellent business and credit ratings.  But there are several aspects to a pallet business including raw materials, storage, operations, transportation and logistics.  Taking a page from the CHEP USA playbook, 3PL everything.  CHEP uses third party companies to repair, ship, and audit their pallet inventory.  In order to compete a startup company must be able to manage hundreds of loads per week.  Sharing in the revenue will not only create stakeholders but have the resources to meet commitments.  The fact that all Rental Pallet Companies own all the pallets in the system, they are responsible for accurate forecasting.  Inaccurate forecasting cost the Rental Pallet Companies thousands of dollars per year.  Partner companies will allow you to keep an inventory without keeping them on the books.  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.      

Pallet Design

There are two 48×40 pallets accepted by GMA and club stores, they are the block pallet and the stringer pallet.  The GMA 48×40 stringer pallet consist of four 1×6 boards, eight 1×4 boards, and three stringers.  The total top deck coverage of a GMA pallet is 63%.  The block pallet top deck coverage is 78%.  They accomplish this by using five 1×6 and four 1×4 boards on the top deck.  The bottom deck consists of three connector boards that are 1”x 5”, four bottom deck boards and nine blocks.

As with any commodity wood prices fluctuate depending on both market and supply demand.  Volume is the key to success and the ability to repair and replenish inventory.  Wood prices there are figured by board foot per thousand.  For example, a mill would quote on a load of heat-treated 1×4’s at $210 per thousand.  Let us say for argument sake all components are $210M.  The total board feet on a GMA pallet are 23.55.  If you take 23.55 x $210M the raw material required to build your pallet is $4.90.  This does not include transportation and labor.    

In contrast, the block pallet has approximately 32.92 board feet.  If you are paying the same amount per thousand the raw materials required to build a block pallet at $210M would be $6.91.  Both example specifications are using softwood as a pricing factor.  Some Rental Pallet Companies uses a combination of hardwood and softwood in their pallet construction.  Hardwood is typically more expensive than softwood and has heat-treating restrictions.  Softwood can be heat-treated in bulk prior to building; hardwood pallets must be constructed first then heat-treated.  This would include combination pallets.  The Rental Pallet Companies estimate their pallet to be worth $12-$15 each. 

Beyond the specification of the pallet is the whether to use hardwood, softwood or a combination in your pallet design.  While it is expensive to build a new pallet, it is more to maintain it.  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 in big part of your operational overhead.  The block pallet has many benefits but you are paying $2 more per new pallet.  Beyond the initial cost of building the pallet is the cost to maintain and repair the pallet.  The key thing to remember is that CHEP and PECO at its core are really, really big pallet recyclers and are subject to the same cost and overhead as any other recycler.  The Rental Pallet design has a 1×6 leading edge board made from hardwood.  This adds to cost both in construction and heat-treating requirements because hardwood treatment cannot be done until after construction. 

Logistics

The general rule on transportation radius delivery radius for a load of pallets is 150 miles.  Pallet sale 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 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 cost.  Some options are obvious like reverse logistics, brokers, logistics companies, proper use of equipment and available lanes.

Smart Logistics 

Reverse logistics is often stated and not used to its full potential.  What opportunities would reverse logistics hold for a Regional Rental Pallet Company?  In the industry it is said that the pallet business is a pennies game.  To be competitive in today’s market you can win or lose the winning bid by pennies.  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 many 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 the 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.  Your regional network of carriers and partners can help enhance your customers operations, making your bid more attractive.     

See the complete article in a future issue of the Pallet Enterprise (www.palletenterprise.com)