More Than Pallets

Supply Chain News

Government Policies and Business Growth – May 2010

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Connecting the Dots…

The supply chain is in critical condition and government is considering pulling the plug.  Transportation and pallet companies are experiencing issues that effect all supply points in business.  In the pallet industry;  iGPS faces perception and legal issues, Brambles and CHEP are going through reorganization pains, and both the plastic and wood pallet industries is facing regulatory and safety policy intervention.  Government is entering the pallet industry, and while regulation is not always a bad thing, how bills are written can be.  Irresponsible Bills like A09173 introduced by Representative Boyland (D-NY), which is a one paragraph bill that simply calls for no food or perishable items to be shipped on wood pallets into New York.  Another example is the “chicken before the egg” legislation introduced by not one, but two representatives in the Pingree family from Maine.  H.R. 4394, introduced by Congresswoman Chellie Pingree, implements a phased ban of decaBDE in plastic product manufacturing and possibly affects the plastic pooled pallet offered by iGPS.  Representative Hannah Pingree introduced an amendment to Maine’s deca ban law that would include plastic pallets, which would have a definite impact on iGPS.  These are bills introduced with a new political philosophy of, “we have to pass the bill so you can see what is in it…” (Pelosi, D-CA) The political environment calls for less research on what affect product bans and regulations will have on supply chain, commerce and economic recovery and more on catering to a political base or philosophy.

The pallet industry is only one dot in this game.  Polarizing topics such as bailouts, TARP, and ObamaCare are dominating liberal and conservative media outlets, transfixing business managers and the public in general on big issues and paying less attention to smaller ones.  Issues like changes in the transportation policy from the Obama administration and the Department of Transportation.  The Obama administration and DOT officials are focusing on a “last mile” policy.  This policy is designed to steer commerce away from over-the-road (OTR) shipments and towards other modes such as waterways and intermodal transportation.  The goal of the DOT is to reduce trucks on the road and use them for final stages of delivery only.

Every industry is focusing on legislation that affects their business and little is discussed on how it will affect commerce.  Companies are using every tool in their “toolbox” to minimize cost and maximize profits.  Business practices like Six Sigma, Kaizen, and other lean management tools are used to optimize business results.  The question is how will government intervention impact business operations and economic growth in the next 18 months?  

Supplying the Chain

Commerce has many parts and supply chain management is one element that can impact the bottom line.  The foundation of the supply chain is how products are delivered to market. Current or proposed legislation is having an adverse affect on the supply chain and will, in the end, erode business confidence.  Aside from business confidence is the affect on business operations.  Companies that use Just In Time (JIT) and lean manufacturing philosophies such as Six Sigma and Kaizen will be affected by the strain of additional legislation and regulation.  The strain will be the result of vendors such as trucking and pallet companies adapting to laws requiring extra steps in operations and equipment modification, not to mention government policies designed to guide businesses toward specific business practices.  In order to connect the dots we need to discuss how companies conduct business and what makes them grow.  In order to grow you need a strong foundation.  In this article I want to discuss several elements of the supply chain and what makes a strong foundation.  Elements such as:

  • Operations
  • Transportation
  • Pallets
  • Government Legislation
  • Risk Management

Lean Operations

Additional steps in process can be counter-productive to companies that have implemented lean operations to their business philosophy.  What is the definition of lean operations?  Put simply, it is a philosophy or way of business life where processes are continuously tested, analyzed and measured for performance and operational efficiency.  Results of which are used to improve processes, customer satisfaction and corporate environment. That sounds good, but what it does it mean and why is it good for business?  Many companies that enter a new market or a start-up can use several strategies to gain market share.  One option is the “grow at all cost” strategy.  The grow at all cost strategy means get out the product, over purchase raw materials, over hire personnel and, just as it suggests, make the sale at all cost.  Once the company meets growth expectations and can supply the product or service more efficiently, the company must trim the fat.

Trimming the fat does not always mean there will be a “body count” exercise.  Often it means re-organizing staff, increasing CAPEX to make operations more efficient and creating or eliminating internal and external departments.  This is accomplished through project management involving participants from multiple departments, education and management levels.  Using people with different skill sets offers a perspective that might not be seen from another.  The term, “the devil is in the details” has great relevance here because it will be the small things that can derail a plan.  The reason Six Sigma and other lean management programs work is the different perspectives contributing to the brain storming

process.  Ideas are suggested that are great, and then there are some that are not.  The beauty of the process is that a bad idea might spurn another idea that turns into the solution to a problem.  The project leader is the key.  The process needs to be guided and solutions not pre-determined.  If a project manager only takes his or her perspective and not open to a particular solution it can lead to project failure.  Let the project take its course and provide your Executives the information needed to make an informed decision.  It is those companies and managers that lack imagination who believe the only answer is lay-offs, cutbacks and divesting in the company.  When this happens you are no longer in the realm of continuous improvement and may be considered among others as a dead company working.

You might ask what lean operations have to do with legislation, policy and regulations and what affect it might have on you.  Part of lean operations is keeping strict inventory control which requires partner vendors to meet deadlines.  They must arrive for their pick up when scheduled and deliver on time.  If the vendor fails and inventory dips below operational requirements it could shut a line down and cost the company thousands of dollars per hour. 

Transportation

In an article published in The Journal of Commerce Magazine titled A National Intermodal Shift (Cassidy and Boyd), the Obama Administration and the Department of Transportation (DOT) is developing a strategy designed to “get more trucks off the road.”  According to the article, key officials want to move a larger percentage of nation’s intercity freight by rail and water and use trucks for last mile movements. Trucks move over 70% of merchandise shipped in the United States compared to 15% on rail and waterways consist of 3% of total tones shipped in 2007.   Here are the key points of the article:

  • Move goods on water and rail for as long as possible. (Deputy Transportation Secretary John Porcari)
  • Major change in governments approach to shipping and transportation
  • Targeted shifts in policy and spending trickle out
  • Underinvested infrastructure and this policy will exasperate the problem. (Randy Mullett, VP of Gov Regs and Public Affairs, Con-way)
  • Getting trucks off the road is the primary objective of the DOT’s freight transportation policy.
  • DOT five strategic priorities:
    • Safety
    • Economic competitiveness,
    • State of good repair,
    • Livability
    • Environmental Stability
    • Strategy consistent with book written by Rahm Emmanual and Bruce Reed – “The Plan – Big Ideas for America.
    • “Last Mile” delivery could leave economy worse…
    •  Administration proposal to divert $527 million to an ill-defined livability initiative – Timothy A. Lynch, ATA Senior VP,

The premise of the article is that government policy is guiding consumers to alternative modes of transportation rather than letting the market decide.  The main point of contention is diverting monies away from State highway funds and fund intermodal initiatives with the goal of increasing freight by 25% without a complete and viable comprehensive plan.

Beyond the possible outcome for the trucking industry, what challenges will this policy have on companies that have implemented JIT inventory management into their operations?  Intermodal is known for greater savings than OTR counter-parts, but delivery times are not consistent.  Additional freight will mean backlogs at rail stations, “last-mile” trucks waiting in long lines to get their containers.  In the late 90’s some companies had to bid for space on trains due to lack of capacity, will that practice return and drive up costs?  Rail is a reliable mode of transportation and should be used when delivery requirements meet the logistics profile of the customer.  But not all operations are a fit for an intermodal solution and government policy should not dictate when it is.

Government Policy

Debate in the United States has reached maximum velocity on whether government policy is inhibiting or encouraging economic growth.  When it comes to the supply chain proposed legislation affects two industries, pallets and transportation.  If you were to think of the supply chain as a car, pallets and transportation would be the wheels and shocks, carries you to where you want to go, and without them the car is going nowhere.

Pallets are a multi-billion dollar industry which the majority is ran by small business.  There are approximately 1.5 billion pallets in the United States.  Any industry with over a billion and a half units in circulation is big business.  Aside from the Rental Pallet industry and some alternative organizations, pallet recyclers are not organized as an industry.  If a company is not happy with their pallet recycler, they simply call the competition a block away.  Due to the nature of the white wood pallet industry they do not have the influence to push for regulation that will not place too much of a burden on the smaller companies. 

Government policy is also affecting how transport companies interact with their customers, other vendors and food safety.  The Federal Drug Agency (FDA) is introducing new guidelines that would require transport companies to play a more active role in food safety at all points within the supply chain.  Transporters will be required to ensure sanitary conditions are met in the loading and unloading of products, monitoring of pests, and the quality of pallets for both OTR and rail shipments.  Each of these variables typically require hours of training.  In many distribution centers drivers are not allowed passed a certain point.  Drivers will need to be given access to areas that they typically do not have.  The next step is the monitoring, reporting and the enforcement apparatus required to ensure companies are complying with new rules.  The question will be; can truck drivers refuse a load based on the quality of pallets and the condition of the docks during loading.  

Government Policy: H.R. 4394 – Decabromine Elimination and Control Act

H.R. 4394 is a bill drafted by Congresswoman Chellie Pingree (D-Maine) calling for a phased ban of decaBDE from products manufactured and distributed in commerce for import and export.  Discussion has circulated if this policy will affect the iGPS plastic pooled pallet.  It is my opinion that H.R. 4394 will not affect the iGPS pallet beyond perception.  Opponents and competitors claim that decaBDE will leach in hydro-cooling environment and contaminate food, as well as, enter the human body.  It is that point competitors will publish contamination concerns in an effort to stop iGPS from gaining market share.  They will market the perception that iGPS is dangerous to perishable and open food containers ran through a hydro-cooling unit.  The fact is, decaBDE makes up 7% of the materials used to manufacture the pallet.  H.R. 4394 calls for a total ban after a three year phased ban with certain exceptions that would exclude the iGPS pallet.  With decaBDE making up only 7% of the iGPS pallet and the spraying and diluting environment of the hydro-cooling procedure, I do not believe contamination will be a factor.

Organizations from both sides have stated their opinions about decaBDE.  According to the L.A Times, Richard Wiles, the senior vice president of the Environmental Working Group, says it is the beginning of the end for brominated fire-retardants.  Steve Owns of the U.S. Environmental Protection Agency said that DecaBDE potentially can cause cancer and may impact brain function.  However, Citizens for Fire Safety have stated opposition to the ban.  They are not so much concerned about the ban itself, but the irresponsible manner in which it is being implemented.  Legislation is being proposed with no viable alternatives offered.  In addition, research is incomplete on the effects decaBDE has on the environment and to humans. 

In a media release the organization wrote, “So many industries rely on this product for fire safety, but now, it is too late for these industries, many of which will be forced to change their procedures without the new development of fire safety protection.  Nevertheless, it is important to remain vigilant on this time-sensitive issue. While Maine has decided to ban Deca-BDE, the EPA agreement continues to set the right standard for fire safety and economic efficiency. It is important to remain watchful of similar legislation in other states that would preemptively ban existing products, leaving communities without adequate fire safety protection. We ask that you please contact the EPA, Citizens for Fire Safety, and SafePhaseOut.org to see how you can encourage the development of sustainable fire safety products before other states needlessly ban Deca-BDE.”

Decabromine: A Pingree Family Affair 

Congresswoman Chellie Pingree (D-Maine) introduced a federal bill implementing a phased ban of decaBDE.  The daughter of Congresswoman Pingree, Representative Hannah Pingree (D-Maine), introduced L.D. 1586 which amends H.R. 4394 in Maine to include plastic pallets, electronics, mass transportation vehicles, building construction, and many household items (Citizens for Fire Safety)  Representative Pingree is the 99th Speaker of the Maine House of Representatives. 

By including plastic pallets to the ban the Pingree family has effectively added more hardship from small businesses to farming villages and to Maine’s bustling cities.  While debate over pallet contamination is at an all time high, H.R. 4394 and L.D. 1586 eliminates a viable alternative in the iGPS pooled pallet.  The average plastic pallet can cost anywhere from $30-$70 per pallet.  In relation, the iGPS pooled pallet can have an issue fee of $6 – $7 per trip.  That price range allows for an alternative to wood pallet for companies that choose to use it.  This is another example of legislation designed to steer consumers away from a specific product for no other reason than politics.  This is truly an example of instant gratification as they are going to ban a product that has been in the supply chain for years with no documented cases of harmful contamination.  Energy should be spent pushing for more research to prove what some scientist suspect. 

New York: Insanity That Is…

New York has recently introduced legislation that would create hardship for any business using pallets.  Legislation that adds food safety protocols for both plastic and wood pallets delivered or shipped within New York.  New York has joined other states as they have amended the Environmental Conservation Law to include a ban of decaBDE.  The amendment does not specifically include plastic pallets; however, if they follow Maine’s lead an amendment to include pallets will be submitted.  Should the amendment pass in Maine and New York follow suit, the plastic pooled pallet offered by iGPS could be met with more business trouble. 

iGPS and plastic pallets are not the only targets of New York representatives.  A bill submitted by Representative Boyland (D-NY) bans all perishable items to be shipped on wood pallets.  The reasoning is that the nature of wood pallets is porous, leaving it susceptible to contamination.  Representative Boyland also cosponsored the ban on decaBDE in New York.  Literally millions of pallets are imported into New York from all over the world and legislation that has an adverse affect on not only small business but the New York economy.   

Risk Management

All of these factors and many more are what supply chain managers must face when determining which company to award bids.  Whether the decision is trucking, raw materials, packaging or pallets these laws will have an effect on future business.  Many industries use plastic pallets delivering into Maine and New York and their supply chain cost will go up significantly should legislation, new regulations and policies pass.  Grant it, it is unlikely the wood pallet ban will even reach a vote but it is the attitude of legislators that is concerning.  The political spectrum in the United States is extremely polar forcing lawmakers to cater to their base.  Bills are introduced without investigating how it will affect not only that industry, but business in general.  Like a great brainstorming session, a very bad idea can turn into a worse idea that can eventually pass. Business managers and investment firms are hedging their bets as to which direction the future of packaging, trucking and the pallet industry is heading.   

Investment Considerations

Although the pallet industry is volatile it presents the most opportunity for investment.  As I have stated, there are over 1.5 billion pallets in the United States with a selected few businesses controlling asset allocation and relocation.  Brambles (parent company of CHEP) and IFCO Systems offer pallet management services for large distributors like Wal-Mart, Costco, P&G, Home Depot and others.  Up and coming pallet companies are prime to offer services that will present direct competition to the rental pallet market and IFCO Systems.  These new up and comers will offer pallet management programs that can give distributors a choice.  Funding and program management is the key.  In my experience, I am seeing more investment and innovation going into building a better pallet than developing an innovated pallet management program.  Pallet management programs that make it easier for the user, not the pallet company need to be developed to compete.  Investors looking for a pallet company to invest funds should not only ask the specifications of the pallet but how it will be introduced and managed in the market. 

 If you would like a PDF version of this report please email me direct.  If you would like advanced copies of articles and newsletters please subscribe to this blog.

  More Than Pallets

  Andrew Mosqueda

  www.morethanpallets.com

  andrew.mosqueda@morethanpallets.com

Written by Andrew Mosqueda

May 5, 2010 at 8:21 pm

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