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Markets in Transition: Is the Customer Always Right on Pallet Standards?
In North America, the prerogative of a powerful customer to specify the pallet used for shipments of incoming product is typically, although sometimes begrudgingly, taken for granted.
By Rick LeBlanc
Date Posted: 5/1/2006
In North America, the prerogative of a powerful customer to specify the pallet used for shipments of incoming product is typically, although sometimes begrudgingly, taken for granted. Smaller customers, on the other hand, typically have to take their lumps in terms of re-palletizing or handling non-conforming pallets arriving from powerful suppliers.
The ‘silo’ mentality has not yet been eradicated. Decision makers choose to optimize their own silo, arguably at the expense of a trading partner. To the extent that suppliers can pass along the incremental palletization costs incurred to the customer, the customer makes the best decision, and the supply chain is hopefully optimized. In North America, the customer’s right to specify the pallet is accepted.
In Europe, however, the practice was recently held under the judicial microscope. The State Alcohol and Tobacco Company of Iceland requires that product arriving at its warehouse be palletized on EUR pallets (the standard mainland European specification), and that the price of the pallet be rolled into the product price. An Icelandic company that imports alcoholic beverages challenged this practice in terms of provisions for competition and free movement, and the case went to a court in Belgium.
The supplier lost. The court ruled that “…the requirement to deliver merchandise on EUR pallets aims at increasing the operating efficiency of modern storage systems by way of standardization. The requirement to include the price of the pallets in the sales price appears to entail that the purchase price can be fully passed on to ATVR (the State Monopoly).”
Furthermore, it noted that standardization requirements “…typically contribute to improvements in the storing and handling of incoming and outgoing merchandise to the benefit ultimately also of the consumers and therefore create efficiencies that may outweigh restrictions of competition in the upstream market.”
A key factor is that costs can be passed along to the customer. But what if, for example, a powerful entity determined that pallets should be standardized, and that there is not necessarily a mechanism to pass along that cost? The benefits of standardization would be enjoyed by the “customer,” but the pain of conversion would be suffered by suppliers — or perhaps on a larger scale by countries with the wrong standard if the goal was to work toward an international standard. In the absence of compensation, the resistance of those suffering the pain is predictable. This was a key issue I faced almost a decade ago when I was asked to consult on the standardization of pallets for the asphalt roofing industry in the U.S. In our prototype plan, there were contingencies to compensate those companies that would have to adapt.
The ‘specter’ of global standardization unexpectedly surfaced in February when a World Bank economist published a paper recommending international pallet standards. Although a lot was read into his report, having talked several times to Gaël Raballand, the lead author, I understood that his primary objective was only to facilitate trade for lesser developed countries. His original concern was that pallet standards required by customers in developed countries were a trade barrier to exporters from lesser developed countries. I argued to him that, like the Icelandic monopoly, customers in developed nations do not discriminate in terms of product origin as to what pallet size they require. The same requirements are demanded of domestic suppliers. The issue is simply supply chain efficiency.
Perhaps my arguments in favor of standardization were too zealous, because when the World Bank paper was released, it recommended pallet ‘harmonization.’ The U.S. pallet industry trade association, the National Wood Pallet and Container Association, and other pallet industry trade groups opposed creation of mandatory pallet standards.
While North American pallet industry organizations have argued strongly against prescriptive pallet standards as suggested in the World Bank paper, they fully support uniform pest control standards when it comes to ISPM-15. The North American pallet industry has opposed the European move to impose unilateral debarking requirements on wood pallets and packaging entering EU countries — requirements that exceed ISPM-15, which has international agreement. The North American pallet industry objects to the European proposal for bark-free lumber because of the significant potential added cost.
So is the customer always right when it demands a specific type of pallet? When a receiver such as the State Alcohol and Tobacco Company of Iceland specifies a EUR pallet, it may impose additional costs on those suppliers not using its specification. To the extent that the added cost can be passed along to the customer, the supplier should be no worse off. The customer is indicating that the efficiency gains of compliance are greater than the premium it is willing to pay in order to enjoy compliance from its suppliers.
One could argue that in the case of the European Union and the debarking issue, the ‘customer’ is on a much larger scale but is not materially different than the Iceland state liquor agency or a domestic retailer such as Wal-Mart demanding a specific type of pallet. The EU favors pallets free of bark from its suppliers because it perceives it will otherwise bear an additional cost for risk of pest infestation.
In any enlightened supply chain, when unilateral policy shifts by either a corporate or ‘nation’ customer inflict pain on trading partners and their existing pallet suppliers, the logic behind such decisions should trigger a closer second look, as it has in the case of the debarked lumber requirements now under scientific review. The process of study and scrutiny is a key component of any successful supply chain, and it is good to see it in action here.