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Pallet Companies Should Follow Path, Team with Logistics Industry
Reusables: We are being presented with a newly defined market. Are we ready for the redistribution challenge?
By Dave Rogers
Date Posted: 4/1/2000
It looks like the country survived the Y2K crunch, and we can label it a non-event — unless you were a computer consultant and now are looking for work. We’ll all get through the April 15th tax day and recall that as a non-event as we tackle the other challenges that come up during the coming year. In the fall, we’ve got a presidential election to look forward to. Of course, that will be an event that affects us all.
But let’s look a little closer to home. How is the new millennium shaping up for your business? Have your business plans in place? Figure you’ve got most things figured out and under some sort of control? Great! But have you considered the impact that the push towards reusables and redistribution is going to have on the pallet and container market?
Where’s the push coming from?
If we’ve learned anything from watching the business, we know that a major paradigm shift is something that needs to be identified early in the planning cycle. Capital outlays are significant events in the life of our companies. Recruiting – and retaining – new employees is getting tougher every day. Market shifts are a welcome challenge if we have the time to prepare. The relentless push for cost reduction, through recycling and equipment pooling, continues to be a large focus of attention in the business periodicals of the manufacturing and logistics industry. Are we ready for it?
The pallet and container business is an integral part in the movement of goods in our economy. Today’s manufacturers, wholesalers and retailers are demanding that the logistics chain squeeze every non-vital penny out of their costs. Handling of pallets, including handling, inspection and repair, is not viewed as a value-added activity in these markets.
Employers continue to have difficulty staffing their facilities and would prefer to focus human resource expenditures toward the activities that add value to their product. Managers are being told to "do only what you do best" and to outsource the remaining activities to someone who does it better – and cheaper. That frees up the customers’ financial resources, employees and space for "more profitable" activities. Clearly, they understand the value. Do we?
Blumberg & Associates did several extensive studies into the requirements of the logistics industry, relative to reverse logistics-type activities. They found that over 70% of those operations surveyed performed some form of reverse logistics and repair "in-house." At the same time, over 55% indicated they would prefer to outsource that function to better focus on their business. Many also were developing other methods to reduce costs associated with the transport and distribution of products – both inside their operation and to their customers. The managers in these operations were abundantly clear in their endorsement of reducing pallet and container acquisition and disposal expenses as a viable strategy for reducing costs.
Interestingly, there were some indications that managers in these businesses have been toying with considering those platforms as assets rather than as expendable items. Some of this is a result of the pooling operations currently working to expand their markets and preaching the "gospel" of leasing versus buying. However, many more are being told that their customers will not accept that "pass through" cost of a pallet that carries product to them — just as many have had their finance departments consider the benefits of not expensing the pallet and container costs. Whatever the impetus, we are clearly going to need to be able to "talk the talk" when our customers bring these concepts to the table.
What is redistribution? The logistics community, through the excellent education work done by the Council of Logistics Managers (CLM), is pushing the concept of Reverse Logistics and Repair Services (RLRS) and the need to make this an integral part of the logistics cycle in everyday operations. The council, through its members, has focused on the "direct logistics" cycle for decades and has made great strides in lowering costs and improving service levels as product is moved from the manufacturer to the end user. Warehouse management systems, bar code scanners, radio frequency identification systems, satellite locators on trucks, global positioning satellite transponders for containers at sea, and incredibly sophisticated order picking-tracking methods are just a few of the tools available to many logistics managers. What has been missing, to a large degree, is the same degree of focus on the other part of that logistics cycle. The attention now being paid to RLRS is the response to that new challenge. RLRS isn’t a new concept to many of us, although few have experience in providing all of the components of this service.
(The accompanying diagram developed by Blumberg & Associates in their presentation to the CLM best illustrates the idea. RLRS activities comprise the lower portion of the diagram. These activities could run the gamut from collecting, refurbishing and returning computer monitors to handling of commercial waste.)
In the case of Transport Pallets and Containers, we could see activities as varied as:
• Storage and Warehousing
These are operations that our customers would prefer not to manage but which they find themselves having to either perform or out-source. The clear message they are getting, both from their customers and their shareholders, is to find the solution quickly. We are being presented with a newly defined market. Are we ready for the redistribution challenge?
Why the fuss over reusables? Why are we hearing so much about "reusables?" First, the grocery business in the U.S. has long heard the tales of success from their associates in the United Kingdom. The U.K. has four top supermarket chains – Sainsbury, Tesco, Safeway and Marks & Spencer – that effectively act as an oligopoly. They tend not to compete on price, aggressively working with their suppliers and maintaining gross margins of around 10%. That compares to their U.S. brethren who routinely post a 2%-3% margin. The distribution channels are highly developed to the point where some of the chains actually own their own reusables and require their distributors to either "lease" the container or clean and maintain the containers at no cost to the chain. With that paradigm clearly established in "benchmarking" the U.K.’s programs, should we be surprised that the idea is gaining credibility in U.S. markets?
And not just in the grocery business. We’re seeing these sorts of activities spreading in the computer-printer-copier market, the chemical industry and the food industry. They view the pallets or container as a transportation platform to carry the product through the entire distribution cycle – in both "direct" and "reverse" directions. Design and acquisition costs of these specialized platforms have pushed companies to consider them as fully owned assets rather than the "necessary evil" of a one-way disposable. We are even watching the addition of bar code labels and RFID antennae and chips to assist in tracking these assets — not to mention the current "stenciled name" ownership controversy in the wooden pallet business. The platforms have become a capital asset in some industries and they must be properly controlled to satisfy financial reporting requirements.
Equipment "pooling" operations such as Chep, IFCO-PalEx and the recently formed Reusable Pallet and Container Coalition (RPCC) employ a reusable platform in their operations. PECO, NPLS and First Alliance have all gained invaluable experience in the market. We’ve all heard their reports and should understand the value that such services provide the customer.
Finally, we’re seeing a wave of legislation being proposed or enacted to support the "reusable" platform. Whether from the efforts of the equipment pooling lobby, municipalities seeking to reduce landfill costs, or the environmental-"green" lobby in Shared Product Responsibility (SPR) and Extended Product Responsibility (EPR), support for the reusable platform is growing. We should be ready to support this market change while still defending the wooden pallet and container business. It can be done.
How do we talk to our customers? The first thing to do is put yourself in their shoes. Yes, we probably have a mill, or an assembly operation, or a depot-repair operation to protect and grow. The customer might even have been a partner in helping you grow your business as theirs grew. You’ve got a foot in the door. Now, it’s time to talk their language.
Are you familiar with their terminology? Do you completely understand their needs and their plans? What are they "missing" in their logistics cycle that could fit with your business? Do they need recycling work? How about pooling coordination for their transportation platforms? Do they have partners that can fill part of the requirements bill but need help in other areas? What "value added" service do you bring to the table? Remember that the growth in the economy has consistently been in new "services."
The CLM’s annual conference addressed a multitude of issues facing members, but the one that stands out for our industry is the need for RLRS. The CLM membership is being advised to make RLRS an integrated part of their operations. They want these services to be a "seamless" business practice, but they understand that very few organizations offer that support. The council maintains that Reverse Logistics and Repair and Disposal, alone, does not meet the market needs. Distribution – or redistribution – must be a part of that mix in order to be "seamless." Existing vendors are being required to either partner with or acquire other firms to develop this seamless service. Finally, the logisticians are being strongly encouraged to recognize that the major players in the market are capable of — or soon will be — RLRS out-sourcing – and include that service requirement in their bids and requests for proposals.
How can we help ourselves? First, learn to think like the logistics manager in your customer’s organization. Understand the direction they are receiving from their shareholders. It’s not so much different from the logistics folks in your company if you think about it.
Second, embrace the concept of reusables and being in a service industry. Wooden pallet and container manufacturing is going to be around for a long time. But the increased application of reusables and new material transport platforms will continue to grow at an accelerating pace for the next several years. We can be part of the solution or left behind.
Third, develop alliances or partnerships with other firms that offer complimentary services. Very few companies can do everything in RLRS and redistribution. It may be a niche market that you find to occupy, but if it provides that missing piece for a total logistics package, then you’ve gained entry where you might have been excluded in the past. Again, the business opportunity is going to be there; it’s up to us to exploit the opportunity.
Finally, learn to speak the language of the logistician. It’s the same as talking about cants, kerfs and cut-offs in the lumber business. Think of your best supplier and how easy it is to work with them. You both speak the same language and employ industry shorthand every time you talk. You need to do the same with the logistics managers that will be looking for your help. Joining the CLM is an inexpensive way to expand your horizons. Take a subscription to some of their industry magazines and newspapers. You’ll be amazed at the information available, and you’ll have a better understanding what your existing – or new – customers are thinking about in the field of logistics.
Where do we go from here? With all the talk of moving into the new millennium and living with the challenges that the change of the calendar year brings, we should investigate and accept the challenge that the logistics industry is offering us. They have clearly identified where they need the help of our industry and specified areas that we should pursue. They are pointing out the path and want us to partner with them, to continue to build on the success of the past. Are we ready to succeed with them?
(Editor’s Note: Dave Rogers is principle of Clearwater Associates, an operations consulting firm; he may be reached at (540) 980-6617. Gary Garkowski, a former Chep employee, is a consultant in logistics and material handling. To contact the Council of Logistics Managers, call (630) 574-0985. This article is based on a seminar Dave gave at the annual meeting of the National Wooden Pallet and Container Association.)