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ĎCombo' Pallets Increase Margins, Bring Other Benefits to Recyclers
ĎCombo' pallets have come into their own in the past several years as lumber prices fluctuated sharply and customers looked for better deals; Clarence Leising shares his experience in this area.
By Clarence Leising
Date Posted: 2/1/2000
A combination pallet is a mixture of any type of new and used wood. It may have new bottom deck boards, top deck boards, stringers, a single new stringer, or some other combination of new and used pallet parts.
Combination pallets have come into their own in the past several years because lumber prices went up and down so much and because customers are always looking for a better deal.
Recyclers try to take customers away from new pallet builders, and the new pallet builders try to take them away from recyclers, and they go back and forth. A combination pallet can help get a customer or keep a customer, or it can bring the quality of the pallet up to what the customer wants. A lot of customers want new stringers or new top deck boards, for example. A combination pallet gives them that. Youíre able to satisfy the customerís need at a better price.
One of the most attractive things about them, from the pallet industry point of view, is that profit margins on combination pallets are high. Margins on new pallets may run as high as 10%, and used pallet margins may be 20% to 30%, although these are the top end. Profit margins on combination pallets may be as high as 45%, even 60%. If you donít build combination pallets, youíre making a mistake. The profit margin is much greater than new or used pallets. Itís basically that simple. Just a few years ago, I would go into a pallet shop and the owner would say, ĎI never deal in used pallets.í Now, thatís all they want to know about. Times are changing. The profit margin on combination pallets is a big reason that pallet companies are getting into them.
This is something I could never understand about new pallet builders: they send a truck out full of pallets, and it comes back empty. But you go to the customer, and someone else is coming in and hauling away the scrap pallets. Itís a service that you can provide to your customers and also helps to increase your profits. Itís a mistake to send a truck out full and let it come back empty. Pick up those unwanted pallets from your customer and use them for combination pallets.
Your trucks are coming back empty, and they should be coming back full. It will look messy out in your yard, yes. But if you donít bring back those unwanted pallets from your customerís business, youíll lose the customer eventually because a competitor down the road will do it for him.
Supplying combination pallets to your customers also will help you to fend off some competitors. A guy who is working in his garage can compete against you on new pallets or used pallets, but not on combination pallets. They take too much time for him to build. By supplying combination pallets, you will eliminate 30% of the small competitors who are going up against you on price.
You only need one thing to start making combination pallets: a dismantling machine. Buy one that is best for your particular company. Pallet shops already have everything else they need.
I recommend that when you dismantle pallets and recover wood, that you sort boards by thickness, not length. A lot of companies will sort by length. New pallet builders love recyclers that sort used wood by length because they will wind up making pallets that have deck boards of different thicknesses, and the pallets will teeter because they are uneven. Sort by thickness, then cut the material to size when you need it. I suggest sorting by three thicknesses: 1/2-inch, 3/4-inch, and 5/8-inch.
The worst thing you can do is to build a huge inventory of sized boards. I visited a pallet shop once and the owner bragged about having thousands of used boards that cost only 9 cents each. But what good are they if you never use them and theyíre turning black outdoors? Figure out your real cost. If you donít use it, donít dismantle it. Find some other way to dispose of the pallet.
You wouldnít believe the profit margin difference if you take two new stringers and put a used stringer in the middle. The customer is not going to say a word. All he wants is something to move his product on thatís not going to break, and this kind of combination pallet will accomplish that.
Some companies that only make new pallets look down on the combination pallet market. They could get more customers by selling them a combination pallet. They also would be providing a valuable service to customers by taking away the unwanted pallets ó customers may be paying someone else to haul them away.
I canít emphasize enough the importance of providing this kind of service to businesses. Unwanted or scrap pallets are a major headache for companies. They take up space, theyíre an aggravation to deal with, and they cost them disposal money.
For example, I supplied pallets for 22 years to a company that manufactured automotive radiators for General Motors. They decided to switch to corrugated pallets, so I built the corrugated pallets for them. One day I asked them why they switched to corrugated. The answer was because they could put in a baler and eliminate their solid waste disposal problem. Their yard had been filling up with wood pallets they didnít need. If you donít start cleaning up the unwanted pallets from your customerís lot, youíre either going to end up in the corrugated market, or the plastic market, or youíre going to hurt the pallet industry.
Sure, a wooden pallet is cheaper. It costs less to make than corrugated. But companies like General Motors donít care. Theyíre more concerned with the cost of hauling away used pallets.
If we donít change the mentality of this industry, there are going to be a lot of blue pallets out there, or whatever color some rental company uses. A lot of big companies are looking at rental. And if pallet companies donít solve the scrap problems of their customers, rental is going to continue to take a bigger share of the market.
The combination pallet was unheard of five years ago. Why did it become so popular this quickly? Because wood got expensive. Now, wood is cheap. But if the market for combination pallets shrinks, the scrap problem is going to return. When it does, youíll lose a $2 million account like I did ó the radiator company. I adapted and made the corrugated pallets, but you know what happened? The company that made the cardboard decided to build the pallets. And they could do it cheaper than me. Thatís when I began building combination pallets.
As it turned out, General Motors wasnít happy with the performance of the corrugated pallets. But when big corporations make a mistake, even if they admit it, it will take them 15 years to change their way of doing business. Are you going to survive for 15 years? And it all happened because no one wanted to take care of those scrap pallets. If you donít want to get into the used pallet market and clean up your customerís scrap pallets, you are not going to maintain your market for new pallets.
The pallet industry seems to change by the day. It has become more aggressive. There are more low-ball competitors out there, guys building pallets in their garages. It used to be when the economy was bad, people would start building pallets. It doesnít work that way any more. The economy is good, but more people are building them. If the little guy working out of his garage is picking up the used pallets from your customer, heís got some leverage against you.
Customer service is important. If you give good service, it will lead to more sales and a stronger relationship with the customer. I used to visit every customer a minimum of twice per month. But when you visit a customer, donít go to the office. Go out on the dock and talk to the employees who are working out there. Look the place over and figure out what your customer needs. Once I found out that a customer would have been better off with a different size. Back in my shop, we had been dismantling pallets of that other size for two years. We could have been selling them to that customer instead.
The shipping and receiving dock is where the problems are, or thatís where theyíre going to occur, not in an office. A purchasing agent or someone else in an office who calls up and orders pallets doesnít know whatís going on out there. While youíre at it, take a few hats or shirts with your company name and logo and a box of doughnuts.
Sell the customer what he needs, not what he asks for. Youíve got to get out there and find out what your customer needs. Why does a customer buy a GMA? Because thatís what theyíve always bought. The guy who buys pallets buys the same kind the buy before him bought, the guy before him bought the same kind as the guy before him, and so on. That customer might be better off with a smaller size that would allow them to get more pallets ó and more of their product ó onto the tractor-trailer.
A manager belongs in the shop, managing personnel. Once I visited a pallet shop that had a lot of problems. The workers were doing whatever they wanted, when they wanted, and how they wanted. I sat down with the owner and the shop manager. The owner asked me, ĎHow do I fix it?í That manager had to go. He wasnít managing. He was in the office. I worked in a pallet shop for 25 years, and I never had an office. The shop was my office.
You need someone out in the shop, supervising production. In small shops, you usually put your manager on the forklift. Thatís a great spot. It gets him out and around and he sees whatís going on.
You should give your managers incentives. Donít pay them straight salary. Tie the managerís pay to how many pallets are shipped. Thatíll give him incentive to ensure the entire shop is operating efficiently and productively, building and shipping product every day.
The pallet business is physically tough, and thereís a lot of labor involved. In that kind of climate, you have to reward people with incentives.
Most production workers need clear, simple directions because theyíre not going to think on their own. In my shop, we used to make samples of pallets that we built on a regular basis. I painted them different colors and hung them on the wall. If an order came in, Iíd say, ĎBob, pull down that blue pallet and make 50 of them.í He takes it down, sets it on the table, and heís got a model for what he has to build. Itís easier for him to copy that sample pallet than it is to tell him a list of pallet parts heís going to need.
Itís the same way with making a jig. Once I told one of my workers to make a jig. It took him four hours. He measured every thing just right, made sure it was square, and so on. It was a good jig but it just took him too long. It would have been better if I had given him a pallet and told him to build the jig around the pallet.
The key to everything is management. Before you go out there and get on the help, get on yourself. Thatís what made me successful. I always looked at myself first.
Again, the key to successfully making combination pallets is sorting wood by thickness when you dismantle old cores. When we started, we sorted by length. We threw boards of different thickness in the same bin. We had a night crew that made odd-size pallets. I came in one morning, and one of the guys on the night shift said he made 78 pallets that night. Guys on the day crew were making 250, 300 pallets. What was the problem? I went in one night. I found that the guy who was making 78 pallets had to sort through all that lumber to find pieces that were the right thickness. That wasnít his fault. I was paying him piece rate, and he couldnít make enough money, so he wound up quitting. We had a lot of turnover on the night crew until I figured out the problem. That was my fault. I thought I had a night supervisor who would report any problems to me, but I was wrong. Take nothing for granted.
If I had known about the problem, we would of started sorting to thickness, then cutting to size. That guy could have been building 300 pallets per shift like the guys on the day crew. He could have made good money, I would have had good production, and everybody would have been happy. The key to anything is management. If someone comes into a pallet shop looking for work, and theyíre willing to work, if for some reason they donít work out, itís the managerís fault, not the workerís.
(Editorís Note: Clarence Leising worked in management positions for pallet recycling companies in the Northeast for 25 years and has sold recyling machinery for Bronco Pallet Systems and Fastec.)