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Position Is Everything: Rising Transport Costs Make Pallet Logistics More Critical for Success
Pallet pooling experts discuss the challenges and importance of pallet management and logistics to properly administer a program and keep customer satisfaction at a high level. Discussion of pallet availability problems at iGPS.
By Chaille Brindley
Date Posted: 6/1/2011
When it comes to serving the new supply chain reality, position is everything. This means having the right number of pallets in the right place at the right time. Pallet availability is king because if you don’t have pallets you can’t keep the customers happy. Compounded by rising fuel and transport costs, pallet logistics has become one of the most crucial aspects of being in the pallet business. While it has always been a critical concern for poolers, it is now a major driver for even regional players as core supplies become tight in most areas of the country.
iGPS Pallet Availability Problems
Pallet availability has come to the forefront in recent weeks as Intelligent Global Pooling Systems (iGPS), the all-plastic pallet pooler, has suffered pallet supply problems according to an internal memo obtained by Pallet Enterprise. The confidential letter to iGPS employees was written by interim CEO Steve Marton.
Marton wrote, “As we all know, we have been experiencing some challenges over the last 6-8 weeks relating to pallet availability.”
Marton explained, “There was a convergence of factors that recently occurred at one time that has put significant pressure on our network and has limited our ability to serve some of our customers at the levels of service that they are accustomed to, and should expect from us. Some of these factors include an earlier than expected impact from product seasonality, significantly increased organic growth of some of our customers well beyond expectations, and longer than expected dwell time at some of our retail customers.”
Pallet Enterprise discussed the memo with Marton, but he refused to comment on the record.
A separate source within iGPS confirmed that the company was short on pallets and doing whatever it could to service customers including refurbishing pallets as quickly as possible and in some cases supplying sub-standard pallets. One problem is that iGPS is not making any more pallets except for re-grinds that merely replace unusable pallets in its system. There are multiple reasons why iGPS is not pumping out new pallets. For starters, these pallets are expensive, and iGPS has hit a funding snag. Also, the company is caught between an old design that is falling out of favor due to the DecaBDE concern and its new design, which is still on the drawing board. Finally, the company is in a holding pattern as leadership seeks to fix problems left in the wake of the replacement of Bob Moore as operational CEO.
Repositioning Pallets Can Make or Break A Pallet Pool
David Lee, the CEO of PECO Pallet, said, “The key to the game of pallet pooling is to control redistribution costs.” This requires active management to eliminate empty miles, reduce asset loss, and minimize storage costs.
Stock transfer costs can eat you alive if you are not careful. Typically pallets tend to collect in the places where people live, but the demand is in the middle of the country where the manufacturing plants are located. Pockets where pallets tend to collect and just stay there are the Pacific Northwest and the Southwest. That is where you have to piggyback on rail or truck freight lines to reposition pallets.
Michael Smith, president and CEO of PALNET, said, “Transport costs are probably the single largest expense per trip for a pooled pallet. Reposition costs could run $1 for a $4.50 trip cost.”
Bill Wade, vice president of logistics for CHEP, said “Having thousands of customers, we see both national and regional trends across our network.” CHEP has a logistics planning process in place based on historical data to account for customer demand, pallet location, storage and positioning.
The numbers of pallets needed can vary significantly depending on seasonal issues. For example, after Christmas retailers are a flush with pallets that flow back into CHEP’s network. Some areas, such as the West Coast and South Florida, can experience strong seasonal variances based on the agricultural market. CHEP tracks these areas based on region not the type of produce on the pallet because CHEP isn’t aware of the specifc commodity or SKU a customer is shipping on its pallets explained Bill.
Despite years of experience and a high rate of forecasting success, Bill admitted that some macro economic events can catch forecasters by surprise. He added, “During the economic downturn, we received more pallets back than we had estimated.” This was a result of de-stocking as retailers and manufacturers scaled back pallet needs due to shrinking demand and lower sales expectations.
Any company or organization operating a pallet pool must match up sales with supply to ensure proper pallet availability. Smith said that you don’t want excessive inventory sitting around, and if you have significant pallet accumulation points, you want to put an aggressive sales effort in those areas to ensure that you will have customers to utilize excess pallets.
Lee commented that PECO has been aggressively doing just that over the last couple of years to maximize logistics flows. He also pointed out that pallet flows are always in flux. He explained, “Customers very rarely stand still anyway. You have to spend time understanding their shipping networks as best as you can. Then you sell into that excess capacity.”
When logistics flows are out of whack, sometimes you have to cut pricing or even allow customers to ship pallets long distances just to get them better positioned for free. Smith recalled a time when he used to work at PECO that the pooler allowed pallets to be shipped to China just to make sure they ended up at the right distribution center on the other side of the United States.
CHEP does a lot to reduce unnecessary logistics costs. It works with Lean Logistics, a sister company owned by Brambles Ltd., to optimize backhauls and establish green lanes that drive empty miles out of the system. Wade stated that CHEP has a mapping process for new customers to ensure it has the right assets in the right place at the right time.
Storing pallets is sometimes necessary especially for pallet poolers as seasonal needs change. Placing a pallet in storage closer to the point of future use requires accurate forecasting and is a necessary step to ensure lower repositioning costs. Storage and repositioning costs may not be as much of a problem for pallets that are bought and resold.
Steve Mazza, a Pallet Logistics & Unit Load Solutions (PLUS) development team member, commented that the PLUS model of a cooperative industry pool in the United States promises lower transport costs. He said, “Pallet rental models require pallets to be repositioned. So if they have a build up of pallets in the Seattle area, they have to truck them down to the pallet using areas in Southern California. In our model, that same thing happens, but we will be paid for it because our rates are different. They are set up to reflect the needs in the area where pallets are being positioned.”
Key Matrices to Watch
Although on-time delivery has always been a concern, the timeline is much more condensed as companies have made supply chains leaner. The amount of excessive early ordering compared to what used to occur has significantly reduced, according to Smith.
As a result, pallet companies have to keep inventory on-hand to service customers at a moment’s notice. Yet, if you have too many pallets, your inventory carrying costs can impact profitability. Pallet management requires constant monitoring just as a pilot must always watch the gauges in a cockpit.
Wade said that CHEP primarily watches two key logistics measurements – service and inventory availability. Wade explained that CHEP averages on-time performance in the high 90 percent range. If performance drops below these ranges, responses are triggered to remedy the situation. He added that everyone measures service differently. He said, “Determining on-time performance can be a long discussion, depending on how you measure and interpret your information.”
Also, CHEP monitors transportation costs and compares its rates with national benchmark data. It tracks carrier route costs and works to minimize inefficient lanes.
Lee said that customer service is PECO’s raison d’etre. To that end, PECO watches on-time delivery (98%+) and inventory as well as focusing on dwell time and damage rates. Customers “will not be let down” and, to ensure that this level of service is provided at the best possible price, asset utilization needs to be kept high which means that pallet cycle times (i.e. the number of days the pallets stay with shippers and receivers) are minimized. Lee said that tight controls on cycle times help reduce the potential for pallet losses and limit pallet misuse and corresponding damage.Pallets left sitting around have a tendency to get lost, get misused and get damaged.
Dwell time must be managed as you track pallet movements and know where your assets are at any one point in time. PECO is known for using very tough controls to reduce leakage. It is much more restrictive about letting customers ship outside of its network than either CHEP or iGPS. CHEP allows this practice but charges for it and has setup systems to try to get the assets back in many cases.
Lee said, “If you can’t find a pallet on your system, then in my view, you have lost it. If you don’t know where a pallet is, you can’t just assume it will come back.”
Lee explained that some pallet pools have operated under the assumption that incoming strays will balance out lost pallets. In other words, since the world is round there are no such thing as lost pallets. But this kind of thinking appears to be exactly what has led to pallet availability problems for iGPS. The opposite way of thinking is to manage loss to reduce strays instead of hoping that strays eventually come back to balance off the loses. You should always ask before a pallet ships, “Do we have a solution to get it back?
In contrast to the rental systems, the measurements used in the PLUS model vary depending on the supplier/customer arrangement. Mazza said, “The beauty of the PLUS system is its flexibility. It is not a one-size-fits-all solution.”
Mazza said, “PLUS is an open and independent pool. Each pallet company can design their own supply chain scenarios that best meet the needs of their customer. The program is extremely flexible. Pallets can be put through their program in many different ways.” This would include everything from rental to purchase to any creative solution devised by the various parties involved.
Logistics Trends and Challenges
Logistics used to just be an afterthought. But now it is a critical part of any effective pallet company. As with any major area of emphasis, there are both challenges and opportunities.
Wade said, “At CHEP, we are facing what everyone else is facing. Inventory is changing. During the economic downturn a lot of capacity (trucks and drivers) left the market.”
Smith pointed to the rising fuel costs as a major concern. He said, “Fuel costs are outrageous.” Innovative companies are looking at things such as new trailers that allow you to get 600-700 pallets on a trailer. But these measures are not perfect. Some customers can’t unload them because they don’t have dock doors high enough to accommodate the taller trailers.
PLUS may be able to reduce logistics costs once it gets ramped up because Mazza said that they hope to have multiple participants in each local area. This means fewer miles a pallet has to travel from pallet depot to customer. Mazza said, “PLUS will definitely save fuel costs because moving pallets to reposition them will be kept to a minimum.”
Mazza explained, “Instead of pallets being physically moved from let’s say Seattle to California, they will be sold off at a rate in Seattle that would most benefit that local market for reissue . Your trip costs may be higher to non-pallet using areas, where as your trip cost would be lower into areas with extreme needs for pallets because you can get more for the pallet on the back end. PLUS will drastically reduce pallet positioning costs.”
Mazza added, “With our system you are dealing with the local guy in the local market who you are going to buy pallets from. Those companies are best equipped and most familiar with the local market. As a result, you get the best service.”
Wade commented that the primary way to reduce fuel costs is eliminating empty miles and reducing miles from the network. A big part of that process is storing pallets in the right place to ensure proper utilization. Another thing you can do is ship in full truckload quantities and avoid partial loads or piggyback them with other products.
Despite the challenges, Smith believes that logistics offer significant promise. Smith declared, “I see logistics of the pallet industry as a huge opportunity because we touch the back door of so many distribution centers, but that opportunity is not being seized.”
What’s Next for iGPS?
iGPS, the all-plastic pallet pooler, recently admitted in an internal memo that its existing pallet supply configuration can’t meet customer demand.
There are multiple reasons for iGPS’ pallet availability problems. This includes growing too fast, not doing enough to shore up supply, the inability to produce new pallets, the logistical difficulties of servicing national accounts, retail customers holding pallets way too long thereby killing dwell times, and seasonal shifts that can be hard to plan for or meet when pallets are scattered all over the country.
Pallet availability problems, among other concerns, has led ConAgra Foods to jump ship after being one of the recent new business wins for iGPS. As the most recent big user added to the network, ConAgra was behind Pepsico, General Mills and Kraft when it came to obtaining pallets.
The question is will these major accounts stay or will they follow ConAgra’s lead?
Marton assured iGPS associates in his letter dated April 22, “We are working diligently on this problem and expect to be able to fully restore our service levels within a matter of weeks.” He added, “While upset, most of our customers feel so strongly about the iGPS platform that they are working with us in a very collaborative manner to get through this problem in the best possible way.”
Is this latest crisis terminal for iGPS? That largely depends on its customers and investors. The company likely has enough cash on-hand from current operations to continue for at least a couple of years. But its ability to grow has been hampered, which could in the long term kill its chances to really compete against CHEP.
In the internal letter, Marton admitted that iGPS has about 10 million plus pallets in its pool. While this is a sizable pallet pool, it pales in comparison to CHEP and is not enough volume to really be able to achieve significant logistics savings. A pallet pool must be much larger to efficiently allow pallets to be sent by customers all over the country and have enough volume to ensure supply at competitive asset return costs.
The iGPS business model was designed around reduced logistics costs, but these savings are hard to achieve without a large number of iDepots and a very large pallet pool to achieve economies of scale.
Even if iGPS received a major influx of venture capital, the company is caught between pallet designs. The current design already has reported a higher than anticipated damage rate and carries with it the negative stigma associated with the DecaBDE issue. But, there is no indication from industry sources familiar with iGPS that it has a miracle cure or revolutionary pallet design up its sleeve. iGPS’ situation has been compounded by the fact that Maine has passed a law prohibiting the use of DecaBDE and substitutes that are cholorinated or brominated fire retardants.
In testimony earlier this year before Maine lawmakers, former iGPS CEO, Bob Moore, said that his company had not been able to find an alternative to DecaBDE that met Maine’s requirements. Moore further stated that if the Maine law stayed in place, it would jeopardize his entire business. The chemical Moore wanted to switch to was a brominated fire retardant that the manufacturer claimed would not leach into the environment. This was the exact claim that was made about DecaBDE when it was first introduced years ago. Environmental and consumer watchdog groups are concerned that the replacements for DecaBDE will turn out to be just as bad for public health in the long run.