PECO Gaining as Alternative in the Arena of Pallet Rental

Last summer PECO paused temporarily in its growth while it searched for additional financing. It obtained the financing it sought last fall. “We got some significant funding from White Mountains Insurance Group, which is a substantial group of insurance and reinsurance companies,” said Mike Tebay, president of PECO. “They were putting together a portfolio of venture-type investments, and we were a company that fit their portfolio well. That gave us solid financial backing.” PECO has been expanding steadily since then, he said, and revenues for 2000 increased 103% compared to 1999.

PECO has remained steadfast to its vision since its inception in 1997. The idea for the company started with Pat and Denton Sherry, owners of Nepa Pallet and Container Co. in Snohomish, Wash. Since they first sketched their embryonic business plan for PECO — originally an acronym for Pallet Exchange Company — in 1996, the goal always has been the same. The vision was to provide a pallet rental alternative — to be a profitable number two player in the market dominated by industry giant Chep.

Mike was elected by PECO’s board of directors in the spring of 1998. He previously was chief executive officer of Archco, a leading provider of fuel management services and fuel and routing optimization software for the trucking industry. He earned an MBA degree from Harvard Business School and had more than 17 years experience in senior management positions in the transportation and logistics industries at the time he joined PECO. For example, he was a vice president in the transportation group of Mercer Management Consulting and held a number of senior positions at CSX Corporation.

Other than its development of a Web-based tracking and information system, PECO has largely been undistracted by the influence of the Internet revolution and the new economy.

“Our overall strategy is to be a viable alternative to Chep,” Mike said. “We’re not talking about going head to head with them and trying to dominate the market. We just want to be a solid niche player and compete primarily on the basis of outstanding service and not on price.”

PECO has been expanding steadily but deliberately, making sure it can meet commitments to new customers as it brings them on. “We have built our company selectively, especially in the field staff, because outstanding service is a primary requirement,” said Mike

Since PECO obtained the financing it sought, it has been building pallets steadily, adding new customers and signing new distributors. “We just signed BJ’s Wholesale Club, and we have A&P on a test basis,” Mike said. BJ’s is a $4 billion sales club-style retailer with 114 locations on the East Coast from Maine to Florida and in Ohio.

Two other well known distributors that have signed up recently with PECO are Spartan Foods in Michigan and H.E. Butt in Texas. “We now have some significant business in Texas and the South Central U.S., as well as expanding in the Southeast,” said Mike. “We’re not on the West Coast yet. We’ll soon be doing some selective work on the West Coast, but on a general basis we won’t be there until later in the year.”

PECO first targeted private label grocery products manufacturers as customers whose pallets would be relatively easy to control, minimizing pallet loss. However, during the last year PECO has selectively targeted other segments of the grocery industry.

One of PECO’s biggest new customers is Georgia-Pacific. PECO also has signed up distributors that account for 40% of the grocery business in the U.S.

PECO contracts for pallet manufacturing, repair and storage. In some cases contracts are with its pallet industry shareholders. “About 40% of new pallet production goes to shareholders,” Mike said. Paul Bunyan Products in New York and Konz Wood Products in Wisconsin are two shareholder companies that have been manufacturing pallets for PECO for a long time and have been doing a great job, Mike reported. A similar percentage of repair work is done by pallet industry shareholders. “It’s determined primarily on a basis of location and their ability to meet our production requirements in terms of volume, service and quality. Quality of the pallets is key.”

PECO changed its organizational structure last fall. Graham Conner is now chief operating officer. David McCulloch is vice president for national accounts, and Brian Davidson is director of operations; they report to Graham. “We’ve got 23 people at the moment, and we are building that gradually,” Mike said.

Graham worked for Chep for 20 years, first in Great Britain and then in the U.S. “He was one of the original ex-patriots that Chep brought over to get started in the U.S.,” said Mike. “He ran distributor sales and rental sales for Chep in the Western region.” Graham left Chep two years ago and was working at an unrelated business for more than 12 months when he was hired by PECO.

PECO operations are headquartered in St. Louis. Corporate offices for accounting and administration are headquartered in Valley Cottage, N.Y. “About half of our staff is in the field, including sales and customer service,” said Mike. “There is also an operations person in the field currently. Brian also does a lot of traveling.”

PECO has had a computerized pallet and container tracking system in place since it began. “It has done a good job for us,” said Mike. The company has been developing a new tracking system over the past 18 months, and it is nearly ready.

The new, state-of-the-art tracking system is intended to do a number of things for the rental company. “Number one,” said Mike, “it is infinitely scalable as we grow. Secondly, it is designed to be much more flexible in its ability to produce reports and analyze our business.”

The new tracking system’s reports will be accessible on the Internet for PECO field staff, customers and distributors. “Thirdly, the new system will be more integrated between various functions, such as operations and the booking of loads,” said Mike. “It will provide us integrated tracking and pallet management from the booking of loads right to the invoicing process.”

Transport is a key component of PECO’s customer service strategy, according to Mike. “On time delivery is critical,” he said. “We set ourselves a target of 99 percent on-time delivery. If you give us 48 hours notice, if you are specific and want it Thursday a.m. or p.m., our target is 99 per cent on-time delivery. We track it every week. December and January, we were at 100 percent.”

“Transport is key,” he added, “and that is why we are focused on two or three core carriers, such as C.H. Robinson and Dino’s Trucking/DTI.”

PECO also uses regional and local carriers that have relationships with PECO customers in their regions. In addition, some PECO depots provide trucking services on a local basis, and about 25% of PECO customers pick up pallets with their own trucks.

The pallet rental business is here to stay, Mike believes. “The economics of pallet rental are proven except perhaps for some of those with the longest dwell times,” he said. Dwell time, as the term suggests, is the amount of time a pallet will stay — or ‘dwell’ — at one point in the supply chain. Pallets in an extended warehouse storage application, for example, would have a long dwell time.

“The economics for the whole supply chain has been demonstrably proven if you truly take into account all of the costs,” Mike added. Many pallet users do not consider the entirety of their pallet costs, however. “A lot of people only look at specific pallet costs. ‘What do I spend to buy pallets? What do I spend to repair pallets?’ “

When supply chain managers take into account all of the hidden costs of using poor quality exchange pallets, according to Mike, it is an easy decision to choose pallet rental. Those hidden costs, he noted, include productivity losses due to down-time of automated equipment that results from poor pallet quality, and product damage, claims and charge-backs from distributors to product suppliers because of nail punctures and broken boards. Other potential charge-backs include re-piling at the dock when an arriving unit load is deemed not safe to rack. “A lot of distributors will charge $15 or $20 to repalletize a unit load,” Mike noted. “Not only is warehouse labor wasted restacking product, but the warehouse door is needlessly tied up, as is the truck at the dock.

“If you take the incremental costs that carriers build into their rates,” he continued, “they are sometimes not transparent, but they are there.”

In addition, many truckers refuse to take exchange pallet loads, Mike noted. “Pallet exchange inefficiencies for truckers have been well documented. The trucker may have to find somewhere to drop off pallets because the next pick-up does not require them.”

In most distribution centers, after a truck is unloaded it is sent to another door to get empty exchange pallets. “You’ve then got another door occupied for another 15 or 20 minutes while the trucker checks out the quality and argues about it,” Mike said. “Repairing pallets, arguing about balances, and so on, result in very tangible costs. But they are not transparent and recorded unless you are very sophisticated and take the trouble to identify them.”

Because those costs are not readily apparent, Mike said, some in the grocery industry have been slow to accept pallet rental. After 10 years, however, Chep has made significant inroads. Chep is still growing at an annual rate of over 20%, he noted. “We are enjoying some significant growth as well,” he added.

According to Mike, PECO has found that many pallet users that rent pallets are looking for an alternative. They want a second supplier. Few single-source their raw materials and supplies. Most want dual sources or at least a back-up source for everything they need. In fact, Mike believes that one of the factors that has slowed pallet rental growth is the comfort level that users have about suppliers: some businesses do not like having to rely on only a single major supplier. “We want to be a viable alternative to Chep,” he said.

One sign of PECO’s responsiveness to the market is its recent roll-out of block pallets. Its first block pallets recently were delivered to Morgan Foods. Block pallets are an advantage to manufacturers of low-density, high-cube products that need to better ‘cube out’ — fill up — a trailer. For certain can stacking applications, block pallets provide better stability and reduce the potential for creasing cans.

Its new block pallets originally were developed by an industry panel some 10 years ago. PECO also worked with the Virginia Tech pallet and container research laboratory and its director, Dr. Marshall (“Mark”) White. “He’s designed us a couple of alternatives that are four or five pounds lighter and a little cheaper,” said Mike. “We are producing some test quantities of the lighter pallets.”

Better cube utilization comes at a cost, however. “The current block pallets are heavier than stringer pallets, and that’s a problem in handling,” Mike noted. “And it’s a problem in weighing out trailers.” For plants still using white wood in their automated palletizers, a switch to block pallets may require them to adjust their palletizers for the slight height increase. There also has been some concern about the durability of block pallets, according to Mike. “There has been background noise from the marketplace that they do not perform quite as well under load.”

Another market-focused initiative is the staging of a user forum in Nashville. Twenty senior logistics executives from grocery manufacturers and distributors accepted invitations from PECO to attend a day-long conference. “We from PECO will be there, not to sell, but to listen — to listen to what the market needs from a pallet rental company and how we can better respond to those needs,” said Mike.

PECO also has differentiated itself from Chep with respect to the way it deals with pallet recyclers, according to Mike. “We differ from the competition in that we want to work with recyclers rather than working against recyclers. When recyclers end up with PECO pallets as a result of performing sweeps and so forth for their customers, we will negotiate with them based on their cost of sorting, segregating and returning them to us.” For many years, Chep’s policy was not to reimburse pallet recyclers for these costs — a policy that rankled the pallet industry. PECO has a toll-free number that recyclers may call — 1-888-799-PECO — if they recover PECO’s red pallets.

PECO intends to continue to compete on the basis of strong service and pallet quality as it moves forward with its red pallet rental program. Part of that service includes PECO’s straight-forward and easy-to-understand fixed cost billing system.

“And finally,” Mike said, “there’s just the responsiveness of our people. On time, meeting our commitments for quality and service, and easy to understand billing. Those are our core values.”