There are many pallet users who believe that leasing pallets is the best strategic choice for their distribution needs, and those who meet that need will get their business. Many pallet companies think that’s the end of the story, but it’s really the beginning of innumerable opportunities.
You don’t have to be a corporate giant or even a formal partnership of mid-size companies in order to meet a customer’s demand of a cost-per-trip option. There is a business model that, up until now, has been working successfully behind the scenes in pockets and regions around the country. Now, one man, who has been on the forefront of employing this strategy, is leading the charge to see this approach expand to a national network of independent, entrepreneurial pallet companies. Steve Mazza, president of S&B Pallet in
"When a customer buys a pallet, it is burdened with an asset it doesn’t want," said Steve. "It’s time to take the responsibility off our customers and keep the asset where it belongs — with the pallet professionals."
Model Overview
Steve works with customers to analyze whether purchasing or leasing pallets is better for their distribution systems. "The cost-per-trip model doesn’t work for every customer," he said. An obvious example is a unit load destined for international export.
When leasing is an option for the customer, Steve believes the advantages of employing this method soon become clear to everyone. When the pallet is valued on a cost-per-trip basis, it costs less than a purchased pallet, and the customer clearly benefits. The pallet supplier maintains ownership of the pallets in Steve’s model.
The pallet supplier contacts a pallet recycler in the region of the pallet’s final destination to arrange to recover the cores. Each company negotiates independently with its customers and other federation partners.
To clarify one point, ownership of the pallet in this model is not the same as it is in the corporate model. "I don’t require my customers to return S&B pallets, just like-kind," said Steve. "If I provided them with 100 grade-A pallets, I expect that when my designated pallet retriever shows up he’ll get 100 grade-A white wood pallets, with customary wear-and-tear from a trip of course."
Pallet suppliers and pallet customers alike have been frustrated by an industry structure that has appeared to prevent independent pallet companies from profitably offering a cost-per-trip pallet service that can compete with large pallet rental pools. Independent pallet companies typically do not have the resources to rent and retrieve on their own pallets that customers may be shipping to dozens of distribution centers in several states.
Steve has successfully operated regional pallet rental programs of his own for several years. It is feasible to expand regional white pallet rental services to a national level with resources already in place, Steve believes. They simply need to be reorganized under some type of umbrella organization.
"The important thing to remember is that every single day of every week, every one of us — along with our customers — is moving pallets through the supply chain," said Steve. "They are being picked up by us, they are being repaired by us, and they are being brought back into production facilities by us, the independent pallet companies."
"What I look at as the problem is that we are not moving the money right," he added. "We are selling that pallet to a customer, and the customer is down-streaming that pallet to a distributor. That distributor is taking the pallet and selling it back to us – he’s making money off of us. We should never let go of the profit potential on our own products."
Managing the Pallets
Steve characterized the current white wood pallet
"We’re the ones who make it happen every day," Steve observed. "We make it happen for the pallet rental companies. They come to us to service their infrastructure. We’re giving our market away just because we’re not moving money right."
In his model, end users lease the required number of pallets from pallet suppliers at a specified unit lease price. The pallet supplier furnishes the customer with a bill of lading specifying the pallet grade and quantity of the cost-per-trip pallets.
Information about pallet under load shipments is provided by the shipper to the pallet supplier, who in turn coordinates the sale and retrieval of the emptied pallets with pallet recyclers in the destination cities. The pallet supplier negotiates the selling price to the recyclers, removing the pallet customer (or distribution center) from involvement in selling cores.
Steve said, "I’ll have a guy in
"What I’ve done as S & B Pallet is form my own network," Steve explained. "Each individual pallet company does this for themselves. This is a completely independent program for independent businesses. If I lease a customer a pallet, I will find that network partner across the country." Being a member of the NWPCA and attending NWPCA conferences has helped to network with other pallet companies.
Pallet grade is defined by the standard bill of lading. "This is where I occasionally see some problems," Steve said. "I may have provided brand new pallets to a customer, and the network guy who picks them up says he got junk. Maybe my customer did not provide like-kind pallets as stated on the bill of lading; maybe the network provider is evaluating the pallets lower than they should be. That’s something that has to be worked out, and that’s where knowing and trusting those in your network really works for you."
When everything works right, the partnering recycler in the destination city sends S&B documentation confirming that it retrieved pallets of the same grade as those sent out. If they are not the same or are a different quantity, the original pallet supplier is responsible for charges applied to the customer resulting from failing to return the required number of same-grade pallets. If the pallet supplier provided high grade pallets to a customer and the recycling partner recovered low grade pallets at the other end, the original pallet supplier would be entitled contractually to an additional fee from his customer. Similarly, if the customer was supplied with 100 pallets and only returned 50, the original pallet supplier would take that up with his customer.
Once the recycler pays the original pallet supplier for a core, the cycle can be repeated. "That gentleman in
Ultimately the success of the business model depends upon the strength of the network in terms of product quality, reliability of the network members, and their ethical treatment of each other.
"There has to be some credibility built into a product that each individual pallet company owns and designs," said Steve, who discussed his proposal at the NWPCA annual meeting and recycling convention in 2004.
Network Forums
Providing a forum for members to consider new ideas is consistent with association policy, noted Bruce Scholnick, president of NWCPA. The association also has provided similar opportunities for CORE and pallet rental giant CHEP to speak at NWPCA meetings. "We’re providing an umbrella under which all new and novel ideas are being discussed by the membership, and that’s quite appropriate," said Bruce.
The business model proposed by Steve needs the broad support and cooperation of the entire industry for maximum success. The NWPCA has provided a forum for educating members about how it works, why it benefits pallet companies and customers, and how to get started building your own cost-per-trip network. Further, association meetings are an excellent resource for meeting pallet company owners face-to-face to identify those who share a strategic vision, marketing principles, and customer-service commitments.
"In 2005, NWPCA will begin holding regional conferences," said Bruce. "These are short, low-cost events, one of which should be within driving distance of every member. This gives everyone a chance to network with colleagues and build a cost-per-trip network should they see the advantage in doing so."
Steve’s network is comprised primarily of NWPCA member-companies. "NWPCA meetings are where the industry comes together," he said. "That’s where I have the chance to meet face-to-face with guys from all over the country. That’s where my network takes form. Besides, if a guy can’t be bothered to join the national association, I’m not sure I want him representing me with my customer at the pick-up."
Asked about the feasibility of NWPCA forming a separate organization to manage the system, Bruce said the NWPCA is opposed for two reasons. "First, our members, when first presented with the concept of the white wood pallet leasing system, said they did not want it to impinge in any way with their autonomy or independence. They want the power of each negotiated deal to rest with them."
The other reason against the NWPCA formalizing the system is the need to keep administrative costs low. "The point in Steve’s model that he feels makes it cost effective is the lack of heavy administrative costs," Bruce said.
A nation-wide independent white wood pallet management model will grow and gain acceptance by pallet customers when national scalability is fully realized and the advantages become readily apparent. Distribution centers would not have to deal with the complexities of many, slightly different, versions of white wood pallet programs – marked and unmarked pallets, and differences in specifications and terminology. Steve believes that establishing one or more standard pallet specifications in conjunction with a white wood pallet management service would provide a national brand that would enable independent pallet businesses to compete with used pallets for business in the grocery industry, where CHEP is a major player.
Hurdles for the Future
There remain some challenges. As pointed out in the NWPCA/Pallet Foundation research study on "Pallet Leasing vs. Pallet Ownership" conducted by Penn State University, pallets are seen as a revenue center by many distribution centers. The end user leasing a pallet on a cost-per-trip basis will see a cost reduction, but distribution centers will not welcome their revenue loss when compared to current practices. To succeed long term, distribution centers would have to be removed from this ‘financial loop,’ Steve suggested. It may be in the best interests of retailers to do so in order to create an effective large scale competitor to existing pallet rental, but they will have to be convinced through a bottom-line approach.
Also, the ultimate goal would be to migrate to block pallets, which appear
to be increasingly favored by the grocery industry. Unlike stringer pallets, though, initial low volumes would result in a very expensive ‘cost per trip’ in terms of retrieval.
It would probably take some dominant grocery industry companies to pull through the white wood block pallet concept, either manufacturers or retailers.
"My business plan saves money for my customer, increases my revenue, and gives recyclers a network for cores. What could be better than that?" asked Steve.
