The whitewood pallet industry in the United States has explored launching an industry cooperative pool for years. The process has entered a new phase with the actual launch of the 9BLOC pallet last month as the first pallets rolled off the production lines. It all started with the PIMS pallet proposed by leaders of the National Wooden Pallet Container Association back a number of years ago. Organizers separated its links with the NWPCA and changed its name to PLUS in 2011 only to run into trademark problems with CHEP USA. Having checked all the legal issues and developed the infrastructure for launching the pool, the initial production run has been marked with the new name 9BLOC. These pallets are now being sold to Costco suppliers with a handful of manufacturers producing the first pallets.
The actual management of the 9BLOC pool is being handled by Pallet Logistics & Unit-load Solutions Inc. (PluSolutions), a non-profit company owned by industry members. It will oversee the tracking system, inspection and standardization of the pool. Having just completed a nationwide road show where it worked to develop a core of industry supporters, PluSolutions has most of the crucial elements in place to start this initiative. Pallet Enterprise sat down with John Swenby of Paltech Group and Steve Mazza of Bett-A-Way Pallet Systems, two of the industry leaders spearheading the development of the 9BLOC pool. Our editorial staff discussed the current state of the 9BLOC system as it launches, the challenges ahead and its prospects for the future.
Pallet Enterprise: Where do you stand in the commercialization process of this new cooperative pool?
Swenby: We began making and marking pallets before the end of 2011. Over the last nine months we have moved from having almost nothing in place to formalizing a non-profit company to overseeing the pool details. Based on inquiries from the industry, we have collected a list of pallet companies that want to be involved and have partnered in the development of the pool concept. The new brand name for the pooled pallets is 9BLOC. Each pallet will be marked with the 9BLOC logo to identify it as part of the pool.
Pallet Enterprise: Who will own the 9BLOC pallets?
Mazza: The tracking system is going to delineate ownership of individual pallets, not possession of the pallets. As far as ownership of the corporation, each member has an ownership stake in PluSolutions. It is individual members that will own the pallets.
The 9BLOC pallet will be manufactured by many different entities. But the ownership of those pallets would be a fluid ownership as they travel through the supply chain. At one point it may be owned by one member and at another point it may be sold off to someone else who is a member. One clear rule is that only members of PluSolutions can actually own 9BLOC pallets.
Pallet Enterprise: How will pallets be tracked in your system?
Swenby: Initially, pallets will be tracked via batches. Pallets may be able to be tracked individually in the future when we deploy RFID or bar codes. There is also a high probability that individual pallets will have a bar code placed on them at the point of manufacture. RFID may be integrated into the pool at a later time.
Pallet Enterprise: Are you planning on building the pool and hoping for customers to jump on board? Or do you already have a lot of pallet user interest lined up? What type of response have you received from pallet users?
Mazza: We are planning on a phase-in program. Our focus at this point is the Costco Wholesale supply chain as it has moved completely to a block pallet requirement. In the beginning, we are going to work with pallet users who are currently buying new block pallets and shipping them into Costco instead of using one of the big three pallet rental systems. Instead of merely buying a pallet that has no real systemic value at the end of the supply chain, they can now buy an official 9BLOC pallet that can be reused in the supply chain, which will cut their total cost over time. Once the Costco system reaches critical mass, these pallets will flow out to be reused by members of PluSolutions.
Once the Costco supply chain is full of these pallets, participants can switch over to whatever model works best for them – cost per trip, rental, exchange, purchase, etc. That is when each individual member is going to approach their own customers. In talking with people in the marketplace, there is a lot of opportunity out there. Many pallet users don’t want to sign up with CHEP, PECO or iGPS. They are looking for another option, and are waiting for alternatives to be viable. The 9BLOC pallet network answers this market opportunity.
Pallet Enterprise: What has Costco agreed to in terms of how it will handle your pallets? Will Costco give pallets back?
Swenby: We are right on the edge of that. Costco is waiting for us to produce pallets before it will comment to any specifics.
Mazza: What is happening now is Costco is saying that it will approve the 9BLOC pallet as part of its system and will not sell or allow anyone to repair these pallets except a 9BLOC licensee. As far as giving back the pallets, Costco hasn’t agreed to that yet. It is going to wind up being a natural progression because once the Costco supply chain is full of 9BLOC pallets, Costco has to do something with them. Costco’s officials are basically saying, ‘Show us the volume, and then we will discuss giving the pallets back.’
Pallet Enterprise: On the phase-in part of the program, are customers getting some sort of credit so as the pallets come back they begin to see savings?
Mazza: What we see is that nothing changes right now. Costco will say that 9BLOC is now our approved whitewood pallet option. Customers that are paying a high cost to buy pallets and shipping into Costco will continue to do that. Costco will use those pallets it obtains as it reaches critical mass in its supply chain. Once Costco reaches that point, the extra pallets will be used to supply demand for in-bound shipments. There is almost a natural progression that has to happen here. The cost of new pallets is not free to Costco. It has to absorb that cost in the prices it pays suppliers. Costco will want to reduce that cost by reusing pallets for its supply chain. The program is open to pallet users, pallet manufacturers, and pallet recyclers that want to participate, agree to abide by the rules, pay the necessary fees to join, and are accepted into the program.
Pallet Enterprise: What is Costco’s current situation in regards to block
pallets?
Mazza: Costco is currently at critical mass when it comes to block pallets. But none of those are marked or certified according to the rules of PluSolutions. Costco’s whitewood block pool that it basically paid a high cost for is worth virtually nothing now. The quality is all over the place. Block pallets that are coming out of the pool today have no value to Costco because it won’t take a recycled, whitewood block pallet into its system. Now you have a significant supply chain trip going through that system and coming out with no value because Costco has no specification or system for creating value for those whitewood block pallets.
Pallet Enterprise: Is the 9BLOC pool going to be only for the small suppliers servicing Costco or will it attract larger players in the fast moving consumer goods market?
Mazza: For right now, we are going to be a niche player. We are going to be filling those opportunities that CHEP, PECO and iGPS don’t work for. But once word gets out that there is another option and pallets start coming out of the supply chain that we can retrieve and supply to Costco suppliers, we can compete against the established rental providers. We are going to have a newer pool. From a quality issue, every one of our pallets will be brand new.
Once we get established, we will have what customers have always wanted. They want that local pallet supplier to be able to give them outstanding service combined with a quality pallet product that competes against the big rental pools. Our customers love us, but the problem is we don’t have the product they love any more. As soon as we can get those 9BLOC pallets back and be recognized as a major pallet pool, I think we will become much more than a niche player. I think you will see some extremely large customers jump on the program. I think there are many customers out there that would take a look at an opportunity to deal with their local pallet provider if they could pool those pallets and provide it to them on a cost per trip basis.
If Costco suppliers keep buying block pallets with the rate they are buying them, within 6-8 months Costco’s supply chain will be at critical mass in terms of whitewood pallets. At that point, those pallets will start to come out of the system. From what I understand Costco can sell some of them but not all of them because they don’t meet any specification so you have a high cost supply chain trip on that pallet.
Pallet Enterprise: What about $12-15 pallets going into Costco?
Mazza: One of Costco’s biggest issues with whitewood block pallets is that they can’t control the specification. Costco knows there are subpar pallets coming into its facilities that cost $12-14 to make. Those pallets are falling apart and they don’t want to repair them. Those pallets have no value to Costco at the back end. Costco wants a way to police the quality of the whitewood coming into its system and 9BLOC has the opportunity to solve that problem. If you see a 9BLOC stamp on a pallet, you know it is up to the specification and know it is OK.
Some companies are paying for a substandard pallet. They will have to spend more to either buy a higher quality pallet or possibly shift to CHEP, PECO or iGPS. I am sure that there will be a percentage that will go that way. Hopefully, most companies will want to stay independent from the three major poolers. Some companies are too small to efficiently ship with a major rental provider. Others have seasonal products that stay on a pallet for a long time, which makes rental much more expensive compared to ownership.
Pallet Enterprise: Once you reach critical mass, doesn’t the network reach a point where it stagnates and doesn’t grow until you find more people who are willing to invest to build more pallets. How do you plan to find investors to grow the pool?
Swenby: We are going to see more customers that are going to want options beyond existing rental providers. And for the future of the pallet industry, if we don’t do something now, we are all going to be out of business in the future. How many new pallets are truly being built to put into the market today? I think it is a very small number compared to what used to be produced in the past.
Mazza: As velocity increases with this system, you are going to out pace the potential for only getting back broken pallets that are in need of repair. Once your customer base gets bigger, you are going to have a lot more pallets flowing through the Costco supply chain. So you wind up with a pallet pool.
The other part of it is that I am not going to wait to get recycled pallets out of Costco. I am going to go out and identify financial institutions that are willing to approve our business plan and invest much like a franchise. Our system is transactional. It is not pallets amortized over five years. When a pallet comes out of the Costco supply chain, I am selling that off so that I am not looking for financing for five years. The financing needs are not as great as what people think. And there are a lot of pallet transactions that require some degree of financing now. If you go out and buy pallets at $12 each and are purchasing many at all, you are going to need financing.
Pallet Enterprise: Who is handling the inspection process and how will it work for the 9BLOC system?
Swenby: We will be training and certifying inspection groups that currently handle the process for ISPM-15 certification. We may not cover all groups. But we are certainly working with TPI and others. Conway & Robison will be our monitoring agent to ensure the program is working properly. This approach eliminates inefficiencies since they already have to come out and inspect facilities for the heat treatment program.
Pallet Enterprise: How many 9BLOC pallets do you expect to have out in the market by the end of the first quarter of 2012?
Swenby: It would be wonderful to say 240,000 plus. But it could be anywhere between 120,000 and 200,000. We have selected several manufacturers to lead the start up phase. Others will be brought on line as customer demands grows. These initial manufacturers are spread across the country and will help us test the software and serve as pilot sites for the program. Once these pilot producers are fully operational, we will begin opening up the pool to whoever wants to participate. If you look at Costco’s system now, you have about 80,000 pallets per month going into its DCs. I have a feeling that Costco is going to mandate if you want to use a whitewood block pallet, you will have to supply a 9BLOC certified pallet.
Pallet Enterprise: Some of the big pallet producers or recyclers are tied up in contracts working for the major rental vendors. Do you think they are going to join your fledgling network and possibly risk their business with the rental industry?
Mazza: We have had interest from some of the pallet companies servicing CHEP, PECO and iGPS. They realize that if they build pallets for PluSolutions, they are making pallets for themselves. They realize that PluSolutions is the vehicle that can allow us to take the industry back away from the rental providers. Let’s face it; we would rather work for ourselves than CHEP, PECO and iGPS, which is where we are all headed now.
