We embrace an action-oriented business culture. We celebrate front-line managers who yell “How high?” when we tell them to jump. That same corporate culture trickles down to pallets. If prices are too high, then find another vendor. No pallets available, scramble for an alternative. But is that a good business practice, or just a Hail Mary tactic to keep your goods flowing?
One popular business researcher recently stated that if she had an hour to solve a problem, she would spend the first 55 minutes defining the problem. Too often, we slap a Band-Aid on a symptom instead of taking the time to develop a better approach.
Struggling with the ongoing COVID-19 pandemic, many buying teams began the year following directives to cut costs and seek more flexible payment terms. In fact, a recent AMEX study suggested that over the last 12 months, 22% of U.S. businesses have been looking for more flexible payment terms (translation – looking for more time to pay) while 23% have been avoiding long-term commitments with particular suppliers (translation – more price shopping). While such firm-centric and myopic practices are conventional, they can run at odds with supply chain optimization, and they turn out to have been exactly the wrong approach for the current pallet supply crunch.
Here’s why. With rapidly escalating lumber prices, most pallet suppliers don’t have the financial wherewithal to carry more term (translation – loaning free money for longer) for customers while also carrying a rapidly inflating inventory value. And at the same time as conventional procurement wisdom would have buyers do some price shopping, most pallet companies don’t have enough pallets to go around. Walk away from your current vendor at your peril. When you circle back, they might not have the bandwidth to fill your needs.
Pallet Duct Tape
In the short run, we see companies doing whatever it takes to keep products palletized and moving. Companies are scrambling to find pallets, and flexibility regarding pallet specification can be important. In this environment, think twice before leaving your pallet supplier, and consider having a couple of strong suppliers. Buy enough from your #2 vendor so that they will at least return your call. The other thing is flexibility. Don’t just stick with your same old specification if something else will work and is more readily available. For example, if you are still sticking with a hardwood spec, in many locations you might want to work with your supplier on softwood options. Flexibility regarding wood species, new vs used, #1 vs #2, and so on might be what you need to do to maintain your product flow. Some companies are looking at non-solid wood options, such as Litco’s molded wood pallets.
Reimagining Your Pallet Strategy
It will be a mistake for companies to simply weather the current situation and wait for a return to the old normal. Think of the 2021 pallet crunch as a call to action for your pallet strategy – a pivotal opportunity. For the last 30 years, I have been talking about pallet strategy, and a lot of people still roll their eyes. Back in the 90s when I talked about pallet strategy, I had a boss who equated such a notion to trying to kill a mosquito with a sledgehammer. Overkill, he said. That was before we shaved $600,000 annually from our DC pallet spend.
So how does it work? A corporate strategy is a plan or framework for achieving its primary goal of profitability. You could think of your corporate strategy as a mighty river system like the Mississippi. Then you have the major tributaries that flow into it, like Arkansas, Illinois, Missouri, Ohio and Red rivers. Think about those as sub-strategies, but instead of rivers, they are marketing, finance, HR, supply chain, sustainability and information technology. All of those sub-strategies are plans to support optimal corporate performance, at least in theory. The Mississippi is only as strong as those tributaries, and a corporate strategy is only as powerful as the sub-strategies that feed into it. The alignment of those sub-strategies is critical to corporate success.
Invest in Pallets Until MC = MB
Think of your pallet system as a smaller tributary that flows into the supply chain sub-strategy. Your pallet isn’t just a line expense item. It either contributes or detracts from overall corporate aspirations. From a microeconomic perspective, we should invest more in the pallet up to the point where the marginal cost of spending more on the pallet is equal to the marginal benefit we derive from that incremental expenditure.
For example, it might make sense to spend more on a pallet if it means we can dish out less in aggregate in unit load packaging, including primary and secondary packages. Perhaps if we invest a dollar in a stiffer pallet, we might save three dollars in corrugate, for example. So why not pay a little more for the pallet? Another example: one consultant recommended an upgraded pallet specification for a client based purely on the calculation of how much time that dozens of warehouse employees were wasting in pushing or dragging pallets around the warehouse that they were trying to enter or exit with their pallet jacks.
Stop with the theory and painful analogies, already. What are my options?
Given the limitations of this column, I can’t go into too much detail, but here are some things to consider:
Reuse Options Beyond Just Recycled 48×40 or Rental
At a time when people are paying record amounts for pallets, why not buy a pallet that lasts many trips? Instead of paying for a pallet for each shipment, it would be costing just a prorated amount per trip, based on lifetime trips, inclusive of reverse logistics and maintenance costs, etc. A closed-loop or pallet retrieval program can dramatically reduce your pallet spend, if done right. There are a lot of potential reuse opportunities that haven’t been taken advantage of because until very recently, pallets have been just so inexpensive that the business case hadn’t been compelling. Now, we are reaching a tipping point for more applications than ever.
Another reuse approach is the recycled market. Recycled pallets offer an informal reuse system, but in today’s environment, a guarantee of supply is critical. With recycled pallets, supply is determined in the marketplace, and so the highest bidder gets the prize. Instead, smart companies will be attracted to solutions that better ensure pallet supply such as a retrieval system, or perhaps some sort of pallet network that guarantees the return of a like number of pallets.
Now, as the pallet pipeline shrivels, closed-loop systems are increasingly being looked at around the country as companies look to hang onto the pallets they already have. As I write, spur-of-the-moment reuse programs are being created to retain custody of pallets. But why rely on an ad hoc solution? Map it out. A well-planned reuse program can help drive prices down lower than what they were before the pallet crunch, on a per-trip basis, while delivering on better quality that can enhance supply chain performance. And oh yes, remember that river tributary named Sustainability. Wood pallets already have a compelling sustainability story, and reuse makes it that much stronger.
Rethink Pallet Specification
Above, I already mentioned options regarding hardwood and softwood, new versus recycled, and so on. But there are other things that have become increasingly important in supply chain management. Pallet weight is a big deal for worker safety as well as freight optimization. Pallet cube optimization through lower pallet height or footprint size selection to maximize vehicle fill, for example, can generate important savings.
But that’s just supply chain savings. How about the marketing opportunity? While a larger pallet can maximize handling efficiency, half pallets and quarter pallets can help eliminate retail stocking labor and boost sales with retail display opportunities. Which one makes the most sense for you – and the answer just might be “both”.
Leveraging Information Technology
For the last 20 years or more, I have written about tracking technology and pallets in Pallet Enterprise. RFID and other Internet of Things technologies have been slow to gain a foothold in pallet applications, but the use case continues to grow as products improve and prices drop.
Providers point out that pallet tracking can provide a host of benefits for pallet management, inventory visibility, freight synchronization, point of sale information and more. The challenge is to quantify these savings that can be derived from a smart pallet. Vendors argue that the marginal cost of installing tracking technology is less than the marginal benefit derived by the various silos such as supply chain, marketing, sustainability and finance. But having the organizational reporting needed to validate such assumptions has so far proven to be an impediment. Many experts suggest just tagging a few pallets to start, just to get an idea of the benefits that are possible.
Bottom line, look at the 2021 pallet crunch as an opportunity to reimagine, or to invent for the first time your corporate pallet approach that aligns with overall corporate aspirations.
Sure, you are obliged to chase short-term supply to keep shipping going, but I would wager that there are substantial savings on the table for many companies if you take the time to look at pallets for what they really are. In the mainstream media, we often see mention of the “humble” pallet. But that’s only the case if you don’t weaponize it as an element of corporate strategy.
