Some recyclers obtain pallet cores by offering a variety
of services to distribution centers. However, bidding for these cores has become
increasingly competitive in recent years as the core supply has tightened. For this
reason, many pallet companies seek used pallets from other sources that are hopefully less
contested
But there is a new problem looming for those who provide services to
distribution centers: an escalating core supply "crunch." These recyclers are
recovering fewer and fewer pallets from distribution centers, a situation that
increasingly will aggravate the dwindling pool of cores.
This trend has significant ramifications for these pallet recyclers. It
is disrupting the delicately balanced relationships between recyclers and distribution
centers.
Recyclers that serve distribution centers are keenly aware of this
trend and the implications for their companies. Michael Doyle, president and chief
executive officer of the Memphis, Tenn.-based Pallet Factory, and Darren M. Bronco,
president of the Anacortes, Wash.-based Pallet Services, discussed this issue at the
recent NWPCA Recycling and Repair Seminar & Expo. The two companies collectively serve
11 distribution centers across the country, and their experience illustrates the changing
dynamics between recyclers and the distribution centers they serve.
In order to obtain cores, pallet companies may provide a number of
different services to distribution centers. These may include on-site or off-site sorting,
repair, storage, and transport. The recycler also may provide other services, such as
pallet tracking and control, training for dock employees, identifying shippers using
substandard pallets, or reporting on trends in pallet management.
In the past, pallet recycling companies such as the Pallet Factory and
Pallet Services have supplied these services on a "no cost" basis. In lieu of
cash, they accepted excess cores from the distribution centers. The distribution centers,
which typically are not permitted much discretionary spending, seem to have widely
accepted this practice of trading cores for sorting, repair, and transportation services.
"Everyone does it a little bit different," Mike said,
"but in some way we have to be compensated for what we do. They are bartering with
wooden pallets."
"That (system) worked fine when Chep wasn’t around years
ago," Darren added. As rental pallet share increases, however, he believes it is
displacing new pallets that otherwise eventually would rejuvenate the grocery pool.
Chep pallets increased to 17-22% of the total volume at one
distribution center he serviced between 1997 and 1998, Mike reported. Darren revealed even
more dramatic numbers at one of his West Coast distribution centers: within nine months,
the number of Chep pallets returned monthly increased from about 8,600 to more than
17,000.
The impact of rental probably was diminished for a few years as grocery
distribution centers bought plastic pallets for picking, which temporarily flushed extra
cores into the market, Darren said. However, now that temporary source of cores is drying
up, too.
Both companies found that payment for their services, which previously
could be covered by the excess cores from the distribution centers, increasingly would
have to be billed to their customers because of the expanding shortfall of cores.
It has been an eye-opening experience for distribution centers that
were used to having various pallet services provided to them at no out-of-pocket cost. One
center that enjoyed "no cost" services for three years suddenly found itself
facing charges of about $80,000 per month.
Not surprisingly, distribution centers may resist when they begin to be
faced with invoices for pallet-related services that they previously paid for in excess
pallets.
Mike and Darren emphasized the importance for pallet companies to
accurately account for their costs when the dwindling number of excess pallets is not
sufficient payment and they must begin charging for services.
"You’ve got to keep your figures…If you don’t do that,
it’s very difficult to get a price increase from Wal-Mart," Mike warned.
Pallet Services takes a somewhat similar approach to keeping their
customer distribution centers informed. "We’ve put a cost on everything we
do," said Darren. "We sort out their pallets to one grade or two grades; we
multiply that by a sortation charge. We handle Chep loads back to the depot and charge
them accordingly."
Pallet Services sorts, occasionally stores, and returns Chep pallets to
the depot for distribution centers, and charges for this service. Distribution centers
typically sign agreements with rental providers that obligates them to return empty rental
pallets to the closest rental company depot.
Darren estimated that one distribution center his company services
would have transportation charges of $20,000 per billing period, or $260,000 annually if
it totally went to rental.
He believes that with increased rental pallet throughput displacing
white pallets, distribution centers also are going to be more likely to actually cut
checks. Increasingly, there are not enough surplus cores for recyclers to cover the costs
of the services they provide to distribution centers.
One tact the recyclers recommend to distribution center clients is to
ask their product suppliers to ship on white pallets but not necessarily to offer pallet
exchange. Shippers already pay for rental, Mike noted; if the cost of a recycled pallet is
similar to what the shippers pay for rental, the distribution center should not be obliged
to return it, he argued.
Both men said their data showed that if returned rental pallets had
been swapped for white pallets, customers would have both enjoyed healthy pallet surpluses
and "no cost" services from the recyclers.
One distribution center indicated that it did not want to increase the
pallet costs of its suppliers, but Mike countered that recycled pallet prices were very
competitive with rental prices.
While the future is unclear, it seems certain that a core shortage will require that
pallet sorting, repair, transportation and tracking activities will have to be paid for
out of distribution center operations instead of buried in trading of cores. This will be
true whether the services are provided by recyclers or performed internally by the
distribution center.
