(Editor's Note: The following is a speech delivered in 1991 at the annual meeting of the Canadian Pallet Council. This is intended as historical document. It does not reflect the current situation for many of the parties mentioned in this speech. The CPC closed down in 2015 after 38 years in operation.)
First, I want to make one thing clear. I am not an expert on the Canadian Pallet Council (CPC) program. You are! I am not an expert in the details of the woes and problems of Canada's pallet manufacturing and recycling industry. You are! I do not hold the power to exercise control over your destiny and that of CPC. You do!
Why then am I here? Because of my position as a publisher for the wooden pallet industry, I have opportunities that most of my pallet friends do not have. We have calls flowing through our office from all comers of the continent about everything one can imagine. As a consequence, we enjoy a unique perch. We are exposed to a panorama of material. Everything from mixing ground pallets with waste sludge to using wooden pallets as an integral part of a grocery display package. Our staff finds itself playing the psychiatrist role for many in our industry. We field questions from unsuspecting students who have been assigned the pallet industry as a paper subject to people with a new idea about how to revolutionize the pallet industry. So, sometimes a few of these opportunities turn into jewels we wish to share with the industry.
From a Canadian point of view, it may seem ironic that somebody from the South Forty-Eight has the audacity to come north of the border and talk about quality pallets and the value of a good pallet pooling system. In the United States grocery sector, we have a system which is broken. We might ship more light weight pallets as a percentage of our production than any other palletized country in the world.
And our system. Oh, our system. It is a real management study of how not to do it. The grocery subcommittee which has been studying the grocery pallet system for the past three years labeled the wooden pallet a "dinosaur." Sounds like an ungrateful comment coming from an industry which the pallet has saved so many dollars and so many backs. It is precisely because of my exposure to the problems and their consequences that I am here.
You have what is viewed in the U.S.A. as the "Model Pallet Exchange System." You are aware of your problems and limitations. You may not, however, be aware of the consequences of the wrong moves on your part. We are living in a shrinking world. What happens in the United States has always affected Canada. With an increase in free trade, however, our mistakes will impact you even more. And believe me, we make more than our share of mistakes! In the pallet industry the United States is looking toward Canada for direction as to how to do it right.
CPC was on many tongues at the recent National Wooden Pallet and Container Association (NWPCA) meeting in Memphis, Tennessee (in the early 1990s). Why? Because Stewart Richardson made an excellent presentation to the hungry crowd about your program; many were already aware of the CPC reputation. In the United States, CPC means an exchange system which works. It means a pallet which lasts. In addition to an already jammed program, they called two or three special unscheduled gatherings for those who wanted to talk about the "Grocery Problem." What did they conclude? As you can well imagine, no final conclusion was reached. There was a strong consensus that we have a problem. Some people felt that the NWPCA should organize a "North American Pallet Council.
That’s right a "Pallet Council." They used that term because the CPC is viewed as a success. It is an exchange system which works. It offers everything a customer could want. Ownership. Rental options. And professional management guidance. To name just a few.
A healthy CPC program is important to the U.S. pallet industry at this time. Pallet people in my country are concerned about what third-party management will mean. They are especially concerned about CHEP. I am not here to bash anybody, but want to report what is actually going on. CHEP is obviously the leader in worldwide pallet rental. CHEP has purchased close to 1.5 million stringer pallets from seventeen U.S. pallet manufacturers. They just recently dropped the lost charge from $15 to $5 for a period of time. Everybody says that their system is not being accepted as fast as they had hoped or expected. Make no doubt about it, though, there are those in the grocery industry decision process who seem to believe that CHEP's third-party rental system offers the management control they need. It all comes down to management control.
When U.S. pallet people look at CPC, they see an alternative. It just might be an alternative worth fighting for. They don't like the power dominance they sense from CHEP. The recyclers are still angry about the registered letter CHEP sent to recyclers over a year ago. To expect recyclers to help plug leaks in your system and then pay nothing for it is a little ridiculous in the first place. To come across as an arrogant owner with a "how dare you have one of my pallets on your yard" approach just doesn't go down very well with the typical entrepreneurial spirit of the U.S. recycler. CHEP's system takes all control out of the pallet industry's hands. It puts it into the hands of one major player. Pallet recyclers are not actively included in CHEP's current U.S. plan. Only a few pallet manufacturers are involved, and even that number is expected to diminish.
In one sense, CHEP is no different from any other large customer who has a limited number of good suppliers. But in a big sense, it is greatly different. CHEP has designs of being more than a big pallet buying and using customer. They hold the potential and the possible power to be a dominant force in our industry. A dominant force over which nobody really has control. The pallet industry certainly has no control over them. Absolutely no control.
CHEP's customers are in the driver's seat at this point, because CHEP is having to do everything within its power to court their business. If the system gets well entrenched in the United States, however, then CHEP may have a system which functions a little bit more like a monopoly. Common sense suggests, no it dictates, that CHEP's rental cost and fees will go up. It is my understanding that CHEP's original fee structure was more aggressive than the one the rental provider is currently using. Competition and winning customers can be a powerful thing.
I can only talk in terms of "ifs" because the future of pallet rental is unknown in North America. If CHEP becomes a dominant force, then CHEP can increase its fees and become a very profitable company. This in itself is not bad; CHEP is in business to provide a good product and make money. The question becomes whether or not the grocery industry wants to put itself in a position where they can potentially be at CHEP's mercy. This concerns them, but they view this management control carrot as being extremely attractive.
The U.S. grocery industry says that a CPC-like system would ideally be the best. They admit that it would save them more money than a third-party rental system. But they believe it will require them to take a more active management role. They want somebody to come in and take away their headaches. CHEP has apparently convinced some of the key members of this subcommittee that they will both eliminate the headaches and save them money. They make it sound like a win-win situation. The truth is that any system which requires keeping up with a flow of pallets will require that people keep records. This is going to mean people on the docks, in the warehouses, and driving the trucks.
So, what is happening south of the border which may affect Canada's pallet industry? Unless something happens to change the minds of at least some of the people in power on the grocery pallet subcommittee, they expect to recommend that the U.S. dry goods grocery industry adopt a dual standard for its materials handling future. They expect to recommend expendable shipping platforms, probably manufactured from corrugated or honeycomb products, for light loads of about 500 pounds or less. For heavier loads they expect to recommend that the industry adopt a perimeter-base block style pallet. They are currently testing several different block style pallets and are not at all certain at this time what specification· will be suggested. It is interesting that this committee is no longer using the word dinosaur. In fact, Ross Murdock from Campbell Soup, co-chairman of the pallet subcommittee, said that wood is now OK. He stated, "We like wood!" How's that for a switch?
So, they are leaning toward a change to block pallets. Why? It appears to me that it is their only safe recommendation. After three years of studying what is a bigger problem than most in the industry could ever image, they are under the gun to do something. I personally have to sympathize with them somewhat. They have already been told that the current system is a disaster and that it will no longer be acceptable. I have to agree that the system has grown large; and continues to deteriorate. They want their mythical "platform." Most of us did not think they would find a platform solution which met their performance criteria and their cost criteria and their damage requirements. Lacking a platform solution, they could recommend a third-party management system or combination of systems.
They are not sure how well the rental systems will work and what they will cost down the road. If they recommend them outright, this really puts them on the hook for the consequences. However, they do know that block pallets work. They have worked in various corners of the globe in exchange and rental systems for decades. But they work more due to management control than they do the specification. The problem is not really block pallet or stringer pallet; it is pallet control. But by recommending a block pallet, the subcommittee is doing something. What's more they are doing something which is proven to work, but at the same time it is new. Yes, they are saying it is NEW. They are in essence buying time. In addition, they are opening the door for third-party management systems, such as pallet rental.
CHEP can probably buy a good quality lumber block pallet for not much more than they were paying for its U.S. stringer pallet. Thus, CHEP may be able to rent it for somewhere near the same amount of money. For grocery companies to buy such a block pallet, as they currently do GMA pallets, would cost them considerably more. Thus, the economics of pallet rental may seem to make more sense (emphasis on the word seem).
Therefore, it appears that recommending a block pallet might accomplish three things. First, it will give them something new, but yet proven; that is a very unusual combination. Second, it will open the door to third party management control, which they admit is probably the real issue. Third, it makes these changes with what may be a minimum of risk to those studying the problem.
Do not misunderstand me. I am not in any way criticizing the subcommittee and its decisions; I believe they are perfectly logical. And after all, I am a mathematician and statistician; logic is my sword. I am saying, however, that the grocery pallet system is a big problem, a huge problem! It may well be a larger problem than most had envisioned. In fact, it is probably a bigger single problem than many of these grocery giants have ever faced in their entire corporate history. After all, with most of the major problems they tackle they have to consider competition, but implementing solutions usually lies primarily within their own corporate bounds. The current GMA system certainly does not lie within a corporation's bounds. It is a frustrating dilemma. To expect a panacea solution is a big step of faith.
You see what I am driving at? Pallet exchange and pallet management control within a large system is a very big issue. The U.S. subcommittee admits that a CPC-like system is probably the best solution for them, but they do not think that they can make it work. They do not think that they have enough control over the people and conditions. They say it is different in Canada. Sure, it is different in some ways.
The United States is 10 times larger in population and product flow. We might be more inclined to buy it and throw it away, a habit which current trends say we must change. It is a bigger problem in the United States primarily because of real estate and location numbers. Many of the major grocery manufacturers have a sister organization in Canada. It may be a smaller volume company, but there are not ten times as many major grocery management teams to work with. We may not be able to accomplish in the United States what you have accomplished with the CPC in Canada. But if we can't, it is only because the commitment is not there. Any other excuse is just that – an excuse. You can blow all the smoke you want, but it all comes down to committed people. It takes commitment. It takes training. It takes an incentive.
If the grocery damage problem in the U.S. is 2-1/2 billion dollars a year. If the U.S. dry goods grocery pallet system is costing the industry $2 billion a year. If they are really getting fed up with their "pallet problems!" Then it is time to act.
No matter how you disguise it, it will take management control to keep up with pallet locations, who owes how much money or how many pallets to whom. The thing which many third-party rental systems provide is the structure to exercise the management control.
Rarely do you get something for nothing. If they can setup and control a system which requires participants to help them keep up with what is going on, then other people can do the same thing. If companies are ready to be committed to a self-control system, they can do it. It will require management commitment at the top. It will require training below. Make no mistake about it. The complexity of pallet logistics requires control to make any system work, including third-party rental. It does not simply happen with little to no effort from the pallet user.
So, what are the consequences if CPC were to gradually ride into the sunset? What are the consequences to Canada of what is happening in the U.S.? Let's examine the facts.
First, if the United States does go heavily to a block pallet of some style, Canada will find itself more heavily involved with block pallets. Increased free trade is going to force more conformity. And the United States is ten times as large. The simple numbers say you will have CPC and CHEP block pallets in Canada as a consequence.
Second, if third-party pallet rental, which currently is leaning toward CHEP, develops a strong beachhead in the United States during the 90's, it will most certainly carryover into Canada as well. Thus, CHEP Canada will benefit, and CPC will likely pay the price. It is a natural evolutionary progression, and it may have very little to do with the best program or which one really costs the least. What happens in the United States has always affected Canada, but the effect will be greater under increased free trade. The world is shrinking. In our case the border is so close that these consequences are almost automatic.
Third, a growth in third-party rental as it currently exists in Canada and is developing in the United States, seems to work against the wooden pallet manufacturer and recycler. CHEP, the only real model at this point, tends to buy from a few selected pallet builders. In fact in the United Kingdom, they operate a large pallet manufacturing facility which they bought in the 80's, long after they were an established part of the market. They apparently bought it to guarantee themselves a supply of quality pallets.
My contacts suggest that this year during the recession CHEP has bought very few new pallets from its other suppliers because the rental provider has not needed as many, and can supply most of them from its own plant. It is also true that in Australia CHEP buillds many of its own pallets. While CHEP has stated that it has no intention of entering the pallet manufacturing business in the United States, one has to be somewhat suspicious based upon the company's history.
CHEP generally repairs most of its own pallets at depots, which the company owns and operates. In the United States, CHEP is doing many repairs at its manufacturing sites. CHEP apparently views recyclers as being less knowledgeable of lumber quality and species and would rather train from the ground up than try to correct what CHEP leadership views are many bad habits.
In CHEP's defense, many of its decisions are logical. The pallet industry finds fault with them primarily because it means that the consequences may not be to the benefit of the overall pallet industry. One might argue that a third-party rental system which works may keep the market for wood by providing an acceptable alternative to our customers. That is, however, assuming that the cost structure and system will work to the users' benefit over the long run. It seems questionable that a company can be highly profitable without costing the system more than it would cost if a well-managed ownership exchange system were in place. Nobody knows better than CHEP what profits are possible through pallet rental.
If CHEP did not think the U.S. market, and eventually the Canadian one, would be highly profitable, would the company have committed some $150 million already in the United States, with the possibility of having to spend several hundred million dollars more? The CHEP people seem bright and very well organized. They would not have made their move if they had not had high expectations. I might add that these are expectations from experience, not just hope and a prayer.
It is also not an automatic conclusion that third-party rental will be wood. Both of the third-party rental parties currently pursuing the U.S. grocery industry have plastic pallets in the system. Do not laugh. There are realistic projections that a $30 quality plastic pallet is in short run projections, and it will be made from post-consumer recycled plastic. Compare this not just to the current U.S. GMA for $6.50 to $7.50 or current Canadian CPC. Compare it to the higher quality expensive block pallet they are considering. Ross Murdock of Campbell Soup indicated that recycling is very high on the grocery indusry's list of important considerations. It may be difficult to believe, but it is true that the plastics people are presenting themselves as pro-environment and the wood people as being ax murderers.
If CPC were to gradually disappear, whether due to CHEP or due to internal deterioration factors, what would be the impact on the wooden pallet industry?
The pallet industry in North America has continued under strong growth. The NWPCA's numbers suggest that the U.S. pallet industry has more than doubled its unit production in less than ten years. While there are some reputable source who believe this is overstated, even they support significant continued growth in the last decade. But the rules of the game have suddenly changed. President Reagan kept the regulatory forces at bay for eight years. Even though we still have a Republican president, the last three years U.S. commerce has seen the spill gates open. Based on the recent state elections, the U.S. voters are getting fed up. And they have become very environmentally concerned. They may not be well educated in environmental truths, but they are becoming increasingly aware and concerned. No telling what they might vote through or pressure politicians to support. The bottom line is that expendable pallets might find themselves suddenly on the endangered species list.
While many may view this as good in many ways, it will definitely affect the lumber and pallet industry. Increased pallet life will mean fewer pallets being manufactured and less lumber needed to do the job. I forecast that the year 2000 will see fewer pallet manufactures and recyclers in North America, maybe considerably fewer. And this is assuming that our industry continues to control some of its destiny by working with companies which own their own pallets.
If rental increases significantly, our industry as it exists today may well benefit from a smaller portion of a shrinking pie. Do not expect past exponential growth trends to continue. The wood pallet and container industry is at the crossroads of the biggest shift in its history. Until now we have sailed on the seas of expansion with changes being more cosmetic and gradual than they have been radical and rapid. We are on the surgical table and anesthesia is being administered.
What should you as CPC pallet manufacturers and recyclers do? If I am correct, the future of this program, which has been a model program to the United States seems more tentative. Not because it has not worked, because it has had an admirable success record in many ways. Not because it is not good, for it has been the best thing that I am aware has happened to the North American pallet industry.
But because we must change our philosophies to meet the challenges of both today and tomorrow. We have to manufacture very good pallets. We have to repair them properly. And we have to increase our educational efforts to use them properly. and treat them with respect.
I would suggest that Canadian pallet manufacturers and recyclers who work within the CPC system may want to talk with your U.S. friends in the industry. Many of them are concerned. Some of them are looking for what they can do to help the U.S. grocery pallet problem, which would eventually help the Canadian CPC program as well. Talk within your own group and reach a consensus of how to proceed. Talk with your U.S. friends and give them your suggestions. The field of change is ripe.
Pallet users increasingly have a different management mindset than they once did. What did not work before, indeed what could not work before, may work better under the emerging quality conscious upper management philosophy spreading across the continent. Maybe the CPC should be working directly with the U.S. grocery industry subcommittee. Stewart Richardson spoke with them on a couple of occasions in the early stages of their study. They are thinking differently now, as evidenced by Ross Murdock's statement, "We like wood!"
Make no mistake about it. The U.S. grocery problem, as currently being studied, and the CPC system are linked to each other. You have a good system. You work hard to keep studying it for changes which will make it even better. This is necessary for survival, especially when so many forces are working to take away your markets for wood pallets.
Life without the CPC? Many of you may not want to think in those terms. Certainly, many of you are aware that the CPC system will either take an increasing role in your future or it will suffer because of pressures being constantly exerted in the system. The way I view it, the wooden pallet industry in Canada, indeed the wooden pallet industry in North America, will look back and wish that they had the CPC back if anything ever happens to it.
I believe I can speak for some of the U.S. pallet industry leaders when I say that we are open to any suggestions that you have. The hour is here. You are more of the experts. Work to keep a strong CPC system. Work to make it stronger.
