The parent company of Pallet Enterprise is celebrating its 40th year in business recognizing the anniversary of the Wooden Pallet Index, which later became the Pallet Profile. Many readers of the Enterprise may not realize that our first pallet publication is the Pallet Profile, a weekly market report and newsletter dedicated to pallet lumber and manufacturing issues.
The first issue of the Wooden Pallet Index began on March 30, 1977, and the reported price of a heavy-duty hardwood pallet was $5.24. Today pallet prices are $10-11. But that number today shows that pallet prices have not kept up with inflation. Total inflation from 1977 to 2017 is 303.5%, and $5.24 after inflation is $21.14 in today’s money. So how has the industry survived?
A big reason that the pallet industry has survived is that pallets do not have anywhere near as much wood in them today as pallets in the 1970s. Board thicknesses have shrunk as lumber prices rose, and pallet users were not willing to pay for a higher quality pallet. The Pallet Design System™ (PDS) allowed pallet manufacturers to produce pallets with less wood that still met strength requirements. Unit loads were optimized with the initial purchase price of the pallet as the key concern.
Pallet companies have become leaner and meaner when it comes to the production process. Automation has enabled pallet providers to do more with less. And companies are smarter when it comes to procuring lumber and using a wide variety of material to get whatever is most cost effective. Recycled pallets have become more common and provide a low-cost option for those who cannot afford new pallets. Also, pallet rental has taken a large share of the fast moving consumer goods market.
But how can companies survive the pallet industry in the future? What will the sector look like in 40 years? And who will thrive?
This editorial explores some of the trends over the last 40 years with an eye to the future. Forecasting is never easy and usually fraught with errors. But it is a good think to even though no forecast can be 100% accurate.
PDS™ Changes Pallets Forever
The Pallet Design System™ was introduced in 1985, and it revolutionized how pallets were made. PDS enables the development of custom designs that have proven science behind them to ensure that a pallet can carry a specific load. PDS has helped lower costs and improve the performance of specific designs.
Future Forecast: The next generation of computer-aided design will focus on more than just the pallet. It will look at the entire unit load as well as the materials handling systems. PDS and Best Load™ are going to help further drive down cost by eliminating other packaging costs, such as corrugated and plastic in the containers and boxes. Interestingly, you can save more money in some unit loads by actually improving the pallet quality if you decrease the corrugated or plastic spend on other packaging. A complete systems-based design concept looks at each component as part of a whole. This idea is just beginning to catch on, but it could be the rage in the next 10 years if logistics professionals begin to understand that the best design can only come through collaboration.
Growth of Pallet Recycling
During the 1980s, pallet recycling grew from an idea that a few did to a big movement in the industry. A lot of old pallets were collected and reconditioned for selling as recycled pallets. This trend led to an entire segment of the industry being born that focuses on retrieving stray pallets and repairing them. Some pallet manufacturers decided to jump into this opportunity, and others saw recycled pallets as competition. In many ways these are very different businesses where one focuses on low manufacturing costs and efficiency, and the other centers on service and core acquisition.
Some people thought a few years ago that the recycled pallet industry would be in real trouble as core supplies dried up and poor quality had become a dilemma. But the market found a way, and now core supplies are strong although quality can still be a concern. The industry has developed a number of grades of pallets, but customers have to be willing to pay for the higher quality ones.
Future Forecast: Looking ahead, pallet recycling will remain a key segment as cost continues to be a primary driver. Some companies will make more combo pallets to augment supply when necessary. Core acquisition will continue to be a major driver in who wins and loses. The most important aspect of the business will be service and growing the ability to provide recycling services beyond just wood pallets. Smart companies will use the pallet as an entry way to providing more recycling and logistics services. The idea is the more you do for a customer, the more indispensable you make yourself.
Pallet Rental Rises and Begins Making Major Inroads
The golden age of the pallet industry was the 80s and 90s before pallet rental took over a big share of the grocery pallet industry. CHEP entered the U.S. pallet market in 1990. Rental was a new concept, but a number of major customers backed the idea, especially Procter & Gamble. CHEP promised a better quality pallet at a competitive price per trip. Customers liked the idea although the initial CHEP program came with restrictions about customer use. It was more of a large, private network with minimal leakage.
Future Forecast: CHEP, PECO and iGPS have saturated much of the 48×40 market in the grocery sector. There are still some areas held by white-wood pallets. But if rental wants to grow, this sector will have to begin producing and offering some other sizes. Look for 3-4 other sizes to be launched within the next decade. Competition between CHEP and PECO will continue, and there is opportunity for maybe a third real competitor as iGPS likely will fade without a massive infusion of new funding and a new pallet pool.
PalEX Developed as Consolidation Effort Began
In 1997, a number of major pallet players joined together to form PalEx, a publicly traded pallet company designed to help consolidate the industry and provide true national management and production capacity. This company later spawned Pallet One and the pallet services division of IFCO Systems, which later became CHEP Recycled. Pallet One remains the largest pallet company in the country.
Future Forecast: The growth of national players which began in the 1990s continues today with a number of major management companies offering national service for both new and used pallets. Many of these companies do not own all of their own production. But they work with other providers in establishing networks. Some of these companies include Palnet, 9BLOC, Northwest Pallet, Ongweoweh Corp., the Pallet Alliance, Kamps Pallets and others. This trend will continue as many companies join one of these networks to some degree while working to preserve their dominance in their local area. Consolidation will continue as some companies change ownership as founders retire. Some new blood to the industry will lead to innovation and a new group of major players.
Heavy-Handed Approach by Pallet Rental Against Recyclers
In the late 1990s, CHEP used police raids and other heavy-handed tactics to secure pallets from recyclers. The most infamous case involved Edgar Lozano of Atlas Pallet in San Antonio. Through the years CHEP and other pallet rental providers have used a variety of tactics to deal with recyclers from threats and intimidation to collaboration, asset recovery payments and even private business arrangements. Currently, CHEP has a fairly favorable relationship with recyclers while PECO is embroiled with a major lawsuit against Northwest Pallet. PECO contends it should not have to pay normal Asset Recovery Program (ARP) fees for some pallets that it claims are in network. But recyclers contend these pallets are stray or not part of any network deal.
Future Forecast: The ARPs offered by major rental providers have not changed in years. Meanwhile costs continue to rise for labor, transportation, real estate, insurance and more. It is up to pallet recyclers to demand some sort of higher compensation. At least recyclers should push for ARPs to rise with inflation.
But the industry will continue to remain fragmented and won’t do much until the costs eventually become too high, and then rental providers may have to relent and tie their ARPs to inflation. In the Northwest Pallet case some favorable rulings will lead to a negotiated settlement that helps Northwest Pallet. But no major industry impact is felt except the details of the agreement will be released to the public. (Note: this is a forecast and has not occurred yet).
Heat Treatment and ISPM-15 Change Export Packaging
Concerns about the spread of wood pests led to the development of international packaging standards in the 2000s. This spurred the growth of heat treating and export certified pallets. ISPM-15 has been successful in some ways, but some wood pests still get through.
Future Forecast: New treatment methods will allow for faster treatment but the approval process bogs down development. Some will continue to raise concerns about the efficacy of ISPM-15 to kill all major wood pests. Others will be concerned that too much cheating exists. The wooden packaging industry will continue to improve the program in North America and other major regions. China will remains a trouble spot but show some improvement. Experts will agree that pallets and wood packaging provide a greater benefit than detriment despite studies, such as the Carey Institute report.
The Plastic Revolution – iGPS
In 2006 iGPS launched an all-plastic pallet pool to much fanfare. Its specially designed plastic pallet promised to forever revolutionize the supply chain. Despite almost $750 million in funding, the company eventually went bankrupt and lost customers. It stayed afloat after being sold off. But slowly the pool has gotten old and was never replaced in large quantities.
Many of the ideas behind iGPS were brilliant. But the execution was poor. Plus, a concerted effort by CHEP, and problems with the fire retardant used by iGPS caused major public relations problems for the plastic pallet pooler.
iGPS dropped prices too much and gave away its premium position. The company also couldn’t scale up to the point to have competitive logistics costs. And some customers struggled to get pallets as needed. After the bankruptcy, the new owners milked the pool for all it was worth. But without a major investment, the company has a limited shelf life.
Future Forecast: iGPS will likely sell off its remaining pool and shut down the company because it will not be able to obtain enough funding to support a new pool. Many of its ideas remain unproven. From iDepots to RFID tags in pallets to more precise billing, iGPS pioneered some novel things. The question is can anybody in the future make them work? (Note: this is a forecast and has not occurred yet).
Pallet Fires Spark Storage Debate
Back a few years ago, the Pallet Profile was the first to alert the pallet industry to new proposed outdoor pallet storage codes that would have significantly decreased the amount of pallets that can be stored on active pallet yards. Our analysis led the industry to act, especially the pallet association that stopped the proposed changes in favor of best practices and a more collaborative approach.
Future Forecast: Fire will remain a major concern because a pallet is ideally designed to be a good fire starter. No matter what a pallet is made from, it provides enough spacing to create airflow. The wooden pallet industry has developed best practices to lower fire risk, but companies will always have some exposure.
Authorities will catch those responsible for arson pallet fires in California. The key is video surveillance footage that can record in the dark when sensors detect human activity. Adequate spacing, training and proper management are keys to lower fire risks.
The Amazon Effect Alters Retail
E-commerce jumped by huge leaps from 2012 to 2017. Amazon led the way as even Wal-Mart offered online ordering and free store pickup. Other grocery retailers now offer online ordering as well. Amazon is working on drone delivery. Everyone is trying to make ordering easier and automated in some cases. This leads to two different paradigms: online fulfillment from DCs and online fulfillment from retail stores.
Future Forecast: E-commerce will lead to more stuff bought as customers can shop until they drop without having to leave home. But overall palletization will decrease as fewer products are sold from stores. Pallets will still be needed, but many retailers will transition to carts, containers and other storage solutions. Pallet dwell times for rental providers will likely decrease as pallets and loads move faster. Leaning the supply chain will remain a key to stay alive in the retail game.
Labor Crunch Leads to Automation Advancement & Innovation
Everyone in the pallet industry knows how hard it has been to find and retain labor over the past few years. This trend has caused the cost of employees to rise. Companies are focusing on culture to attract workers. But other industries can afford to pay more.
Future Forecast: The only real solution will be automation. But that leads to a whole new set of problems. Automation is not a panacea. High production lines require better lumber and improved sortation. Scanning and lumber sortation equipment that are relatively new for pallet operations today will become standard over the next two decades.
Advanced automation means that companies will need some higher caliber employees who can handle PLCs and other automation issues. More robots and automatic lumber feeding will mean that women can take on more roles in pallet manufacturing shops. Pallet recycling will remain harder to automate some functions. But equipment suppliers will respond to the challenges so that many roles in both manufacturing and recycling can be done with as few workers as possible. You will always need somebody to manage the automation or at least until artificial intelligence improves.
Advanced automation also costs money and can break down. But it will become a necessary evil. The good news is that the next ten years will offer the opportunity for the greatest advancement in technology for the pallet industry in North American history.
Data Drives Successful Companies
Significantly connected to lower production costs and lean manufacturing is better data. Automated lines provide consistency and better production tracking. Companies must get data from customers and their own processes to be able to take advantage of changes and spot problems.
Future Forecast: Pallet companies can no longer manage their data with simple spreadsheets and tick marks. Customers will want online ordering and tracking, accurate pallet counts and feedback on ways to optimize delivery. Thorough programs don’t have to be complex. But you do need to capture enough data to identify problems as well as opportunities.
Machines will need to be tied into networks and accessible remotely. Artificial intelligence will scan production processes and identify issues such as lumber sizes that are running low, inferior quality lumber and inefficient forklift driver practices. More than likely in 40 years forklifts and trucks will drive themselves.
Just because you have lots of data doesn’t mean that you will know what to do with it. The best companies will use advance algorithms to turn mounds of data into insightful action steps. Somebody at your company should be tapped now to chart your data strategy. Otherwise, your company will not be ready for what is coming next.
The Flexible Survive
Harwood lumber shortages and softwood price spikes lead some pallet companies to develop their own sawmill and logging crews. While some large companies always had these in place, concerns over securing the supply chain led some companies since 2000 to add sawmilling to their expertise.
While this may cost money and takes lots of time, it also provides the pallet company with added flexibility. When you control your raw material supply, you can impact your quality, efficiency and delivery schedule.
Future Forecast: The trend of more vertically integrated companies will continue although it will remain a strategy used mainly by mid to large-sized pallet companies. Small shops just can’t afford to be in the lumber game. The one exception is the West where few pallet operations will have their own saw lines.
From your lumber supply to your facility and even personnel, smart pallet companies will value flexibility. This approach will allow you to respond to market changes.
