Is the White Wood Pallet an Endangered Species?

This special report explores how the white wood pallet pool might become more proactively managed in the future. It does not break new ground as much as summarize some of the recent information on the topic and closes with a few ideas about small steps to make the existing white wood pool more effective.

Essentially, the white wood exchange pool is a system. It is replenished by new pallets coming into the pool and depleted by the exit of pallets due to dismantling, grinding, etc. The quality of pallets in the pool is a function of initial pallet quality, in conjunction with usage and repair variables. In the 1990s and into the 2000s, the white pool was increasingly starved of new high quality pallets coming into it as CHEP won over large grocery manufacturers, which had previously put a lot of new pallets into the system.

At the same time, the white wood pool was sustained by the rapid growth of an increasingly sophisticated recycling industry. As a result, the average age of the pool was generally believed to be getting older, with the amount of #2s increasing relative to #1s. A few large recyclers advise me now that core quality, at least out of the larger grocery DCs, seems to be stabilizing. Regardless of whether or not quality is leveling off, a number of factors still threaten the future viability of the white wood pool. These include the following obstacles:

! Continued increase of CHEP market share

! Decreasing interest in exchange systems as companies increasingly outsource non-core activities such as pallet management

! Fragmentation of pallet suppliers

! Lack of pallet standardization

! Increased centralization of logistics decision making, which does not favor local pallet companies

! Pallet user interest in RFID pallet tagging, which opens more doors to closed loop systems and non-wood pallets

! Ongoing perception of poor quality in the white wood pallet pool

Over time, the above trends could negatively impact the success of the white wood pool, or for at least some significant segments of it, unless certain adjustments are made.

CORE Recycling Council, Inc. is a not-for-profit company that has emerged to unite recyclers in the fight against having to provide “free retrieval logistics” for proprietary pallets. Free logistics refers to independent recyclers being forced to provide free or low cost retrieval, sortation, storage or return services for owners of proprietary pallets. In the past, some owners of proprietary pallets, especially CHEP, have threatened recyclers with lawsuits or criminal charges if marked pallets were not returned gratis.

Don Black, president of CORE, sees the ‘free logistics’ issue as a first step in a longer process. By correcting free logistics, he feels that this will promote competitiveness by more fairly allocating the costs of proprietary pallet logistics onto the proprietary pallet system, rather than being subsidized by the white pallet system. With the elimination of this subsidy, CORE would then turn its attention to other issues of importance to the success of the white wood pool.

To many it may seem like the 48×40 white wood pool has been around forever and will be here forever, but in fact, it isn’t as old as a vintage Ford Mustang. According to an account by warehousing expert Ken Ackerman, a warehouse operator interested in the concept of pallet exchange surveyed the grocery chains in its area during the early 1960s. Each food chain had a storage rack system based upon a different pallet footprint, and standardization “seemed impossible.”

Ken credits General Mills with driving standardization in the 1960s. The standard pallet it developed was later accepted by the Grocery Manufacturers of America as its standard pallet design, hence the origin of the “GMA” pallet. Grocery distributors converted their storage and handling systems to handle 48×40″ pallets.

Responsibility for managing the pallet program was reassigned to the Grocery Pallet Council (GPC) in the early 1970s, but the standard quickly became compromised. “To cut costs, many pallet users found cheaper types of wood,” he wrote. “Others made changes in thickness and spacing of deckboards. Eventually the Grocery Pallet Council disbanded, and today the only pallet standard that is preserved is the length and width dimensions.”

Problems resulting from quality erosion culminated in the creation of the Grocery Industry Pallet Subcommittee in the late 1980s through the early 1990s. In 1992, the subcommittee released a number of recommended pallet performance specifications. The result generally favored block style rental pallets as a solution.

The growth of the CHEP program and white pallet recycling characterized the 1990s. While CHEP’s growth effectively eliminated many new white pallets that had previously renewed the white wood pool, it also displaced more cores for recyclers to process. The growth of recycling ensured the longevity and repeated utilization of white pallets, albeit ones of an older average age. Over the course of the 1990s, CHEP market share in the grocery sector continued to grow, where today it is said to be over 50% for major grocery retailers, and much higher for Wal-Mart. Some grocery accounts, such as the big box retailers, have become very demanding about white wood quality requirements. Recyclers have become skilled at sorting 48×40″ into a number of grades to meet the needs of specific customers such as Sam’s Club, Costco, etc.

Different models have been suggested as templates to reinvigorate the US white wood pool. CPC and Europallet systems are often touted as examples of exchange pools that have successful pallet standards and enforcement mechanisms.

The Europallet is the predominant white wood pallet pool in Europe with over 300 million in circulation. While specification is strict, standardized pallet exchange requirements were purposefully avoided in order to allow greater transaction flexibility. This freedom has made the Europallet system more flexible and adaptive to other industries beyond just grocery. Widely used in other industries, it is less vulnerable to encroachments by CHEP than it would be if the Europallet was utilized only in grocery.

Despite the success of the Europallet standard, the pool finds itself under increasing pressure in various parts of Europe. While CHEP’s grocery market share in Germany was said to be less than 10% last year, another source pegged CHEP share going into large grocery distribution centers in France at closer to 50%, slightly larger than Europallet share. Similar to the market demand in North America, pallet users increasingly are frustrated with the hassles of exchange and want more pallet-related services. Where there are standards, there are inevitably enforcement costs. One enforcement issue faced by the Europallet system is that of counterfeit Europallets coming out of Eastern Europe. It is also worth noting that European countries where CHEP has established its system early in the development of palletized handling, such as in Spain and the UK, CHEP share is extremely high, in the order of 90%.

Like the Europallet system, CPC incorporates a standardized pallet. In addition it supports a standardized pallet exchange process, designed to facilitate ease of pallet interchange and maintain quality standards. Launched in Canada in 1977, CPC looked very similar to the GPC system launched in the United States. The CPC model endured and prospered, and the GPC model did not. CPC boasted 80% of the Canadian grocery market share in the early 1990s, but it has slid considerably since then. More U.S. control of Canadian logistics decision making due to NAFTA and a general trend in the consumer products industry towards contracting out non-core activities have led to the slide in CPC market share.

CPC’s Belinda Junkin has expressed disappointment in the past few years that despite proving CPC is a cheaper system on a cost-per-trip basis, it has lost share anyway. The CPC is currently developing an Internet-based, centralized pallet tracking system. It may provide better accuracy and ease of use while facilitating more third party services within CPC.

Although a single, enforceable, high quality standard would have certain advantages for a rejuvenated US white wood pool, there is no way such a major capital upgrade would be attainable without the serious support of pallet users at very high levels to buy the standard. The likelihood of such support is remote to nil in the absence of a major event, such as the unlikely withdrawal of CHEP from the market, or a sudden urgency among pallet users to provide a higher quality alternative to it.

Other more limited programs such as pallet banking have been designed to improve pallet user convenience and pallet quality, especially for transportation companies. Pallet banking programs date back to at least the 1980s. The concept was brought to the forefront in the mid-90s when Pallet Pallet launched its Palletbanking operation. The basic idea was that white pallets could be dropped off at one pallet banking location and picked up at another. This has been especially attractive to truckers forced to participate in pallet exchange. By providing a list of participating depots and pre-approved credit terms, pallet banking helps trucking firms eliminate non-productive activities associated with exchange and underutilization of trucks in backhaul. First Alliance Logistics’ Pallet Clearinghouse presently offers a pallet banking program on a national basis. Some major regional recyclers with multiple depots also offer banking services to their clients.

Over the years there has been talk of developing more expansive pallet banking systems including shipper and receiver involvement, centralized data collection and collaborative marketing efforts to win national accounts. In its present form, without large-scale involvement of shippers and receivers, pallet banking exists predominantly as a partial solution for carriers with respect to pallet exchange making it predominantly a niche service.

Some pallet companies also offer pallet rental on white pallets, as well as recovery and retrieval services. These have been targeted at specific lanes and have provided value where such lanes can be isolated. More complex pallet networks can provide greater value by reducing empty pallet relocation costs, increasing pallet utilization, and reducing delays.

Finally, another tact is that of segment abandonment and market migration – in other words, as the pool deteriorates, sell to applications where #2s are appropriate and accepted. Over the years, the market place has led pallet companies to seek this outcome in order to move their #2s. In the west, one application that emerged to nicely fill that gap was the acceptance of #2s for the agriculture industry and produce shipments. The truth of the matter is that pallet companies already try hard to move their #2s, and there may be limits to the upside of such segments.

A White Wood Report Card:

Casting aside the other pallet system models, one way to proceed is to examine the strengths and weaknesses of the white wood pool. Its weaknesses have received a lot of attention form its critics over the years, including damaged pallets resulting in product damage, inefficiencies related to pallet exchange, as well as lack of consistent specifications and tolerances for manufacture, repair and damage. Other weaknesses relate to the fragmented nature of the industry, and perceptions of poor quality, which collectively make the white wood program more difficult to sell to national level accounts.

On the plus side of the ledger, the white pallet is relatively light, thus a better fit for the ergonomics initiatives that are springing up everywhere. And where the pallet is absorbed as a price of packaging by the product shipper, it provides a very convenient shipping platform that does not require documentation or data entry. There are no hidden tracking, reporting or pallet management costs, and no pallet exchange hassles and related transportation inefficiencies. There are no lost pallet charges that may be part of a rental program. Other positives are the extremely wide availability of the white pallet, including competitive pricing among white pallet providers. You just don’t see two CHEP outlets competing for the same business. Also importantly, the white pallet can be sorted or repaired to suit the application with appropriate service customization. The white pallet can be customized in specification and service to best meet customer needs. Best of all, from the pallet user’s perspective, recyclers will often pay an acquisition fee to buy the pallet back.

Looking ahead, the white pool must keep in mind a number of current and emerging trends in addition to CHEP’s continued expansion. Some of these trends seem to be conflicting. One concern is pallet liability. More customers in the future will be demanding a defensible pallet – one supplied to a specification rated to the application, and adherence to that specification assured by appropriate statistical process controls by the pallet supplier. At the same time, customers will require even greater convenience as they continue to downsize and outsource in a time-compressed, just-in-time environment. They will demand quality to meet performance and liability concerns but will have less time to inspect for it. Higher levels of trust will be required while relationships will be more difficult to establish in downsized, centralized customer organizations. Pallet decision making will become more and more centralized as supply chains become increasingly national and international in scope. Yet at the same time, localized, customized pallets and services will be needed.

Don of CORE said that that many big companies are more comfortable using a visible national company with impeccably dressed national sales managers. Image is important, and recycling in general has not been effective in developing a marketable national image.

Increasing global logistics trends will make it more difficult for national level pools to survive. “It requires trying to control what has been an uncontrollable industry,” Don said. He noted that everybody wants a smooth system of handling a necessary evil, and he believes that recyclers are up to the task. “CHEP is not devoid of problems,” he noted.

Beyond the issue of free logistics, there are some basic steps that stakeholders to the white wood pool should consider. One that has been talked about in some detail is a basic certification process for pallet businesses, i.e., do they have a business license, are they on properly zoned property, do they pay their workers comp premiums. Moving to a slightly higher plateau, another certification measure to consider would be confirmation that pallet suppliers have statistical process controls that ensure that the pallet they say they are selling is what actually gets on the truck. Any red tape such as supplier certification will go against the grain for independent minded recyclers. But it is a way to provide pallet users with the due diligence they increasingly seek while presenting a more professional and consistent national image to key corporate decision makers.

Another initiative to consider is developing a more unified language around pallet specification. One company’s #1 isn’t significantly different than another’s #1, but there still is an element of ambiguity. Then there are #2s. Some #2s have companion stringers, some don’t. Some have plugs. The ability to customize is a key advantage of the white wood pool. However, the ambiguity and inconsistency of terminology relating to 48×40″ pallets causes inefficiencies for the white wood system as a whole. Likewise, a uniform pallet bill of lading, such as found in CPC, might also be beneficial in taking some of the uncertainties out of how pallet transactions are handled among pallet users.

With the acceleration of centralized logistics decision making, the need for national or even international level marketing initiatives will grow. Networking initiatives may be made easier through more universally understood and accepted pallet grades and certifiable statistical process controls. Networks should be increasingly hemispheric in scope, rather than simply country specific. CHEP is a multinational company with a goal of becoming a global company. Logistics are becoming increasingly global.

Big ideas, such as a CPC style system or a Europallet system, would require major capital investment. It seems that the best short term course of action is to better use the white wood resources currently in the market.

White Wood Pool Strengths, Weaknesses, Opportunities and Threats

! Lightweight design provides ergonomic benefits.

! Competitive pricing among many white wood suppliers.

! Wide availability can be treated as a packaging expense – hassle free.

! Pallet provider is at closer proximity, better understands local requirements, and can customize as required.

! Major pallet users paid acquisition fee for surplus pallets rather than paying to have them hauled away.

! Success of white wood pool can act as effective competition to CHEP.

! Inability of pallet users to eliminate pallet rental loss may make one way white wood pallets more attractive.

! Introduction of pallet business certification and process controls will help quell concern about pallet quality and pallet user liability.

! Just-in-time models support convenience of one way white wood.

! More precise specification language will promote standardization.

! IPPC, global logistics requirements may favor expendable HT or fumigated pallets.

! Lack of standardization of pallet design.

! Quality experience and perception issues.

! Lighter weight provides lower load rating and durability.

! Pallet exchange hassles, especially inconsistencies of requirements among trading partners and carriers.

! Fragmentation of pallet industry creates a lack of consistency among suppliers.

! Lack of high-level grocery industry interest in making the white wood pool stronger.

! CHEP momentum and growth will become organic.

! Recyclers will be unsuccessful in attempts to shatter their culture of fragmentation.

! More national, international level pallet decision-making puts white wood at disadvantage unless marketing model changes.

! Concerns about pallet liability favor CHEP unless steps are taken to build customer confidence.

! Supply chain tracking technology such as pallet-level RFID favors closed loop or managed pools.

! Increased demand for pallet quality due to material handling automation will favor CHEP or closed loop systems.