Letter from Ed: Buy Now ? Pay Later!

                  While the principle stated here can find a wide variety of applications in both life and the business world, this particular letter is addressed to the thousands of pallet using companies and those who specify and purchase their pallets. I encourage those in the pallet industry to share this letter with customers and other key decision makers.

                  Out of necessity, today everybody is conscious of what is spent on an item. Unfortunately, what you pay today and what your decision eventually costs you down the road may be two entirely different things. I gave some thought to the title of this editorial. Should it read “Pay Now or Pay Later?” or “Buy Now – Pay Later!”? I chose the latter for a good reason. Buying is a conscious decision one makes. But all too often, especially when it comes to pallet decisions, there are costs beyond just the purchase price that have to be paid. The unforeseen costs can be what really undermine the effectiveness of your decision.

                  While pallets are discussed more today than they have been in the past, much of this discussion centers around the initial purchase price, quality, style (block vs. stringer) or how a particular design will function in a customer’s materials handling environment. All of these are critical factors to consider. What generally doesn’t get discussed are the extra fees or costs down the road to the overall market caused by individual purchasing decisions.

                  When it comes to white-wood (non-rental pallets) a perfect example is the impact on the overall quality of the pool when companies dilute pallet specifications and pallet users require a cheaper pallet forgoing quality in the process. This has had a horrible systemic effect over the years by degrading the overall quality of pallets in the white-wood 48×40 pool.

                  Likewise, pallet rental has some hidden costs depending on which company you use. Regardless of the supplier, switching from buying to renting pallets is a major decision. And it is virtually impossible to reverse course without spending lots of money to do so. This is because once you flush all white-wood pallets out of your supply chain, you are left with primarily rental pallets. If you wanted to switch back to buying pallets or running your own pool, it would take significant dollar investment to supply your operations. Rental companies know this and use it to their advantage. You may think, “Well I’ll just switch to another rental provider if I don’t like the price or service level agreement of my existing supplier. “But that may not always work in reality.

                  For starters, there are only three major pallet rental pool providers in the United States (CHEP, PECO Pallet and iGPS). All of these companies will be competitive to a point. But you only have three choices in pallet rental when you may have dozens of choices if you are buying new or recycled pallets. Also, all of the rental companies are big players that are accustomed to tough negotiations and higher profit margins than the typical pallet manufacturer or recycler. Pallet rental isn’t really a free market the way that white-wood pallets are because the three major companies control the price. I don’t believe they collude together. Yet at the same time, they won’t cannibalize each other’s businesses the way that white-wood companies have been known to do.

                  If you look at the trends around the globe, countries or regions where pallet rental providers (notably CHEP) have significant competition from a non-rental pallet system, pricing for pooled pallets is more competitive. Prices for rental pallets are cheaper in Canada than they are in the United States. Beyond just competition in the rental market, if you want real competition, you need competing systems that push each other to lower cost for everyone. Thus, if you make decisions today that reduce the competitiveness of white-wood options, you are only increasing the costs of your rental pallet tomorrow. It makes sense to consider this cost when making your purchasing decisions. It may be best to support a number of different systems and models to provide for the most competition in the market.

                  I believe that smart purchasing agents and logistics executives understand this dynamic. Also I believe that is why the most recent pallet survey conducted by Modern Materials Handling indicated that the number of respondents who would not consider participating in a pallet rental system went up last year going from 34% in 2010 to 38% in 2011. Also, the percentage of people who might consider rental went down by 5%. Although these are small movements, the fact that so many people in the supply chain are leery of rental indicates that there is room for more models to flourish in the United States. That is why a group of white-wood pallet industry leaders are launching a cooperative pallet pool that will allow for various pricing models including outright purchase, rental, cost per trip and almost anything else the market can devise.

                  Called 9BLOC (www.9bloc.com), this cooperative block pallet pool is targeting manufacturers that are working to meet Costco Wholesale’s block pallet mandate. Still in its infancy, pallets are getting ready to roll off the production line. But 9BLOC is looking for Costco suppliers that don’t want to ship on the traditional rental providers but need a white-wood alternative. The good news is that by supporting this effort now, you will likely lower your overall system costs later if 9BLOC and its network can develop in much the same way that the CPC and EPAL systems have in other countries.

                  Pallet rental companies have successfully sold the argument that you don’t want to be in their business, but there certainly seems to be a strong business case for pallets being a place where money can be made. Last year, CHEP Americas reported $276.9 million in underlying profits with an overall profit level around 17%.

                  Ever since pallet rental appeared in the United States over 20 years ago, it has been sold heavily on both a lower price today and less materials handling hassle. It may be true that a rental pallet costs less in some cases. Certainly, some pallet companies prefer leasing from a tax and accounting standpoint as well as the use of its capital reserves. Some pallet rental companies have done a good job of policing quality and driving up overall industry standards.

                  And it may appear that a pallet using company will have less pallet hassle. But I contend that the practices of some rental companies lead customers to merely exchange one headache for another. One major pallet buyer told me a couple of years ago that she budgeted $1 per pallet for administrative fees involved in reconciling pallet rental invoices and lost pallet fees. Some rental pallet providers charge transfer fees, lumber and fuel surcharges, lost pallet fees, and other add-on costs. So the daily rental fee may not be the total cost at the end of the day. By the time many pallet users become aware that they are being charged for lost pallets that they do not believe are their responsibilities, there may be little they can do except pay the fees.

                  I am not trying to take sides in this issue. Rather I want people to understand that pallet rental has often not turned out to be the panacea that had been envisioned. And in the end, you have to realize that the lower price option today could cost you a lot more tomorrow.