When supply chains sneeze, to borrow from an old saying, pallet companies get a cold. There is an impact for pallet users, and then logically, for pallet suppliers as well.
Pallets after all, are a derived demand. Customers buy pallets because they need them, not because they look great stacked outside the plant. As the U.S. manufacturing base has eroded over the years and become globalized, pallet companies increasingly found that the local product manufacturers they had served for decades disappeared as production shifted elsewhere – to the southern United States, to Mexico, and then more dramatically to Asia. And as that business was lost, new opportunities predictably emerged for the supply of pallets to palletize inbound containers of products from Asia being de-stuffed in the United States.
There were subtle differences, of course. Often times the quality requirements for products being de-stuffed manually is not as sensitive as for goods being palletized with automated equipment. Recycled pallets are more popular for de-stuffing consumer products arriving from abroad. So with globalization, we have experienced a reduction in demand from domestic producers, but increased demand for pallets for palletizing imported products as they are de-stuffed.
Over the last five years, as many companies were still in the process of building global supply chains, the tide of change has shifted yet again. Globalization was built on the pillars of cheap fuel and cheap labor, but neither of these can any longer be taken for granted. Fuel has more than doubled in cost since January 2006. Even though fuel prices have dropped from historic highs thanks to the global economic downturn, long-term trends point to significant future fuel price increases unless new oil supplies or energy innovation improves the availability of cheap energy. Wild fluctuations in fuel prices add a level of danger and unpredictability to off shoring that many multinational companies would prefer to avoid.
Rising standards of living in Asia and fluctuating global currency prices are also making former globalization powerhouses less competitive. Between September 2006 and September 2008, the U.S. dollar lost 11% of its buying power versus the key international currencies of the Yuan, Yen and Euro. One study recently found that 56% of companies surveyed now have a higher landed cost for products produced in Asia than they had when they manufactured them at home. Needless to say, the rationale for global trade is being critically re-examined.
Other concerns include quality and public safety problems associated with the materials used by Asian manufacturers. We probably all remember the Chinese toy scares that made headlines in 2007 after Mattel recalled toys for toxicity concerns involving lead-based paints.
Costs of manufacturing in China have been on the rise. China passed its first minimum wage laws in 2004, with each province and autonomous zone setting its own rate. Rapidly increasing consumer prices in China led several provinces to raise minimum wage standards dramatically in 2008. The Guandong province, China’s richest, raised its minimum wage by 18%. Some Chinese government subsidies have also been eliminated, which has further increased manufacturing costs in China.
Intellectual property protection has also been a concern for some manufacturing operations in Asia. Cheap labor isn’t a big plus if you give away strategic information to get it.
One of the latest trends to address these problems is reverse globalization or shortening the supply chain, also known as near sourcing. Companies are hoping to reduce cost and risk through reducing globally sourced products. Some production will return to the United States, and more is anticipated to return to Mexico and South America, thus increasing the importance of the Mexico-U.S. corridor. Other shifts predicted include increased use of rail shipment versus long haul trucking, decreased import traffic, and increased exports. Globalization is far from over, but in the future it will be used more selectively. As has been made painfully obvious, off shoring production to distant lands isn’t always the best solution for a manufacturer.
Earlier this year, Bryan Lusby, managing director of global forwarding for the Americas at C.H. Robinson told World Trade Magazine that he has seen “a migration of both manufacturing and assembly of finished goods from Asian origins back to the Americas…most aggressively over the past couple of years.” Lusby commented that this trend has occurred across all sectors although high cost, high duty goods are on the forefront of the movement.
Possibly the biggest advantage of near sourcing is speed to market. This can be especially beneficial for companies involved in manufacturing consumer goods or industrial parts. Companies only have to bring in what will sell, which reduces inventory costs while allowing them to be more responsive to any sudden demands in customer preferences or requirements. Near sourcing also provides an environmental benefit by reducing the carbon footprint of the companies involved. It is hard to be very green when your product must be shipped across an ocean to get to the final destination.
What’s all this logistics coughing and sneezing mean for pallet companies? What I have described above is the beginning of what some opinion leaders believe to be a significant shift that will transform America’s logistics landscape. There will be implications for pallet companies, with decreased emphasis on Asian imports and more emphasis on near sourcing. Near sourcing should provide greater opportunity for effective pallet management systems. Pallet companies that are strategically placed close to these near sourcing corridors will be able to take advantage of these trends. As always, there will be new opportunities and new threats as trade patterns shift.
Major winners will be logistics companies located along the U.S./Mexico trade lanes as well as rail and intermodal shippers that can help transport near sourced products. Look for increasing demand for transportation, customs brokerage, import/export services, and regional warehousing companies in the U.S./Mexico trade lane. Regional third party logistics services have been one of the brightest stars in the supply chain universe for a while and will continue their strategic importance if near sourcing continues. A report by the International Warehouse Logistics Association (IWLA) anticipates a promising outlook for warehousing 3PLs despite a slowdown in other sectors.
Many pallet providers have logistics and packaging expertise and may have excess warehouse space as well. Now is a perfect time for smart pallet companies to extend beyond being just a pallet company. Combining contract packaging, logistics, trucking and warehousing services with an effective pallet management system can bring a huge win to supply chains. Many companies often prefer to focus on core competencies during weak economies. Now may be a good time to pursue opportunities in logistics that will only get better if near sourcing proves to be a long-term trend.
The one significant challenge that pallet companies may face is the condition of their warehousing equipment and trucks. Many pallet companies used fairly beat up materials handling equipment or old warehouse facilities. These may be too worn down to pass the 3rd party audits for food safety, site security, etc. if they are planning to get involved with food products or fast moving consumer goods. For sure there are opportunities, but it may require capital investment to take advantage of those situations.
The amount of near sourcing has slowed as the global economic downturn has eased price and shipping costs although overall trends point to more near sourcing in the future. In reality, this may be little more than a counter balancing to the off shoring craze that replaced the vertical integration trend. Many companies will likely follow a hybrid approach that involves both near sourcing and off shore production in Asia. High dollar products or items where speed is critical may find sourcing in the Americas to be the best fit.
