With PECO Pallets and some recyclers currently involved in disputes over return fees for proprietary pallets, it is time to review again the issue of fair compensation for services that recyclers offer to help rental pools locate, collect, sort and store pallet assets. Pallet customers get the benefit of using rental pallets, but frequently the costs and process of returning them and collecting strays belongs to pallet recyclers. The Pallet Enterprise covered this issue in detail in 2013, and given recent disputes about these costs, it seems like a time to run the article we published in September 2013 with some updates.
For years CHEP, PECO Pallets, iGPS and other operators of proprietary fleets have claimed that they offer fair prices to safeguard and return pallet assets. But a Pallet Enterprise investigation indicates that many pallet companies likely are losing money, especially when they handle the return transport of these pallets. This investigation is based on detailed analysis that researchers from Penn State University collected as part of a class action lawsuit against CHEP USA a number of years ago.
Researchers Dr. Chuck Ray and Dr. Judd Michael studied eight pallet companies with time-and-motion analyses and evaluated financial, logistic and other data from 2005-2008. Judd Michael stated in affidavits filed with the court, “We quantified that the financial burden is above and beyond what CHEP offers to recyclers due to a combination of both direct (ex: transportation, handling, storage) and opportunity costs, and thus each recycler incurs a monetary loss for each and every proprietary pallet they must handle.”
By far the largest source of stray proprietary pallets remains CHEP with its millions of pallets in circulation. However, PECO Pallets has recently raised the issue of return of in-network pallets at the end of a trip cycle. It appears that many of the costs are the same regardless if a pallet is a legitimate stray or coming from a partner facility. The only difference is whether or not all parties are under contract to provide those services in the first place. Although the rental giant offers some compensation for return services through an Asset Recovery Program (ARP), it has remained virtually the same since its inception minus a modest fuel surcharge that some companies receive for handling the transport of stray pallets.
Currently, CHEP offers $3.00 per pallet delivered to a CHEP service center over 200 miles from the pallet recycler, $2.25 delivered per pallet for those under 200 miles, and $1.25 per pallet loaded onto a CHEP provided truck at the recycler’s location. PECO has offered a similar program and for some pallets is claiming that for others 20-30 cents per pallet is more than fair compensation. PECO is certainly taking a much harsher attitude now toward some recyclers than CHEP has, and the main point is that recyclers need to know their cost and stand up for their rights.
Other owners of proprietary pallets will negotiate on a case-by-case basis. CHEP offers its ARP nationwide to qualified pallet recyclers for stray pallets outside of its network. CHEP generally sticks to its ARP although some recyclers receive a fuel surcharge, free pallets or payment for doing other functions, such as dock sweeps and depot work.
The study finalized in 2008 estimated that the recyclers it surveyed lost $2.38 per pallet on average after the compensation that they received from CHEP. This research included small and large operations as well as those conducting dock sweeps for CHEP and standard recyclers. It gave a wide range of CHEP-related situations and interactions. While there has been no such publically available study for PECO, it makes sense that the costs should apply about the same for most pooled pallets handled by recyclers. In fact, costs to handle PECO pallets may be higher than CHEP given the fact that CHEP has more depots and more pallets in circulation thereby reducing storage and transport burdens on recyclers.
Judd Michael suggested that every company surveyed was losing at least some money despite the ARP. And it all depends on how your operation is setup. The following are key costs to consider when evaluating your real costs for processing proprietary pallets.
• Acquisition costs if you have to pay for a complete trailer and a proprietary pallet takes up the space for one or more white-wood pallets.
• Transportation costs from collection point to the recycler.
• Sortation and handling costs.
• Storage costs.
• Admin and paperwork costs.
• Delivery transportation costs.
• Lost opportunity costs associated with trucking and other considerations.
• Equipment costs needed to retrofit your facility to efficiently handle proprietary pallets.
• A reasonable profit.
Judd Michael said, “The cost structure depends a lot on how easy or hard it is to pick up the pallets. A number of recyclers were having pallets delivered to them. There may be a big operation that is very efficient. And they have a much smaller burden to process proprietary pallets. A small recycler may have to go way out of his way to pick up or return these pallets.”
Michael added, “One thing we observed was that some recyclers wait for hours at a time to unload CHEP pallets at a depot. If you have to go from the hills of West Virginia to Baltimore or Pittsburgh for example, you have a long distance to drive. Your truck is on the road essentially all day to make those deliveries.”
CHEP stated that it has improved its relationships with recyclers since the study was done years ago, and that wait times have been reduced. However, the rental company provided no data to support its claim.
The study found that most recyclers have space in their warehouses and incoming truck space for proprietary pallets, but the real problem comes when you consider the opportunity cost involved in delivering pallets to an authorized depot.
Looking at best practice in general for dealing with proprietary pallets, Chuck Ray commented, “If you absolutely can’t avoid collecting these pallets, presort and stack them out of the way as early in your process as possible, then never touch them again. It would generally be best to have proprietary pallet owners come pick up the pallets instead of the pallet recycler returning them to a depot.”
You really need to look at your operation and figure out if you have a bottleneck area and how working with proprietary pallets impacts the flow of your operation. If trucking is a bottleneck then you certainly don’t want to allow proprietary pallets to reduce throughput, and if you have sorting or forklift or whatever bottlenecks, then operators should always try to keep proprietary pallets away from those areas.
Ray added, “Another thing that we observed is that proprietary pallets were stored out of the way in some odd spot in the yard. When the truck came to get them, the recycler had to tie up a lot of forklift time to go get them because they were out in the back forty somewhere.”
When asked about the fairness of its current program, Dan Gormley, vice president of asset control for CHEP USA, said, “We are confident our program is fair. As a result of our 2011 acquisition of IFCO Pallet Management Services, we have detailed insight related to the cost required to perform this activity. Our partners can generate nice profits through our program when they operate efficiently. The high level of participation in our program strongly supports that our compensation levels are fair and profitable for our participating partners.”
For their research, Michael and Ray used stop watches and video to measure the true costs/processes at the various plants. But we have developed the accompanying decision tree to help you evaluate the effectiveness of your current relationship with PECO, CHEP and other proprietary pallet companies.
Are you losing or making money when you touch proprietary pallets? Don’t be so sure that your assumptions from years ago were ever correct or still hold true today. This is something that pallet companies should investigate. Or else they will keep on being paid the same thing year after year while costs slowly creep up. Is it time for a raise or a complete rethinking of retrieval fees for pooled pallets?
Smart pallet companies should calculate their true costs and consider changing practices to reduce liabilities. This may mean telling the rental operators and proprietary pallet companies that they will have to pick up their pallets instead of having them delivered by the recycler. What you can’t afford to do is the same thing you have always been doing because eventually the cost creep will eat away any profit you may have thought that you had. Meanwhile recycler costs continue to increase each year while its primary competitor freezes recovery fee rates.
It seems that the time has come for the industry to demand more compensation as well as better policies to reduce the impact on recyclers.
