Third-Party Patchwork Will Accelerate Paradigm Shift

Yes, Chep continues to methodically grow its 48×40 pallet rental business in the Americas to 30 million units and beyond, but its continued growth is not the biggest development in the arena of third-party pallet services.

Several suppliers of returnable plastic containers have entered the produce market, and suppliers of returnables have managed to wrangle some tax breaks in a few states. Technology is advancing to track returnable pallets and containers. Mergers and liaisons are changing the landscape. Add them up, and you get a rapidly growing, increasingly diverse infrastructure for pallet and container management falling into place.

Pallet management continues to expand and diversify. Customers are increasingly engaging pallet people in a broader dialogue about management of other unit load packaging, such as containers, bins and collars. Likewise, topics like customer and down-stream automation systems, labor requirements and product quality are finding their way onto the negotiating table. Providers of third-party pallet management services are not only broadening their services, but they also find themselves honing a different kind of marketing approach. While 48″x40″ pallet rental now is widely understood, customer awareness of retrieval and recovery programs is not as widely grasped. Trade promotion has helped, but often sales people have to work hard to explain what they have to offer.

Coalescing to work like a patchwork quilt, this mix of retrieval networks, tools, measures and initiatives could become the foundation for the pallet industry’s retrieval and recovery grid of the future, the platform for growth. “We are really excited about prospects for growth,” said John Lorentzen, president of First Alliance Logistics, a company formed several years ago by several major pallet businesses to take advantage of third-party management opportunities.

Third-party providers are going to start working with other third-party providers to interconnect their own networks, John believes. “Everybody has those niches that are working relatively well today, but what we are going to find is those niches are going to start overlapping. I’m going to be open to working with others, such as Bromley, Pallet Management Systems or PalEx.”

Each network has facilities in its own areas, he noted, but none has facilities in all areas. “We are looking to independent people, also,” said John. “As things develop over the next few years, the different networks are also going to start networking together.”

Network logistics aside, the idea of third-party as a sales tool is steadily growing. For a new generation of pallet people, taking lumber out of the pallet may no longer be the instinctive response to price pressure from a pallet buyer. Now, it is far more likely than ever before that a pallet company sales rep will ask what happens to pallets when they reach the customer’s shipping destination. Pallet people can explain the potential savings of capturing and reintroducing reconditioned pallets — which typically generate higher profit margins — where feasible in order to reduce the customer’s cost per-trip cost — the proverbial win-win situation for both.

However, while a customer’s pallets may be retrievable, they may not be recoverable, John warned. It is not an easy task to convince a potential customer on faith to upgrade his pallet in order to make a retrieval and recovery program work. First Alliance determines whether the pallet is durable enough to perform economically in a multiple use system before pitching the concept to a prospective customer.

In other situations, signs of surplus pallets are the cue that third-party retrieval and recovery programs may make sense. Bill Heussler, president of H&H Wood Products in Hamburg, N.Y., recognized such an opportunity. After observing a steady flow of pallets and skids ending up outside his customer’s secondary processing plant, Bill’s company helped them establish pick-up points for retrieving and refurbishing the pallets so the customer could use them.

Some pallet sales people say that customer awareness of third-party management options is steadily improving because of extensive promotional efforts by the National Wooden Pallet and Container Association (NWPCA) and trade press coverage. “The NWPCA has provided a real spark,” said John. “The promotion they’ve done has really created an awareness in customers out there.” Customer awareness is just the first step in the selling process, however, and many pallet users do not yet have a good grasp of what is involved. When he accepted the post with First Alliance 15 months ago, “I thought people were a lot more aware (of retrieval and recovery programs) than they actually were,” he recalled. “The trade promotion opens up the door, but you’ve still got to work really hard.”

One of the most significant developments has been the pending merger of PalEx and IFCO. The merger is scheduled to be completed early this year. (See details below.) PalEx owns the second largest pallet rental pool in North America through its Superior Management Group’s inventory of Canadian Pallet Council pallets, but sales for third-party services were only 3.8% of PalEx revenues for the second quarter of last year. With the roll-out of IFCO’s returnable plastic containers in the U.S. and the recent hiring of former NWPCA president John Healy, who has been a strong advocate of retrieval and recovery, it is reasonable to assume that IFCO will place greater emphasis on third-party services.

There have been other interesting liaisons as well, both formal and casual. San Francisco-based Container and Pallet Systems (CAPS) raised its profile considerably in the last year. It partnered with software company Savi Technology to enable CAPS to expand its radio frequency identification (RFID) tracking capabilities. Most of CAPS’ business is in automotive container pooling, and it appears to have positioned itself at the value-added end of the scale, promoting RFID tag usage and offering Internet-based tracking and reporting. It has been providing RFID tracking of containers for General Motors for some time. Although the majority of its business is in automotive, CAPS also is interested in the produce RPC rental market, where Chep and IFCO already have footholds through deals with Wal-Mart.

Companies with a vested interest in third-party pallet and container services also have been involved in the formation of a new trade organization, the Reusable Pallet and Container Coalition. Members include such companies as Chep, IFCO, and Pallet Management Systems Inc., as well as manufacturers of returnable pallets and containers, mainly companies making plastic pallet and container products. Along with Chep, the association has lobbied successfully to eliminate taxes on pallet and container rental in Florida and California. The RPCC also is lobbying at the federal level for favorable tax treatment for rental pallets and containers. For example, it is seeking tax credits for investments to help reduce solid waste, particularly for reusable container customers that would re-engineer their manufacturing processes in order to transition to RPCs.

While some networks are emerging, some have failed. PalletPallet recently went out of business. It had two significant third-party divisions, Palletbanking ® and National Pallet Leasing Systems, a 48″x40″ pallet rental program. The future of both is uncertain.

Palletbanking was a proprietary system developed by PalletPallet where a customer could deliver palletized goods or deposit the pallets into the ‘bank’ at a destination. Pallets could be removed from the ‘bank’ at a local depot, repaired and ready for reuse. The division was widely believed to be profitable, and there was speculation that Palletbanking would be sold.

Pallet Enterprise contacted some of the major companies that provide third-party pallet services, requesting information about new developments. Those that responded have been included in the summaries that follow.

Florida-based Bromley Pallet Recyclers acquired the former Pallet Pallet facility in the Chicago area, thus continuing its expansion into the Midwest from its established base in the Southeast. The move followed the acquisition of J&N Pallet in Columbus, Oh. and Indy Pallet over the last few years.

Bromley added eight new on-site operations in 1999 to service Wal-Mart facilities, bringing to 10 its total Wal-Mart locations. Including its Wal-Mart locations, but prior to the Pallet Pallet acquisition, Bromley reportedly had 25 facilities.

Bromley’s approach in the past has been that national or even international companies tend to focus regionally on their distribution requirements. It was confident that it could provide consistently good service to customers even though its locations were mainly in the Southeast.

Bromley is involved in other businesses, including real estate development and campus housing. The company plans to develop a $140 million commercial real estate project in Tampa Bay, Fla.

To see its way forward, the Canadian Pallet Council (CPC) must first look back, executive director Belinda Junkin said in her year 2000 forecast.

The CPC developed a new strategic plan in 1998 to guide the organization in four areas: quality improvement, fair allocation of maintenance responsibilities, education and training, and facilitation of north-south pallet interchange.

The CPC moved aggressively last year to improve pallet quality with a program to remove double stringers from the CPC pallet inventory. It also has spent considerable time and effort into many other factors affecting pallet quality. Some improvement was achieved in 1999, and this year the CPC plans to continue to improve the overall quality of pallets in its pool.

There were rumors last year that CPC would privatize, possibly linked to PalEx or at least partner with a major U.S. pallet company to get some exposure in the U.S. market. A consultant, David Luton, recommended several different strategic paths, including variations of those mentioned above.

The rumors subsided, and now the betting is that CPC will postpone any dramatic liaisons with the private sector. Meanwhile, some analysts believe that the CPC may increase the member repair commitment in order to help improve pallet pool quality.

Chep has won some significant CPC member business in the past two years, the most recent being Nestle. The strong competition in Canada should benefit pallet users.

In the past three years the CPC distributed a total of more than $1 million to members who repaired more than their fair share of pallets; it disbursed $240,000 in 1999.

Corporate down-sizing, mergers and Y2K issues have brought increasing pressure to out-source pallet management to third-party companies, Belinda said, a trend she expects to continue. Large multinational shippers are moving towards single-source supply and North American rationalization of production. These trends are driving the most critical issue facing the CPC: how to make its program available throughout North America. The CPC has been studying this issue, and its leadership will recommend a specific plan to the membership at the annual meeting this spring.

Globalization is affecting the Canadian market. Many Canadian subsidiaries of multinational corporations are being rationalized into their American business units. Consequently, more and more business decisions are being made south of the border. Given the limited exposure of the CPC in the U.S., the shift is a concern.

Nonetheless, business confidence remains high overall. “The Canadian economy continues strong, and many Canadian companies are aggressively competing for business in other countries,” Belinda said. “I believe 2000 will be a year of expansion and success for our member companies.”

Container and Pallet Services (CAPS) is a San Francisco-based company that supplies reusable plastic shipping containers and pallets on a rental basis. It also provides management services for containers owned by other companies.

It offers packaging and shipping professionals an important alternative that eliminates the overhead and logistics of owning plastic containers, according to CAPS.

CAPS does not manufacture its own containers and pallets but purchases them from manufacturers to meet the specific needs of its clients. This approach enables CAPS to be extremely flexible in meeting customer requirements.

CAPS agreed last fall to team with another California-based company, Savi Technology, to support radio frequency identification (RFID) tracking, and it appears to have positioned itself at the high-tech end of the third-party management market.

“We’re excited to be the only company to currently offer this combination of service and technology,” said Spencer Hoopes, chief executive officer of CAPS. Spencer previously started a major plastic container manufacturing business in the Northwest and is well known in the material handling industry.

The RFID technology was originally developed for military logistics applications and is gaining increasing acceptance as a tool in the private sector for automated data collection systems.

“The partnership between our two companies will give customers an information-edge,” said Darren Hakeman, director of product marketing for Savi. “It provides companies with the ability to enable customers to turn data into knowledge, creating a strong competitive advantage in information systems that is like nothing else in the industry today.”

The backbone of the CAPS tracking program is a computer program known as CAPS-TRAC™. Accessible via the Internet, it is designed to help companies capture significant cost savings through improved supply chain knowledge.

The value-added benefit of better supply chain ‘visibility’ will help third-party providers make an impact at higher levels in customer companies. A Wal-Mart executive has said the retail giant will be looking at RFID capability for rental returnable plastic containers that will come through its distribution system.

CAPS works with a variety of Fortune 1,000 companies in a range of industries, including automotive, plastic resin and dry food manufacturers. The company is interested in the produce market and has had trials with at least one major retail chain in downstream distribution.

First Alliance Logistics is very excited about its prospects for the future. “There are some very interesting deals you can put together for people,” said John.

Since he joined the company as president in late 1998, First Alliance has shifted focus from national accounts and developing a tracking system to a regional approach in the retrieval and recovery arena. “We’ve definitely proven that we can do it,” said John, “and that we can do it from a bigger distance away and make it economically feasible for all parities involved.” First Alliance provides recovery programs ranging up to 1,200 miles.

While First Alliance can recover pallets nationally, its goal is to put them back into a customer’s system regionally, which achieves greater cost savings. For example, First Alliance may retrieve pallets in California and return them to a customer’s plants in that part of the country rather than shipping them all the way to the East Coast. First Alliance also is looking at performing dock sweeps. “We are also looking at performing pallet removal for some of the national retail chains,” John said. “We think there can be some opportunities there.” First Alliance continues to fine tune its sales approach to address issues of concern to clients, such as keeping the confidentiality of certain customer information.

First Alliance recognizes the need to network. “Each of us has our own facilities in our own areas, but none of us has facilities in all areas,” John observed. “We are looking to independent people, also. As things develop over the next few years, the different networks are going to also start networking together.”

John acknowledged the difficulties being faced by recyclers in finding 48″x40″ cores. His advice for recyclers: be prepared to network. “We think the types of things we are doing are going to build opportunities for recyclers rather than take them away from them,” he said. “We’re the type of group you can align yourself with and create opportunities.

“We’re basically working non-GMA programs,” he continued. “That’s our focus. As we expand in that area, that gives some recyclers better opportunities. We don’t ask people for any hard and fast binding contract, but what we want is for them to be willing to work with us when we come into their area with an opportunity.”

Pallet people should be open minded about new opportunities, he suggested. “Just because you haven’t done them before doesn’t mean that they couldn’t be good.”

Ongweoweh continues to grow rapidly. Annual sales increased by $4 million to $30 million in 1999. “Big O” has been known primarily as a pallet broker or wholesaler, but that is starting to change. It continues to add well known ‘coast-to-coast’ pallet users to its third-party pallet management stable. The Ithaca, N.Y.-based company provides pallet retrieval and recovery for Eastman-Kodak operations in the U.S., Canada and Mexico. Ongweoweh also provides pallet retrieval services for 24 Dupont facilities.

Ongweoweh signed a four-phase pallet management deal with Smurfit-Stone Container Corp. that covers 170 North American manufacturing plants divided into three product groups. “We’ve been into it since last August,” said Randy Brown, vice president of sales. “It’s been an interesting process. And once you’ve got the retrieval network in place, it is very cost-effective.”

As part of its retrieval network, Ongweoweh partners with various pallet companies to maintain 170 retrieval sites across North America. It recently contracted with Pallet and Container Tracking Systems to develop custom pallet tracking software.

Ongweoweh has successfully challenged the assumption that truck-load pallet accumulations are critical to making third-party pallet management work. Ongweoweh can collect relatively modest volumes of pallets from retrieval points across North America, repair and recondition them, and still provide significant savings for customers when compared to new pallet purchase.

The pending merger of PalEx and IFCO, Europe’s leading provider of returnable plastic containers, will result in a company to be known as IFCO Systems N.V.

PalEx is North America’s largest provider of new and recycled pallets and of reconditioned industrial containers, with 69 facilities in 23 states in the U.S. and seven provinces in Canada. It owns and operates the second largest pallet rental pool in North America (mainly CPC pallets), managed through its Superior Management Group acquisition, and is engaged in the rental of industrial containers.

IFCO owns and manages the leading multi-trip container (MTC) pool in Europe, primarily serving the produce industry. It also has MTC operations in the U.S., Latin America and Japan. Started in 1992, the European pool now serves approximately 15,000 supermarket outlets in 15 countries. The pool consists of about 50 million collapsible, reusable plastic containers. The company offers produce retailers and growers significant economic, logistical and environmental advantages over disposable packaging alternatives. IFCO leases the containers to growers, retrieves the empties from retailers, washes them, repairs damaged units, and returns them to growers. IFCO deploys the containers from a logistical system that includes 91 depots. Since 1993 its European revenues have grown 20-fold.

Pallet rental and related services have only been a negligible portion of PalEx revenues, but sales for third-party services should increase dramatically — somewhere in the 20% to 25% range — in the new business entity.

The hiring by PalEx late last year of John Healy, formerly president of the National Wooden Pallet and Container Association, also should help drive third-party business efforts; he has been a strong advocate of pallet recovery and retrieval programs.

The merger is expected to create a leading global provider of supply chain support services with annual revenues of about $550 million. IFCO Systems will include IFCO’s European, U.S., Asian and Latin American returnable packaging and logistics systems and PalEx’s North American pallet and industrial container operations. The new company will own and manage the leading rental pool of MTCs in Europe and a rental pallet pool in Canada. It will also be the largest provider of new pallets and pallet and container reconditioning services in North America. The combined enterprise intends to accelerate the roll-out of existing early-stage IFCO MTC pools in the U.S., Asia and Latin America. In addition, it plans to bundle other supply chain support services with existing IFCO operations by designing and managing closed-loop logistics and materials handling systems.

Pallet Management Systems Inc. (PMSI) experienced significant financial losses in the second half of 1999 despite substantial growth in revenues during the same period.

It took steps to address the losses in January when its board of directors elected Donald S. Radcliffe to be chairman. In addition to duties as chairman, Don will be involved with daily operational and management decisions. Chief executive officer John Lucy III and president Zachary M. Richardson will report to Don.

“The board felt it was necessary to provide additional management guidance to take advantage of unique opportunities which the company has in manufacturing and reverse distribution,” said Don. “I believe that the company can return to profitability and regain the momentum it had during the first three quarters of fiscal 1999 and will endeavor to see that this happens.”

“We are pleased to welcome Don to our management team as he will be taking an active role in the management of our company,” said John. “His business experience will be extremely valuable in taking our company to the next level.”

Don has been a director of PMSI since its inception in 1986. He is currently chief operating officer of World-Wide Business Centres, Inc., a multi-national executive suite operator, and president of Radcliffe & Associates, Inc., a financial advisory and services firm. He serves as a director of SVI Systems Inc. and Complete Wellness Centers, Inc.

PMSI closed its Lakeland, Fla. plant recently and is working to complete its acquisition of the Nelson Company, a container and pallet management company based in Baltimore. The Lakeland facility performed sorting, repair and storage services for Chep pallets; PMSI was expected to take a $100,000 write-off as a result of the closure.

PECO Inc. was founded by Denton and Patrick Sherry of Nepa Pallet & Container Co. in Snohomish, Washington. They envisioned a cooperative business that would allow independent pallet companies to compete in and profit from the trend in the grocery industry to pallet rental.

As originally conceived, pallet companies that were PECO shareholders would have a degree of territorial exclusivity. They would get a share of depot work and orders for new pallets in their operating areas providing their prices were competitive.

With the passage of time, however, PECO came to be run at arm’s length by professional managers as a completely separate business entity. It has added non-affiliated depots and pallet manufacturers as needed to its list of shareholder-providers.

While most of the early investors were pallet companies, the heavy capital demands of a growing rental pool are leading PECO to court other potential investors.

PECO continues to grow in size and geographic coverage as a renter of pallets to the grocery industry. It owns the third-largest rental pallet pool in North America, after Chep and PalEx, and the second largest in the U.S., as the PalEx pool is mainly operated in Canada by its SMG division. PECO reportedly is recovering pallets out of well more than 100 distribution centers in the Midwest and the Northeast.

The company began with a regional roll-out concept and with a focus on “house” brand products with specific shipping destinations. The approach limited the need for depots and field staff.

PECO has been successful in retaining customers and in expanding business with them as it increases its recovery network to include more distribution centers, according to Mike Tebay, president and chief executive officer. With a gradually growing field staff and increasing rental activity, its retrieval process is improving and becoming more efficient, according to PECO.

The rental company prides itself on providing strong customer service and simple-to-understand invoices and reporting statements.