What Price Recovery? Fair Compensation for Recyclers Is Essential to Ending Contention Over Pallet Ownership
The Cost of Recovery: Fair compensation for pallet recyclers who recover rental pallets and proprietary pallets will be a key to resolving the conflicts over pallet ownership.
By Rick LeBlanc
Date Posted: 11/1/1999
Late last year, Chep and Peco announced that they would compensate recyclers for recovering their rental pallets. With unconfirmed reports of certain soft drink bottlers in some markets doing likewise, the pallet industry may have turned the first corner in the contentious debate over pallet ownership. The next step will be for pallet recyclers to determine what is fair compensation for the services they provide.
"I’ve got a pretty good idea of what it costs me to ‘muscle’ a pallet across my dock," said Brian Cosentino, president of Skid Recycling in Bellwood, Ill. "I know my transportation expenses and those kinds of things."
The process of ‘muscling’ a pallet across the dock includes not only in-bound transportation, Brian pointed out. It also includes other tasks required from the time a pallet is removed from a user’s dock and arrives at the recycler’s facility until it is put on a truck to be returned to the pallet rental company.
Along the way, a recycler may incur costs for sorting, storage, supervision, administration and loading — direct costs related to the recovery of proprietary pallets as well as proportionate costs related to the use of plant and equipment. In order to determine fair compensation for recovering proprietary pallets, recyclers must know the costs for each task associated with their business.
"Once you become definitive by concentrating on specific cost factors, you limit your perception of the actual cost of handling pallets," said Don Black, vice president for Pallet Services in Anacortes, Wash. "It is something more than rent, taxes, insurance, payroll for truck drivers, forklift operators, sorters, depreciation, and so on."
Recovery costs in the range of 65 cents to 75 cents per pallet would be appropriate, suggested several recyclers who were interviewed for this article.
However, one cost is much greater than those typically associated with handling — the cost of acquiring pallet cores or ‘landed cost.’ "One of the big factors we have to wrestle with is ‘landed cost,’" said Don. "It isn’t because we knowingly buy the proprietary pallet. It is because the deal we have to make is to blindly buy it. The seller (distribution center) is not making any guarantee other than it is a 48x40 pallet."
With core prices in the range of $1 to $2 in various parts of the country, compensation for acquiring proprietary pallets received in the incoming mix of used pallets looms as the most significant issue of all. While Brian believes that recyclers should be compensated for acquisition costs, he recognizes it could open the door to an underground economy. There are no easy answers, although continued efforts to educate and train pallet users can help to prevent proprietary pallets from leaking out of loops.
A related issue is disclosure. The owner of a proprietary pallet may want to know from where the pallet has leaked. The pallet recycler, on the other hand, may not want to reveal his source of pallet cores, which is of strategic importance to his business.
One recycler said he was asked to disclose the sources of pallet cores as part of his compensation agreement, which only helped to derail the negotiations. Another recycler suggested that revealing such sources would be fair only if a recycler is reimbursed for acquisition costs paid to that pallet user; this arrangement would compensate the recycler for acquisition costs while helping the pallet rental company to close a loop.
The issue of compensation for acquisition costs can be a tough issue for some recyclers. One recycler reported receiving soft drink pallets among the cores it obtained from a distribution center. The soft drink company wanted them back and did not want to pay anything for the service. Meanwhile, the distribution center took the position that it had ownership rights to the soft drink pallets; it would not entertain waiving its core charge for them because the distribution center already had exchanged pallets for them. In turn, the soft drink bottler did not want to address the issue with the distribution center when the situation was explained by the recycler because it was reluctant to tell the customer how to run his business.
Not surprisingly, the pallet recycler was caught in the middle. With a tight core market, some recyclers may think they have few options in such cases other than absorbing acquisition costs in order to maintain core supply. The market eventually solves these issues, but at a toll. Recyclers faced with paying acquisition charges for proprietary pallets on an ongoing basis may have to reassess such business relationships unless they are compensated.
On the other hand, other recyclers reported that they have worked out arrangements with core sources to include billing adjustment for returning proprietary pallets that have leaked from a user’s dock in error. Such is the case with William (Bill) Kapler, president of AAA Pallet & Lumber Co. in Phoenix, Ariz. His customers do not complain about adjusting bills for rental pallets that are mixed into core loads. "We don’t see a great deal of them," Bill said. "If we see 30 or 40 in a week, we’re lucky. For us to pull them out and stack them aside is no big deal."
In the early days of Chep, Bill noted, those who were hit hardest were truck drivers. Some drivers did not realize it was a one-way system and accepted them as exchange pallets, only to find later they would not be accepted upon return to their customers. Drivers were obliged to buy other pallets to meet their pallet return commitments.
As for the cost of handling proprietary pallets, Bill emphasized that every recycler faces different situations. "It all depends on how much they’ve got to travel," he said, "as well as how they sort. A lot of people sort right at the tables, and if you throw a Chep or something in there, it makes a whole extra pile for the guy." Bill suggested that if pallets are sorted before reaching the repair station, then the impact is less severe. "You have to develop a whole extra line to handle the (proprietary) pallets that come through the repair station. Some of the guys who are heavily automated still have to set up another line to handle them." With automated stackers in the $15,000 range, this is a significant cost.
Bernie Kamps, president of Kamps Pallets in Michigan, is able to relate to both sides. His company manufactures, recycles and rents pallets. "As a recycler, I want to get paid,"he said. "As a rental company, I understand the ownership issues."
Bernie takes the broad perspective. "We negotiate with recyclers to determine what’s fair value," he said. "It is no fault of recyclers that the pallets have leaked."
"If the customer’s pallets have leaked," he added, "we have to educate them and their customers. We would rather buy back the pallets, but we don’t want to create an environment that encourages stealing."
When Chep first entered the U.S. market, it took a hard stand in order to prevent a black market, Bernie observed. However, there are signs that pallet recyclers are taking a stand on the issue of pallet ownership and fair compensation — witness the official and unofficial gatherings held in conjunction with the pallet recyclers meeting in Memphis, Tenn. that was sponsored last spring by the National Wooden Pallet and Container Association.
"A hard-nosed approach has its cost for all concerned," said Bernie. "In the long run it is not creating a good relationship." Some recyclers in his region are being paid for handling and transporting rental pallets, he said. "Most are happy with the situation."
Bernie believes in building good relations with rental customers and recyclers alike, but it is not always easy. For example, Kamps Pallets accumulates soft drink pallets. "We might get back two or three in a load, and suddenly we have a load of them," he said. "Some of the beverage manufacturers are good about it. They say, ‘How much (do we owe you)?’ " However, others refuse to acknowledge the costs born by recyclers in recovering their pallets. "There is good salesmanship and education involved," Bernie noted. "You’ve got to explain to them about double dipping, and say, ‘You’ve charged a deposit, and now you want it back, too?’ "
Kamps Pallets returns Chep pallets to the distribution centers it serves. "We look at it as great customer service," explained Bernie. "We would rather build good will."
Pallet user education is a critical factor, according to Bernie. "We do audits and explain that we will charge them for lost pallets. We look downstream and see they are leaking. Some say a 1% or 2% attrition is not worth investigating. We talk to dock people. Our philosophy is to educate, educate, educate."
It has been Bernie’s experience that if a recycler retrieving a Kamps pallet is located in a particular city, then the company can determine where the pallet originated. For example, Kamps’ pallets that recently turned up in Florida quickly were traced back to a Chicago area shipper with an Orlando customer.
It seems likely that more such agreements will be made between rental pallet owners and recyclers, especially for rental pallets, as their recovery systems continue to mature. Hurdles like compensation for recovery and acquisition, pallet user disclosure by recyclers, and resolution of disputes remain obstacles. However, many seem confident that these challenges will be overcome as these activities become more routine. Recyclers increasingly will specify terms for proprietary pallet deductions in their core purchase contracts.
It would be unfortunate if such areas of contention end up in the courts and draw the pallet industry’s focus away from serving the pallet user. A formal process for resolving disputes may be called for if too many negotiations become stalled.
It remains to be seen how the issue of recovery of rental and proprietary pallets will be resolved. Will the outcome favor pallet rental companies and owners of proprietary pallets? Or will they agree to compensate recyclers fairly for recovering their property? When the smoke clears, only one thing is certain: cooperation between both sides will be critical to ensure the continued delivery of quality pallets and service to the pallet industry’s customers.
Do you want reprints or a copyright license for this article? Click here
Research and connect with suppliers mentioned in this article using our FREE ZIP Online service.