So You Want to Get in The Pallet Business?
What would it take to make an entry into the pallet industry and start a business manufacturing new pallets? Article examines what is required for start-up operations.
By Dr. Ed Brindley
Date Posted: 8/1/2005
Over the years one of the popular questions fielded by our office is something like: "How do I get started in the pallet business?" The last couple of years, versions of this same question have appeared a number of times on the Pallet Board, the discussion board on the Pallet Enterprise’s Web site, www.palletenterprise.com. My typical response is – "So, you want to get in the pallet business! Why?"
My experience is that people who are considering entering the pallet business often believe they have found some sleeping opportunity, one that offers attractive profits. Before starting an analysis about the wisdom of entering the pallet arena, let’s put the two previous assumptions to rest.
First, the pallet industry is not in any way a sleeping business. Pallet manufacturing dates back to World War II or earlier, and pallet recycling dates back at least 25 years. Many of the products used daily in our society are not that old. Both industries at this point are at some stage of maturity.
Second, while people still make money in our industry, and some even make ‘good money,’ the golden days of big profits in pallets are mostly a thing of the past. Does that mean that a new entry in the pallet industry can not make attractive profits? No, people can still make satisfactory profits if they are smart businesspeople and market conditions work in their favor. Profit margins over 3% to 5% are difficult to make in pallet manufacturing; many manufacturers would be very happy with this kind of margin. It was just a few years ago when recycling seemingly had unlimited potential, but the days of double digit recycling profits are more and more limited.
Buying and Selling
While pallets may look like simple products and the manufacturing or recycling steps may seem to be fairly simple and straight forward, the details of running a successful pallet company require wearing many hats. Look first at the following rule to both survival and profits: most successful pallet companies that make attractive profits do so by combining buying well (new lumber or used pallet cores) and selling well. While processing efficiencies can help fine tune profits, the key elements are buying right and selling right.
Buying right includes lining up satisfactory sources of lumber or pallet cores. This means being able to buy sufficient quantities of material of the right kinds (species, hardwood or softwood, pallet types, etc.) at competitive prices. Having the savvy to recognize a bargain is important, as is having the financial resources to take advantage of good deals on the market.
Selling right includes developing customers that can support a young and hopefully growing company. Most people probably have at least one potential customer or they would not be considering starting a pallet company in the first place. Initially the owner often handles sales as one of his major functions. Hiring a salesperson can make sense, but most companies do not take that step until they reach a sufficient size. Selling pallets through wholesalers is a common practice, particularly in some market regions, such as the Mid-Atlantic and Upper Midwestern regions. Using wholesalers has its drawbacks but is one way of letting somebody else handle the critical sales functions without having to take on the financial responsibilities associated with sales. Of course, using wholesalers also separates you from the direct relationship that some people find to be so important with their customers.
Many leaders in the pallet industry believe that the next generation of successful pallet companies will supply full service unit-load/material handling. Exactly what this means is open to a variety of interpretations, but it will almost certainly include eliminating hands-on problems associated with handling empty pallets and managing customers’ pallets in some way.
Pallet manufacturing steps break down into several categories, such as lumber preparation, fastening, special features, and transportation.
If you had asked me years ago, I would have advised against buying pre-cut material. Practically all pallet shops, even those that buy material ready to nail, occasionally have to cut some material for a variety of reasons. Thus, a versatile saw for cutting small quantities of lumber is almost a necessity. However, pre-cut material is potentially a viable option if initially only a limited number of sizes and specifications will be manufactured. Be aware that having somebody else cut your material bypasses any potential control and profit that may be possible when cutting your own material. Material delivered to your nailing stations represents well over half the revenue from a pallet.
Decisions relating to lumber supplies are critical. Sometimes limited quantities of lumber can be purchased at prices below typical market prices. But once a buyer needs enough lumber to support a medium or large sized pallet manufacturing plant, the quantity of lumber needed will require paying market prices. Buying competitively is easier for companies that have access to dependable financial backing and have established strong relationships with multiple sources of lumber. It helps to understand lumber defects and grades if one wants to buy high quality material.
The important function of nailing can vary from automated machine nailing for higher volumes and non-startup operations to less automated machine nailing, and finally to hand nailing with pneumatic nailers and staplers. Most small shops start with hand nailers because they are versatile and affordable. While bulk loose nails may be less expensive, collated nail distributors often will supply pneumatic nailing tools and maintain them for no charge as a service to get your nail business. This is a trade-off that makes it easier to get into business with less financial outlay and allows you to manufacture specialty products and pallets, which is potentially more profitable. As a pallet manufacturing company grows, however, higher volumes typically require automated nailing systems and bulk nails; this kind of account may be difficult for a smaller, start-up company to service.
Thus, buying pre-cut material and using collated nails and pneumatic nailers is one way to get started with minimum capital cost. Wholesaling initial pallet orders out to established pallet manufacturing companies offers another way to get started and requires no capital investment in lumber, machinery, etc.
Value-added pallet features include such things as chamfering deckboards, notching stringers, stenciling and branding, and heat-treating or chemically treating for export or sanitary applications. Many of these value-added features require a capital expenditure, but they may also open the door to more profitable business. Heat-treating has become the ‘hottest’ service for a pallet manufacturer. As a requirement for exported pallets, heat-treating teased the industry for a couple of years before establishing itself as a reality this year. At this writing, heat-treating is probably the most profitable value-added pallet service in a long time. Pallet companies are hoping that it doesn’t lose its luster in a few years.
Initially a start-up pallet manufacturer might want to solicit business for specialty products, small quantities and custom requirements. Larger manufacturers can usually build high volume, competitive orders more efficiently and may not be as interested in the small orders or ones that wrap up their machinery and people for fewer dollars. Larger pallet companies often charge more for smaller quantities and odd requirements, leaving room for start-ups to compete successfully for this business.
Trucks to pickup and deliver, as well as forklifts for materials handling, are very important for all pallet companies. Trailers are particularly important as a recycler grows because they function as containers to store used pallets at core supplying companies and distribution centers. Remember that rapid delivery is one of the most important services that a pallet supplier offers. Long before just-in-time became a household word, many successful pallet suppliers had made handholding a necessary ingredient of their delivery service. Transportation is important and should be watched carefully because it can be an expensive proposition.
Anybody looking at the possibility of starting a pallet company is doing so to make money. The pallet industry is tough and competitive, but many pallet companies have been successful in the past and many will probably be profitable in the future. Having the financial stamina to survive the rough waters is very important. Lumber suppliers typically want to be paid quickly, often once a week for the previous week and sometimes with each delivered load. Employees are typically paid weekly. There is little time for receivables to initially provide cash flow for payroll.
On the other end of the equation, pallet customers often take their time before paying a pallet supplier. Thirty days or longer for payment is typical; sometimes it may be 60 or 90 days or even longer. Many pallet customers are large companies, and their pallet suppliers are small companies. Thus, customers typically hold all the cards; many will not hesitate to let smaller suppliers, such as pallet manufacturers, cash flow their financial needs.
The labor pool tapped by pallet companies involves mostly low-skilled or semi-skilled workers. While the skill levels needed in a successful, established pallet company are increasing as more electronics are used, the job requirements of basic positions in a pallet plant, particularly a smaller start-up operation, require mainly physical endurance and a willingness to work. The work is hard, and the wages are less than exciting. Over the past decade, Hispanic workers have increasingly become a dominant part of the workforce for pallet companies and sawmills.
Anybody who is starting in the pallet business should know that it will be challenging. Our industry manufactures products that society needs. The derived demand of pallets and containers makes them important but not highly desired. The biggest challenge that exists to the wooden pallet industry at this time appears to be what impact rental pallets, particularly CHEP, will have on the whitewood pallet market. But even if CHEP continues to make inroads into the whitewood pallet market with its blue rental pallets, there will be a need for wooden pallet companies for a long time. The nature of the services offered by wooden pallet companies, particularly recyclers, may evolve into something in the future that is considerably different from historical services.
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.