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Markets in Transition: Third-Party Plastic Pallets -- To Defend and Expand
Plastic pallet and container companies have shown an increasing interest in third-party management in recent years, and over the longer haul, that should be a good business move for many of them.

By Rick LeBlanc
Date Posted: 2/1/2006

The headlines haven’t been coming in a flurry, but they are none the less significant when it comes to thinking about the defense and expansion of plastic pallet and container markets.

Last summer, for example, Rehrig Pacific Co. purchased all service-related businesses of Penn Pallet Inc. of St Mary’s, Penn. and announced it would run them through Rehrig Penn Inc., a new, wholly-owned subsidiary of Rehrig Pacific. These businesses comprised asset recovery, pallet management, dock sweeps, and wood pallet resale — with one notable customer being Wal-Mart.

Rehrig Penn also purchased 50% of Penn Pallet’s equity in Penn-Alliance of Charlotte, N.C., a national pallet sales and management business that Penn Pallet owned jointly with First Alliance Logistics Management.

More recently, Gait Packaging bought a share of the produce returnable plastic container (RPC) market through acquiring CHEP’s North American RPC business.

To quote Rehrig Pacific president Will Rehrig at the time of the Rehrig Penn announcement: "This is a strategic acquisition, solidifying a platform for Rehrig’s entry into the pallet service industry. Service and logistics represents a large and important piece of the company’s future."

Plastic pallet and container companies have shown an increasing interest in third-party management in recent years, and over the longer haul that should be a good business move for many of them. There are forces at work that threaten some of their existing business, which they must defend while looking for growth. Third-party management is a platform that may allow them to both defend and expand.

A couple of factors threaten existing markets that plastic sellers must counter. One obvious concern has been increased resin prices in recent months, which
have put upward pressure on plastic pallet prices.

To quote from the December 2005 issue of PlasticsTechnology: ‘Recycled resin prices in 2005 started out on a volatile note and only got worse as the year progressed. After Hurricanes Katrina and Rita, virgin resins became even harder to get, and demand for recycled resins soared, as did their prices. Reprocessors say they have been selling everything they can make.’

Price increases for pallets translate into a harder sell, not to mention greater pain if pallets go astray.

Beyond that, the increasing complexity and geographic span of supply chain operations are straining the viability of smaller pools, including in-house plastic pallet pools. Trends such as national and global supply chain rationalization are putting the squeeze on national and regional pools, as well as plant-level closed loop systems.

Given that some significant third-party pallet deals have recently been made in the beverage sector, it might be opportune to take a look at our old fictitious friends over at Bubba Fizz Soda.

Bubba Fizz used to have several bottling plants around the tri-state region. They all had proprietary closed loop pallet systems. One had converted to plastic while the other two still used proprietary stenciled timber pallets. Some standard 48x40 pallets also were used for club store accounts.

Then the ‘lean’ experts in logistics and manufacturing did their thing. "Specialize production," they said. "Run bottles for three market areas at one plant, run cans for the three market areas at another, and close down the third plant."

Then they downsized the in-house trucking fleet and threw a lot more work at outside trucking providers. The pallets from the closed plant were shipped to
the other wood pallet operation, which had a similar — but not identical — specification.

It didn’t really matter, because pretty soon pallets from all three original plants seemed to be getting mixed. Pallets had to be repositioned, at a cost not factored into the original calculations. Another unforeseen consequence: new pallet
purchase rates were on the increase
because of pallet shortages. Executives began to look at third-party programs as an alternative.

In the above analogy, I don’t mean to suggest that we are on the edge of some imminent and dramatic shift in pallet preference. However, it is clear that cost justification is best achieved in a reusable pallet program when continued reuse results in an attractively low cost per trip.

Better pallet control can help maintain this as changes to the supply chain erode the simple closed loop concept in some applications. Better pallet control likewise helps achieve the goal of multiple trip savings as introductions are attempted in other, more challenging non-closed supply chains.

Next up: look for the plastic pallet and container companies to continue to strengthen their third-party management expertise or build alliances with companies that have it.

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