Former CHEP CEO Discusses the Future Of Pallet Rental
iGPS: Former CHEP CEO talks about his years at Big Blue and his plans for launching a 100% plastic pallet pool to compete against his former company.
By Chaille Brindley
Date Posted: 7/1/2006
Known for pushing CHEP USA over the billion dollar mark, Bob Moore helped drive the rental concept in the United States. While CEO of CHEP International for more than seven years, Bob was a controversial figure even for some at the rental giant who were concerned about his growth-focused strategy. Now, Bob is hoping to make news again by launching a 100% plastic pool to compete against the company he once captained.
Beyond simply creating a competitor to CHEP, Bob hopes to bring a greater degree of discipline to the grocery distribution environment and pioneer the use of plastic, RFID-enabled pallets. Is he taking on more than he can really accomplish? Or are his lofty goals something that will revolutionize the pallet industry forever?
Bob thinks he has a winner in iGPS, the new pool he is launching. But there are a lot of obstacles in his way. Not the least of which is the culture he would have to change to make a plastic rental pool work. Bob talks with the staff of Pallet Enterprise about his rental concept, his experiences with CHEP and what the future may hold for pallet management and pallet rental.
Pallet Enterprise: Why launch a 100% plastic pool now?
Bob Moore: The supply chain continues to move toward greater automation. And with greater automation comes the need for a pallet that is the same every time you use it. It weighs exactly the same and has the same dimensions. That is not possible with wooden pallets. But it is possible with a plastic pallet.
††† The need for RFID tagged pallets is clear. It allows enhanced shipping notices. Tracking and tracing becomes much easier if each pallet is uniquely identified with an electronic serial number. And there is a 30% weight savings. This pallet weights less than 50 lbs. A poolable wooden pallet weighs 70-75lbs., which translates into fuel savings.
††† We are just emerging into a time where retailers are saying no more floor loading of meat. As a result of that, cross contamination becomes a critical issue. Once a pallet has been used in the meat industry, nobody else will touch it. Once a wooden pallet is stained, then the produce guys, the dry goods guys, the electronics guys, nobody wants it. Cross contamination issues exist with wood because it cannot be sterilized. A plastic pallet can be sterilized as many times as you want to sterilize it.
Pallet Enterprise: Describe your pool concept and tagging technology. How does it compare with other services already in the market?†
Bob Moore:† As you know, I was the CEO of CHEP from 1995 to 2002 when we took it public. CHEP has a patent on its L-shaped RFID tag design. Wood is difficult to tag because of the moisture content and the density of the material.
††† The situation is even more difficult for CHEP because it has about 80 million pallets in the United States. I donít know how you would stop them all to tag them. And a partially tagged pool does not work for anybody. It does not give you the efficiencies that come with a completely tagged pool. You canít send 90 tagged pallets and ten non-tagged pallets and try to track them through the system. The ten that you canít track may be the very ones that you need to track. It has to be 100% or none at all.
††† Every pallet that iGPS puts in the pool will be tagged with a unique electronic serial number that is syn≠chronized to a barcode tag.
Pallet Enterprise: How helpful will the tagged pallets be to comply with Wal-Mart or other retailer-based mandates?
Bob Moore: I think it will be pretty useful for them. On the serial number, we use 16 bit on a 64 bit tag that has a 10 meter, bi-directional read range. This has a much longer read range than what you would get from imbedding a tag in a wooden pallet. As you know, I did a lot of research on RFID while at CHEP, and wood is just tough to tag. While you can put a composite block with a tag imbedded in it on a wooden pallet, then you have to partially disassemble the pallet. This process is very expensive. It is pretty inexpensive to mold a tag in when you are building a plastic pallet.
Pallet Enterprise: Who is going to make these pallets? Are you using a standard design? Where is the tag going to be placed?
Bob Moore: We have six different manufacturers. We want to be supplier agnostic. As much as we didnít want to have one sole manufacturer at CHEP, it will be the same thing here. There will be two tags in each pallet. Tags will be embedded in opposing blocks. You would love to have one tag on the center block because that is the least damaged part of a pallet. The problem with that is that RFID signals will not penetrate liquid. It will be a standard grocery pallet, a 48x40 footprint size. Our pallets will all be rackable to 2,800 lbs.
Pallet Enterprise: How many pallets are you looking to launch your pool with?
†Bob Moore: We donít have a set number. We are fully funded. Our funding source has said, ĎIf you can rent it, buy it. We will take care of the money.í It is the same thing that we did when we built CHEP.
Pallet Enterprise: Is Pegasus Partners the main funding source? According to Pegasus Partnersí Web site, it will drop anywhere between $20-75 million on a project when they are ramping up. Will you have that level of funding? Will you have enough money to launch a major push against other rental pools already in the market?
†Bob Moore: Yes, Pegasus Partners is the lead financier. We are better funded than CHEP was in 1990 when it came to the United States. CHEP had $160 million in 1990, and we have more funding than that committed at this launch. And of course, we have to because our asset costs significantly more, about $50 per pallet.
Pallet Enterprise: In the past, CHEP has lost a lot of pallets. Now you are talking about renting an asset with even greater value than a typical CHEP pallet. Are these pallets only going to be offered in closed loop situations or are you going to let them out in the general retail supply chain? How do you plan to keep your losses down and get your assets back?
Bob Moore: The iGPS pallet will be mainstream. Our plan here is to develop an ubiquitous pool that is similar to CHEP. The difference is that in the CHEP system, they donít know that a pallet is being lost until a long time after it is lost. With each pallet being tagged and having its own unique serial number, we set the system up to let us know when a pallet has not been scanned for a specific number of days. Then the system alerts asset protection to investigate the situation. We stop the bleeding almost instantly.
Pallet Enterprise: As far as operating facilities, depots and DCs, are you intending on outsourcing those? Are you open to work with recyclers that might have experience working with CHEP?
Bob Moore: We will outsource everything that does not have a direct customer interface. There are a lot of very good recycling companies that do work with CHEP. And unless their agreement with CHEP prohibits it, we would be happy to have them work with us.
Pallet Enterprise: How will you work with recyclers? One of the contentious issues for CHEP has been compensating recyclers for return services. What is your intention as far as compensating recyclers for their help in retrieving any stray assets that may exist?
Bob Moore: We are building a system from ground up. Having owned 240 million pallets in 42 countries at CHEP, I can promise you that there is no mistake that I have left untouched in regards to pallets. A lot of the mistakes that were made at CHEP will not be made here. And because we donít have any scale, we do understand and realize the issues. There wonít be any rookies on this team either.
††† It is our intention not to let the relationship between iGPS and recyclers get contentious like it did at CHEP. We believe that recyclers bring real value to the whole supply chain. We want to take advantage of what they do well. There is economic room for everyone who brings value to the supply chain and that certainly includes recyclers.
Pallet Enterprise: Does that mean that you would have something like CHEPís Asset Recovery Program? There is a cost involved with helping iGPS get back stray pallets.
†Bob Moore: We recognize that and will recognize that in terms of what we contract with the various recycling entities. Obviously, the more efficient ones will be rewarded. We want a reward system
Pallet Enterprise: Why has iGPS decided to initially focus on consumer electronics and pharmaceutical products?
Bob Moore: Two reasons Ė the pharmaceutical industry desperately needs tracking. There is one drug company that indicated it could have saved $3 billion over the last 6-7 years if it had the ability to track pallets and get shipments back quickly when it discovered a problem. RFID tracking is very important to them. For consumer electronics, the robustness and consistency of the pallet is important. Because of the value of the goods on the platform, damage caused by a problem with the lead deckboard, is a big problem if you have a load of laptops or digital cameras.
††† Having been with the wood pallet rental guys as long as I was, there is no doubt in my mind that Wal*Mart & Target are some of the largest receivers of electronics and pharmaceuticals. These pallets are going to go in there. And if they like the pallet and inside information says that they will, you know how long it will be before they start asking customers to ship on this pallet to them.
Pallet Enterprise: How will your pricing model compare to what CHEP and other rental companies offers?
Bob Moore: As you know, CHEP customers pay based on pool average because that is the only thing that they can do. CHEP batch tracks everything. For example, if you build widgets and you only keep this pallet for eleven days versus say somebody else who keeps it for 40 days, you wonít pay pool average. You will get rewarded for turning the asset faster.
††† Today, the real efficient, fast moving goods subsidize what the slower moving goods do. Itís just the nature of batch tracking, which is how CHEP, PECO and others do business. Thatís one issue that the RFID solves, we know when the asset goes into and comes out of a location.
Pallet Enterprise: How will the fee structure work?
Bob Moore: We are not going to reinvent the wheel in terms of the current rental payment structures. But we would like to see the distribution of those charges better defined. And as a result, the cost of using the pallet is shared more than it is today where the manufacturer bears the lion share of the cost. I donít know if that is going to change.
††† One of the issues with CHEP, PECO or Kamp Pallets is that they donít have any proof about who should bear that cost or where pallets are lost. With the RFID tag, we will know who scanned it last, and who had it last.
††† In terms of charges, I donít know what the number is today but when I left CHEP, the pallet was paid for when it left manufacturing for 30 days. But the dwell time was really closer to 44 days. There was 14 days where the pallet was not being paid for, and nobody knew who to charge for that. If you ask the retailer, it would claim it did not have the asset that long. CHEPís answer to that is here is how long we think you had it. CHEP used field audits. But there was a lot of guesswork, and at the end of the day, you couldnít validate it like you can scan data from RFID tags.
Pallet Enterprise: It sounds like your system will force more discipline into the supply chain. One of the issues that CHEP has had is retailers keeping pallets for long periods of time without paying for the extended dwell time. Now it appears like you want to hold everyone accountable when big retailers have been used to getting away with a lot. How will major customers react to this? You may be offering a more concrete solution that they really donít want.†
Bob Moore: Having spent twenty years in consumer products before I was at CHEP, I think what everyone wants is options. CHEP is not in the top five as far as favorite supplier for manufacturers or retailers. CHEP has leveraged its size and its somewhat monopolistic position in terms of pricing. All you have to do is look at CHEPís earnings. Its earnings growth is phenomenal. Somebody is paying for that. And they are paying for that through unprecedented price increases.
††† Manufacturers and retail distributors are both looking for an alternative to CHEP. Somebody who is well-funded, knows how to run a pool and can offer an alternative. Not just plastic versus wood, but simply an alternative to CHEP even if it is a well-funded wooden pool. PECO might have been able to do it if they could have bought enough pallets.
††† The way that one retailer put it to me is that ĎWe want somebody to break up this monopoly.í
Pallet Enterprise: One of the problems with RFID is the interaction of the data with different points in the supply chain. How are you going to handle that hurdle?
Bob Moore: In our rental agreement, which is what the manufacturers sign. And the manufacturers donít typically lose a lot of pallets because their goods are on them. Itís the retail DCs where the bleeding happens. We have got a distribution agreement that is a little more focused on doing the right thing with the pallet. We are saying to the retailers that if they want the pallet to go downstream to the store thatís fine. Itís a good quality pallet and is suitable for retail display. It wonít have any protruding nails or tear up your floors. But if you want it to go to retail, you need to pay for it.
††† We have clearly been working on this for a couple of years. We have been out and talked with a bunch of them. And they have said, ĎOk. We donít ever want to pay for a pallet. The fact is. We are buying slave pallets today. And we are ultimately doing things that cost us more money. If this makes the supply chain more efficient, we will do it, especially if you can tell us where we have a problem before it becomes a $100,000 problem. We can with this technology.†††
††† I was around in the consumer goods industry before we had barcodes. And I remember the early days of barcodes when it was a bit chaotic. The technology came of age pretty quickly. And RFID adoption will be easier than barcoding because the software and systems to crunch the data has already been developed. The work that we have to do today with RFID isnít any where near as onerous as the work that had to be done 30 years ago with barcodes.
††† Everybody can read this pallet even if they donít have RFID capabilities. In the early days, it will be a little less efficient. But we will be able to accommodate those that read barcodes.
Pallet Enterprise: Where is iGPS in its ramp up stage? Do you have any customers signed up yet for your program? When might we see an iGPS pallet start to show up in the supply chain?
Bob Moore: A pilot program is already underway. You wonít see us starting to show up in any large quantities until probably mid to late summer. Then you will be able to go out to DCs and see them. The pallets will be branded, black with the iGPS logo on them in white.
Pallet Enterprise: What are some lessons from your experience with CHEP that you want to do differently?
Bob Moore: We donít want to lose our assets, and we lost plenty of pallets at CHEP. Our utilization, I saw both ways at CHEP. We had asset utilization rates that were so high that our transport costs went through the ceiling. We had too few pallets; they were all being utilized. We didnít have any safety stock. We had utilization around 93-94%. On the other hand, I donít want utilization where it is today with CHEP, which is much lower. We think we will be able to manage that balance better. Because of the scale, we simply wonít have as many pallets as CHEP. We canít make them as fast as CHEP makes them. We will be able to manage the utilization better.
††† One of the things that I noticed was that CHEP brought three million pallets in the United States last year. You wouldnít think if CHEP had a low utilization rate that you would buy more pallets and exasperate that. But there is some of the ASRS equipment out there that is so intolerant relative to
††† Another thing that I have noticed over the last couple of years is that the quality of the CHEP pool is getting older. It appears that the overall quality of the pool has diminished pretty significantly. CHEP needs to spruce up its pool, and I think it is going to be harder for them to do that because they have created earning expectations that donít lend themselves to fixing pallets. Repairing pallets cost money. I think that they are going to have to spend the money. Our entrance into the market may help them spend the money because there will be a competitor out there.†
Pallet Enterprise: Hasnít the quality of the pool become an issue because the company is public, and it has to please investors? This makes me wonder if it would be better for a pallet rental company to stay private, especially since you are talking about long-term return on the investment.
Bob Moore: When you have to march to the beat of the drum of a broad base of investors, it can be hard. One of the reasons why I left CHEP was that when we took the company public, everything became more complex. It was a lot easier running a private company where it was just a balance sheet on a couple of joint venture companies.
††† iGPS is a privately held company with very patient investors who are not looking to make a zillion dollars overnight.
Pallet Enterprise: Why did CHEP pursue a public ownership strategy?
Bob Moore: CHEP simply outgrew both parents. GKN and Brambles were really taxed to come up with the funding that CHEP needed. The strategy was to unwind the joint venture and then Brambles started divesting. It also got rid of some industrial businesses.†
Pallet Enterprise: Do you believe that your plastic pallet pool will force CHEP to take a closer look at plastic and consider transitioning its pool to plastic?
Bob Moore: I donít know. The plastic pallet costs a lot more. But there are some synergies if you are all plastic. If you have $4 billion worth of wood pallets as CHEP does, if you start buying plastic pallets itís all just incremental cost. You donít get the synergies because you still have to have the same infrastructure for inspection and repair.
††† It would be difficult for CHEP to convert to plastic. I wanted to convert CHEP to plastic in 1996. At that time they had about 7-8 million pallets in the United States. It would have been a whole lot easier before they had 80 million pallets in its U.S. pool. The board of the two companies didnít want to.†
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.