Technology Can Transform Pallet Business Says Logistics Expert
Logistics expert that pallet companies have the potential to radically transform themselves by leveraging information technology.
By Staff Writer
Date Posted: 5/1/2000
Pallet businesses have the potential to radically transform themselves by leveraging information technology, according to a logistics expert.
New computer software products leverage the power of information technology to facilitate supply chain planning and execution, noted Dr. C. John Langley Jr., a professor of logistics at the University of Tennessee.
As significant as the technology is and the benefits it provides to change ways of doing business, there may yet be a further evolution to the stage that providing and using such information is a company’s core mission or activity — even for pallet and container companies, he suggested.
"It’s...easy to wonder whether the idea that your business could become an electronic business is actually something that has a lot of merit," John said in a seminar at the annual meeting of the National Wooden Pallet and Container Association, held recently at Marco Island, Fla.
"There’s a tremendous opportunity here," he continued. "I guess the question would be what’s the likelihood that in the future you could have companies actually in the pallet business where their business was not the manufacture of pallets but primarily the facilitating of information flow — and by the way, they have relationships with companies that manufacture pallets."
In his presentation to the NWPCA audience, John discussed key supply chain concepts and strategies, identified critical supply chain issues and offered some predictions.
Fundamental changes are occurring in the pallet industry, he noted. There are opportunities for pallet companies that grasp supply chain management principles and combine them with other concepts to attract new customers and new markets.
John spoke with NWPCA staff and members of the pallet industry to gauge some of the key issues and concerns facing the pallet industry in preparation of his remarks. "My take on those conversations is that this industry faces intense competition," he said. Some of the pallet industry’s concerns are chronic over-capacity, significant margin pressure, a highly competitive business environment, and significant barriers to entering the industry.
However, many other industries share similar concerns, he noted. "You’re not any different than any other industries...," he said.
He also remarked on the proliferation of types and sizes of pallets. "It’s too bad you can’t take a magic wand and create greater standardization."
Other areas of concern to the pallet industry, he said, were pallets made of alternative materials, the tight labor market, environmental issues and pallet life cycle, and new and innovative business practices.
The last category included such concerns as utilization of information technology, third-party pallet rental and leasing programs, and a move toward supply chain management. Chep already has taken a significant market share in pallet rental, John noted, and analysts predict that interest in pallet rental programs will accelerate in coming years.
The demand for pallets is a "derived" demand, John said. That is, it is derived from the demand to move a product from one point to another.
"Today, as we’re looking at alternative logistics and supply chain systems, what we’re really trying to do, if at all possible, is to eliminate the need to move the product, in a physical sense." Some products, for example, lend themselves to digitization, such as movies or CDs, which opens up new distribution methods. Before long, he predicted, instead of movie videos being mass-produced and then transported through the supply chain to video rental businesses, movies will be made available in digital format and delivered in other ways. The auto industry is also moving to create new channels of distribution, he noted. "The way that it is coming to you physically is quite different from the one that used to be. The way they’re building them is not predicated on having large amounts of inventory but anticipating demand for the vehicle."
"I think what you need to be doing," he added, "is looking beyond the demand for pallets itself and asking yourself, ‘What are the drivers of the demands for pallets and what are the types of change we’ll see in the future?’ "
He drew an analogy with playing hockey. Star player Wayne Gretzky was known for his uncanny ability to size up the play and anticipate where the puck was going to go. He skated to that area where he expected the puck to go.
U.S. industry traditionally has focused on areas such as transportation, inventory, warehousing, materials handling, order processing, and so on. In the 1970s and 1980s, however, it began to think the activities should be integrated and began evolving to a logistics perspective. At this stage in the evolutionary process, industry is focused on supply chain management.
Business must look beyond logistics to exert control over the supply chain, John said, whether they serve consumers or — in the case of the pallet industry — industrial users. Companies are looking upstream in the supply chain and working to satisfy customers by developing relationships with retailers, manufacturers and suppliers. Consumer supply chains are being shortened with businesses dealing directly with consumers, such as through catalogue sales. Probably of greater interest to the pallet industry, he said, is the business-to-business market, where there is a great deal of change occurring and new models appearing. "The path that we are on is probably one that is going to change our business environment forever," he said. Compared to consumer markets, he added, supply chains in the pallet industry are more direct.
Industry also is witnessing a shifting of activities in the supply chain, including the pallet industry. Activities that used to be performed by one company now are being done by someone else. The overall trend is to compress the amount of time from the availability of materials to delivery of a finished product to the end customer.
Wholesalers will continue to be squeezed out of supply chains, John indicated, particularly in such industries as grocery, drugs and pharmaceuticals, and other consumer products. The user, he noted, is only concerned about having "the right quality products at the right time, the right place, the right quantity, and a number of other different ‘rights.’ "
Although pallet business traditionally may have been limited geographically to a distance of a few hundreds miles for materials and customers, "I think you may see some change in that in the future," he said.
The focus on supply chain management is identifying or anticipating consumer or end-user demand and building that information into the planning process in order to take costs out, improve service, and provide a higher level of value to the customer or user.
Benefits of supply chain management, according to John, are integrated, end-to-end pipeline solutions, such as moving from ‘push’ to ‘pull’ distributions systems and build-to-order manufacturing and assembly. Other benefits are improvements in logistics speed, flexibility and customer service, segmenting customers based on their logistics needs, and restructuring and streamlining networks. Impacts to networks include the ability to differentiate product closer to the customer, total visibility over assets, and eliminating unnecessary infrastructure and reducing inventories. Customers want to know where their shipments are, but their chief concern is whether or not a supplier is still on track to meet a delivery time, and, if not, what the supplier is doing to make good on its commitment.
Examples of success in supply chain management, he said, are Kraft and Dell Computers. Kraft moved from a system of seven supply chains to a single supply chain, rationalizing and streamlining product flow to eliminate inefficiencies. In the case of Dell, its computers used to be retailed at warehouse-type stores. The company transformed itself into a built-to-order business. As a result, Dell achieved a 9% cost advantage over competitors, a 49% increase in sales and a 50% increase in profits.
Only 53% of businesses have a formal supply chain strategy, according to a 1999 study. Forty-seven percent did not have one," said John. "That just tells us there’s tremendous opportunity for improvement here."
Critical supply chain issues, he said, are:
• creating logistics value
• performance measurement
• supply chain relationships
• information technology
• outsourcing logistics services
• and senior management recognition.
Another study looked at why businesses fail to measure supply chain performance. Among the reasons: companies found that successful measurement was difficult, measures may not be aligned with corporate strategy, too many other measures already are being collected, reluctance to divulge performance measures, and problems with language and communication.
Companies are using information technology to operate their businesses more efficiently on a daily basis, to form and handle relationships with other partners throughout the supply chain, and to achieve major changes in supply chain processes, such as improved order management and customer service, and also to facilitate involvement with so-called e-commerce, or doing business via the Internet.
E-commerce is spurring much change, he noted. "I don’t think it’s unfair at all to say it’s a little bit like the Gold Rush." Students in MBA programs work in the summer to gain some experience, he noted. In the case of those that get summer jobs with Internet start-ups, half-way through the season some students are being offered full-time jobs with attractive salaries and stock options.
In another survey, about one-third of companies responding indicated that online or Internet orders for their products will grow more than 800% in the next two years. Although members of the pallet industry have presences on the Internet, John suggested they could do more. "I think you need to look at the Internet as a way to communicate with your customers," he said. John also predicted that online pallet ‘auctions’ are likely to increase.
The Internet has given rise to companies that are setting up electronic marketplaces, positioning themselves between manufacturers and their traditional network of suppliers and wholesalers, John noted.
Outsourcing of logistics services has become about a $40 billion a year market, John noted. Another study last year showed a shift in the types of third-party logistics service providers that are being utilized: the shift was from transportation-based providers to warehousing-distribution providers, which supplies 51% of services to the market.
Another study assessed what type of logistics providers are best able to manage the supply chain. Software providers are positioned to take a leading position in this field, John said, by operating companies that would offer a broad range of supply chain services.
In the future, John predicted, successful companies will have a highly collaborative business environment. They will have "ruthless" knowledge of what they do well and what they don’t. They will use information technology to develop new markets and products and new ways of doing business. They will understand and respond to needs of end users or customers. And they will promote and get involved in effective supply chain management.
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