Pallet User Education Series: Red, White & Blue: A Cost Analysis of Rental vs. White Wood Pallets
Red, White & Blue: Former CHEP insider provides real world analysis of costs associated with rental and white wood pallet programs; first in series of columns focused on pallet users.
By Andrew Mosqueda
Date Posted: 7/1/2009
Editor’s Note: This is the first article in a series focused on educating pallet users on issues related to pallet management, including pallet rental and effective use of wood pallet recycling.
What’s red, white and blue and moves the world? The answer is your pallets, which are a crucial part of any supply chain. A pallet is no longer just a pallet. In the wood pallet market there are thousands of pallet recyclers managing local territories, and then there are the CHEP USA and PECO Pallets rental systems. Rental pallets are usually colored to identify them from a “white wood” or non-painted pallet. CHEP paints its pallet blue while PECO uses red.
Whether you buy or rent, each approach has its own benefits and hidden costs. This article will help you discover what approach may work best for you. What you think may be saving you money could actually end up costing a lot more in the long run.
Pallet Type Primer
“White wood” is the nickname for a general exchange, non-rental pallet that is widely used in a variety of industries around the world. These pallets are sold to customers that then use the pallet as they see fit. The dominant footprint size is the U.S. consumer goods market is a 48x40. These pallets are manufactured and recycled by independent companies. The largest white wood recycler in the country is IFCO Systems of Houston, Texas. Another major player on the scenes is PALNET, a cooperative of companies that are working together to provide local service with a national network and centralized billing and management functions.
There are three major pallet rental systems in the United States – CHEP, PECO and iGPS. Rental companies offer pooled pallets to shippers at a competitive rental price, but these pallets must be returned when the trip is done. CHEP is the oldest and by far the largest rental company in the country, and the other two have former CHEP executives at the helm. PECO is gaining market share at a steady pace and is known for having flat billing rates whereas CHEP charges for actual use of the pallet. iGPS is the latest player to enter the rental market. It offers an all-plastic pallet pool that boasts RFID tracking.
Distributors like Wal-Mart, Costco, Kimberly Clark, Proctor & Gamble, and Loblaw’s frequently request pooled pallets due to the perception of higher quality and lower prices. The concept is that you can get a higher quality pallet at a lower upfront cost by renting instead of buying. However, this great deal may not always turn out to be a bargain.
As with all pallet rental companies there are differences in how they approach the market, but their basic business model and pricing structure is the same. The strategy for many of the white wood pallet dealers is to sell what they can, and as much as they can. However, some pallet companies have begun to develop a strategy to compete against the rental pallet market. By offering multiple pallet specifications, pricing structures, flexibility, and using Repair, Reuse, Recycle (3R) programs, pallet dealers are able to show environmental benefits and the ability to compete in a 21st century market.
Beyond the Initial Fee – Knowing the “Real” Cost
The basic rental pricing structure is the following:
1. Issue Fee: Average price: $5.00
2. Daily Hire: Average price: $.035 (not all contracts include daily hire fees)
3. Lumber Fee: Average price: .045 - .09 (not all contracts include lumber fees)
4. Transportation: Average price: $190 - $200 (depending on national fuel prices)
5. Transfer Fee: Average price: $.15 - $18 (depending on type of transfer and destination)
6. Non-Participant Fee (NPD): Average price: $8-$18 (not all rental companies charge)
7. Heat Treating Fee: Average price: $1.00 - $1.90
The hidden cost comes in the administration of the program and the multiple variables that can derail the system. There are many aspects to a rental pallet contract that require action from the program administrator. I am not going to get into rental contracts at this time, rather discuss pricing elements that make a rental pallet offer sound attractive.
The issue fee is the bait. If I came to you and offered a pallet that is accepted as a new number one GMA pallet for $5.00, would that sound like a good deal? The answer for many purchasing managers would be, yes. If I were consulting a purchasing manager, my advice would be to look a little deeper down the rabbit hole.
The daily hire fee is a pricing variable that can gradually sneak up on you and is tied directly to inventory management. For example, the cost for keeping a 940 pallet buffer is $197 per week. This is after your issue fee and before your transfer fees. Rent is figured like this (pallet balance x product days x daily hire fee). 940 pallets x 7 days= 6580 product days x .03 rental fee = $197. Because the CHEP invoice period is from Saturday to Sunday, have your stock as low as you can by Saturday close of business. I would bring your buffer down to 300 pallets. Your rent for the week would be: 300 pallets x 7days= 2100 product days x .03 rental fee = $63. This would save you $134 just on your buffer stock. You will need to make sure that you have a load delivering on Monday so you do not run out.
Lumber, transportation, collection and heat-treatment fees are fixed cost and will adjust depending on the market. I would keep a close eye on your transfer fees. This is the charge that CHEP bills when a pallet is transferred from the product manufacturer to a wholesaler or retailer. During my years at CHEP, I have not met anyone that could adequately explain how the transfer fee is broken down throughout Canada and Mexico. This fee can change depending on the location of the recipient.
When it comes to transfer fees the one thing to remember is that not all companies are a fit for a rental pallet program. Cost could vary from $1.50 to $12.00 per pallet, making it cheaper to buy and ship a new #1 heat-treated pallet. Shipping to a company outside of CHEP’s network, otherwise known as a Non-participating distributor (NPD), significantly raises transfer costs. NPD fees can run $18 to $24 per pallet. From the pooling companies perspective you basically lost their pallets, giving them the right to invoice you for the lost equipment. Most brokers are considered an NPD because they do not cooperate with any of the pallet rental companies. Although brokers will most likely ship to a distributor in the rental system, you will be charged the NPD fee because you cannot account for who the pallet end user was. Brokers are still fairly common in the produce industry.
The rental pallet industry has its place in the supply chain, but rental is not for every company. The trip cost is the real number to watch, not the issue fee. The trip cost includes all of the pricing elements combined together to equal your real cost to use the rental pallet. In most cases your $5.00 issue fee will turn into a $7 - $10 pallet, depending on how well you work the program.
Is “White Wood” the Answer?
Beyond pallet rental providers, independent white wood recycler are also competing against IFCO, a national white wood recycler. From what I see, IFCO competes against CHEP by offering very low prices on white wood pallets. The local pallet recycler has to respond with superior service and custom jobs. In contrast, the rental companies and IFCO offer less flexibility for lower prices.
The local pallet dealer can offer:
• New #1 Pallets (Soft & Hardwood)...$8.25 - $11.00
• Used #1 Pallets (Soft & Hardwood replacements)...$5.90 - $ 7.25
• # 2 Pallets $3.25 - $ 4.00
• Combo Pallet (Mix of soft & hardwood)...$6.25 - $ 6.75
• Custom Crates & Cages
• Recycling programs (3R programs)
Prices will vary depending on region and season. The pallet recycler’s strength lies in its ability to offer a variety of products and services, whereas the larger companies are basically a one trick pony.
The one-way pallet does not meet the environmental concerns of the Wal-Mart’s and Costco’s of the retail world. But it can typically match on price after trip cost and man hours needed to run the program effectively are included into the rental price. A “white wood” pallet program can meet environmental, quality and price concerns if you work with a specialized pallet recycler instead of the small guy down the street who offers the cheapest price.
In a Repair, Recycle, and Reuse (3R) program the pallet recycler will leave a trailer for the customer to fill with mixed used pallet stock. The pallet recycler will then unload, sort, and repair the pallets. The pallet recycler will then deliver a load of pallets repaired to the customer’s specifications. Through this program I have seen a distributor’s pallet cost drop 50-70%. Not all pallet recyclers can pull this program off, but for those who can, they can compete against the larger pallet companies.
Compensation for returned pallets can be the place where you make or break your pallet program. Various pallet recyclers use different scales to determine quality and price. The dealer may claim to offer a higher price for all the #1s you return, but if the recycler has a much more stringent requirement for what qualifies as a #1 pallet, you aren’t getting a better deal. Consider what you are supplying and what you are getting for a trailer load of returned pallets.
What’s The “Catch”?
At the end of the day, a purchasing manager needs to ask if he is getting the full benefit from the rental pallet program. Is your trip cost more than the cost of a number 1 pallet? The one thing to remember is that pallet rental is a self-managed program. Rental companies claim to take away pallet headaches for customers. But, in reality, they just add different ones.
You are responsible for ordering, reporting, reconciling, correcting, and possibly conducting your own audit. Along with the management of the assets, there is management of your inventory levels and who you are shipping. I have seen several companies do an excellent job and never have issues with lost equipment. I have also seen companies think they are doing the due diligence and end up paying a large bill for lost assets.
All of the points should be variables in your cost analysis when determining which is better for your operations. The system can be complicated and the only piece of advice I can give you is, if you are going to implement a pallet rental program at your business; learn it, own it, and love it.
Andrew Mosqueda is a former Inventory Project Manager and Customer
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