CHEP USA Turns 20: Pallet Pooler Makes Indelible Mark on Industry, Demonstrates Path for Future Transformation
As CHEP marks its 20th anniversary in the United States, the Pallet Enterprise looks into what made the rental giant such a success story and what lessons the industry can learn from its ability to institute systemic change.
By Chaille Brindley
Date Posted: 9/1/2010
The impact of CHEP USA on the pallet market over the last twenty years is epic. It’s actually a perfect textbook example of how to initiate systemic change in a complex industry. Through all its successes and failures, bold moves and misguided actions, brilliance, some might say arrogance, and ingenuity, nobody can dismiss the impact of blue pallets on the U.S. supply chain.
Consider this reality. When CHEP first launched in the United States in September 1990, pallet exchange was king. Pooling was a novel concept. Shippers bought and sold pallets. They didn’t rent them. The block pallet, which has become a mainstay in the grocery industry today, was mostly a European phenomenon. Pallets were primarily purchased at the local or regional level. Even pallet recycling was in its relative infancy, many companies bought new pallets customized to fit their precise needs. Nobody really knew what sustainability was. And, the concept of quality standards sounded nice, but nobody had made it stick across the industry.
Twenty years later, the landscape looks very different, and CHEP was the primary driver behind most of these massive changes. Many companies have come and gone trying to replicate CHEP’s success in the U.S. market. But nobody has been able to match it.
As CHEP turns 20 this month, it seems fitting to do more than just celebrate this industry icon. This moment serves as an opportunity to look back at these momentous changes to see what the future may hold as well as what it may take for industry players to make their mark just as CHEP has done.
Love them or hate them, CHEP’s story is something you can’t really ignore. And the smartest competitors will learn from what CHEP has done both right and wrong to chart the course for tomorrow.
Pre-Launch Planning, Setting the Stage
CHEP first entered the North American market by launching in Canada in 1980. After developing itself in this smaller market, senior management at Brambles Industries decided to tackle the United States when key factors came together to encourage such a risky move.
Brambles Industries, the current parent company of CHEP USA, joined with GKN Industries of the United Kingdom to start in the United States as American Pallet Systems (APS), a pallet repair facility in Chicago, Ill. APS served to help GKN-Brambles understand the U.S. market. APS acquired the patent rights to the Palletron line of repair equipment, which gave GKN-Brambles the equipment expertise to develop the depot network it would need to service a national pool.
In the spring of 1988, GKN-Brambles intensified its move into the U.S. market when two executives from Australia were brought in to lead the effort – Kevin Cheadle to develop CHEP USA and David Ferguson to APS. With corporate headquarters in Chicago, the business quickly established depots in Indianapolis, Cincinnati, and Chicago to serve initial customers, such as Marsh Foods and Procter and Gamble.
GKN-Brambles decided to enter the U.S. market when the time was right. The primary catalyst was a report in 1987 by A.T Kearney, a global consulting firm. This report identified $2.5 billion of annual product damage in grocery logistics. It concluded that 70% of the pallets in the system are substandard and account for 20% of the product damage. Only product overhang was blamed for more damage.
The 1987 Kearney report clearly identified quality problems in the pallet industry, and GKN-Brambles believed it could solve them by introducing pooling into the U.S. market. Brambles and GKN had been successful with the CHEP model in Australia, Europe, the United Kingdom, and Canada. But it had to see if similar approaches would work in the complex, geographically difficult, U.S. market.
Spurred by growing recognition of quality and pallet concerns in the U.S. grocery market, GKN-Brambles decided to establish a national pallet rental pool in the United States. They formed GKN-Brambles Enterprises Ltd. in 1989 to launch the U.S. pool.
GKN-Brambles dispatched an experienced CHEP team in March 1989 to study the market and develop a U.S.-focused business plan. Later that year the grocery industry pallet committee reported that, “The present (exchange) system is a shambles and cannot be made to work.”
A number of grocery and retail trade organizations came together in 1990 as the Pallet Subcommittee of the Joint Industry Committee on Shipping Platforms to explore the issue. They commissioned Cleveland Consulting Associates to conduct a grocery industry research study. This firm reported that pallets cost the grocery industry at that time nearly $2 billion in product damage, carrier inefficiency, pallet purchase costs, various productivity loses, and the costs to sort and maintain pallets. This meant each dry good case incurred over sixteen cents in associated costs. For example, one primary problem was truckers spending unproductive time and running unloaded miles to obtain acceptable pallets.
The pallet subcommittee representing the Food Marketing Institute, Grocery Manufacturers of America, North American Wholesale Grocers Association, and others considered a wide variety of options, including CHEP. They concluded that CHEP could save the industry $890 million per year. Some other options might have saved more money. But CHEP was one of the best options to develop a standard without durable good manufacturers and retailers having to take on the responsibility themselves.
As momentum started to build, GKN-Brambles committed $140 million in funding to launch the pool. CHEP started with Procter & Gamble and Lever Brothers, two cornerstone clients familiar with pooling from their experience in Europe using CHEP. They began with a pre-launch pilot program involving West Coast distributors.
CHEP Invades U.S. Market with Clear Strategy & Infrastructure
CHEP USA officially opened its doors in September 1990 with 150 people based in its New Jersey headquarters and regional centers in Atlanta, Chicago, Los Angeles and New Jersey.
David Lee, the current director of operations for CHEP USA, is one of the longest tenured CHEP executives in the United States. His experience with the company goes back to the early days of the company launch in 1990.
Commenting on the launch, Lee said that the large grocery players would accept nothing less than a national pool. This required a national depot network with the ability to position pallets around the country, a field team in place to educate and work with customers, an experienced supply chain team to manage the pool, and a computer control system to ensure everything runs smoothly.
In 1990, CHEP deployed its first million pallets across its network and already had in place information systems that included EDI capabilities to interface with customers’ electronic records and computing systems.
Lee said, “We came to market with all the necessary elements of success.” From anchor customers to a stated need in the market, CHEP entered the market and quickly began to add customers.
Lee said that CHEP had to “design a program that fit the United States.” He explained that CHEP veered from its traditional exchange model to a one-way system to accommodate the geographical challenges of a country the size of the United States.
Meg Thornton, a marketing and new business development consultant specializing in distribution packaging and supply chain logistics, wrote a number of the first articles on CHEP that ran in the Pallet Enterprise. Thornton recently said, “CHEP had to address the complexity of the U.S. market, the demographics, product flows, gaining geographic coverage to roll out nationally…creating that business model was very challenging.”
There were some bumps along the road. A former CHEP insider said that CHEP experienced some push back from customers when management insisted on lost pallet fees and required that contracts be put in place to secure asset return. There was an abatement program introduced to moderate customer concerns. This illustrates the careful dance that CHEP has always had to perform to meet customer needs while managing the pool to ensure asset utilization and quality control. After all, if the finances of the pool didn’t work in the long run, the business would not be a success story today.
Actually, the company took a little longer than at first expected to break even. Initially, senior management had hoped for a five year break even period. But CHEP eventually reached the break even point about 6 to 6.5 years into the business launch after spending about half a billion dollars. The reason for the delay in reaching financial goals resulted primarily from costs incurred in launching the block pallet as well as customer push back when contracts were introduced involving financial penalties resulting from lost pallets.
Secret to Success – Reducing Cost, Offering Quality
CHEP sought to do more than just introduce a new way of doing things. It focused on innovation that improves supply chain efficiencies, reduces product damage and creates systems that ensure quality and standardization.
One of the primary innovations that CHEP made to the U.S. grocery industry was the introduction of the block pallet. Lee said, “The biggest change in the industry is the recognition and acceptance of the 4-way, block pallet. You even see retailers moving to it today.”
Lee credited CHEP with leading this innovation because stringer pallets had always been the dominant driver in the U.S. market before CHEP. Eventually CHEP completely abandoned the stringer pallet, and its entire U.S. pool is 4-way, perimeter-based block pallets today.
CHEP considered using a block pallet when it first entered the market. Block pallets were the dominant style CHEP had used in Europe. But the company opted for stringer design since it was the dominant style available in the United States at that time. There was concern that CHEP might struggle getting enough quality suppliers to build block pallets back in 1990 as well as the higher cost of producing block pallets.
CHEP was already undertaking a massive transformation project by introducing pooling. Some inside CHEP were concerned that adding a block pallet on top of that would be too much for the market to accept, according to Lee. Many companies are resistant to change, which is proven by the fact that many industries still ship on stringer pallets today.
CHEP introduced its 4-way entry block pallet, “CHEP 4-Way” in May 1992. It featured flush non-reversible, full-perimeter base, 87% top deck and 55% bottom deck coverage, a payload rating of 2800 lbs. The company claimed significant reduction in product damage and new trailer loading patterns - with an industry savings estimated at $170 million per year.
Lee pointed to the Campbell Soup Co., which announced a national roll-out on CHEP 4-Way in November 1992. Campbell’s cited the ability to stack loads higher as well as a major reduction in product damage by switching from stringer to CHEP’s block pallets.
Lee explained that the stringer cut out area of a pallet was a major source of damage to cans for Campbell’s. This damage was significantly reduced after switching to block pallets. The grocery industry began to open up to the advantages of block pallets. In October 1992, a grocery industry pallet committee encouraged a “Move to true 4-way entry pallet design.”
The block pallet push resulted in a number of things. For starters, CHEP offered a pallet style that allowed for easier access and use at the retail level. Block pallets also boasted reduced product damage for some customers.
Through the years, CHEP has experimented with many different pallet designs and modifications. Thornton said, “CHEP had challenges at certain points with their choice of pallets, which they did remedy.”
Pallet problems can drive higher repair costs and impact the overall return on investment for the pool. Little issues such as placement and thickness of deckboards, the type of nails used, etc. can impact performance.
Block pallets were a novelty that some customers quickly began to see as a necessity. Block pallets are more expensive to make, which makes them more suited for pooling than exchange or one-way purchase situations. Since CHEP was the only source of these pallets in most cases, once companies decided to switch to block, they had limited options. This continues to be a problem today for the white wood industry looking to compete with CHEP.
When CHEP found solutions to customer problems, it effectively communicated those benefits to customers and prospects. A perfect example of this strategy occurred in 1993 when the grocery industry announced its Efficient Consumer Response (ECR) program. ECR was designed to target cost and waste reduction amounting to $30 billion. Quality pallets and pallet management was one of nineteen key requirements. CHEP effectively marketed its system as a solution.
Thornton said, “The paradigms were shifting and CHEP was there with a proven model.”
More than any other pallet company on the planet, CHEP has proven to be a highly skilled marketing company with the ability to make blue pallets a very distinct brand in the marketplace. This all began with CHEPmunk in October 1990. This mascot was tapped with the responsibility to get the word out about converting from pallet exchange.
CHEP created marketing partnerships with customers. They became major public advocates for the CHEP pooling model. Companies, such as Campbell’s, Boskovich Farms, Kellogg’s and others used the CHEP brand in their advertisements similar to the “Intel Inside” campaign run by the major chip maker with computer and electronic manufacturers.
For example, Campbell’s advertisements spelled out truck utilization and damage reduction savings to customers using CHEP’s 4-way block pallet. Boskovich Farms advertised its rebate program and other benefits of CHEP to customers. And Kellogg’s incorporated the use of the CHEP block pallet and savings in advertisements and messages to its customers.
This advocacy program was crucial to encourage early growth and conversion from pallet exchange. If the big players were on board, the smaller shippers were at least curious and in some cases felt the need to follow suit just to keep up with the competition.
Customer Recruitment Strategy & Alliances
Beyond aggressive marketing, CHEP used alliances with product manufacturers, distributors and retailers to encourage companies to ship or receive on CHEP pallets. For example, in March 1991, major grocery trade carriers offered $60 to $120 per truckload for participants in CHEP’s pooling program.
CHEP used its relationship with both major retailers and product manufacturers to secure new business. One of the most important relationships in the United States is with Walmart. Through an advocacy program, CHEP used a pull-through strategy to encourage manufacturers to ship on CHEP pallets to Walmart. The retailer receives a higher quality pallet in many cases with less product damage. The product manufacturer meets customer requests and saves money in many instances.
In other instances, product manufacturers give special channel pricing to distributors and retailers that will receive on a CHEP pallet and become an official part of the CHEP network. Pallet pooling is the kind of business model that works best when many players are involved to optimize the network. One customer recruits another customer recruits another company.
Product manufacturers prefer to ship to companies that are a signed CHEP participant because CHEP generally charges fees to send pallets outside of its network. Plus, there is also the increased risk of lost pallet fees for pallets shipped to outside recipients.
Technology & Innovation
Ever since the first day of official business, technology has helped drive the CHEP business model. You have to be able to keep track of pallet flows, bill customers, forecast needs, manage inventories, communicate quality concerns and delivery schedules, ordering, etc. The heart of any good pallet rental business is top-notch information system tools. The CHEP ePooling Solutions eBusiness toolset, includes Portfolio, Portfolio Personal Edition, Portfolio + Plus, and EDI (electronic data interchange) to connect CHEP and its customers.
Looking to the future of asset control, CHEP announced a major pilot program in November 2001 to evaluate “intelligent” RFID tags. This allowed real-time tracking of assets. CHEP pioneered the use of RFID with pallets. It offered CHEP Plus ID, a CHEP pallet equipped with a RFID tag. Today, most of CHEP’s pool is not equipped with RFID tags. The rental giant found that the tags were not worth the cost just for CHEP’s own internal needs. It was only worthwhile if a customer wanted the tag to meet a retailer request or some other systems requirement. CHEP customers opted to meet retail RFID requirements in other ways. CHEP continues to experiment and conduct trials with RFID and other tracking technology although it is difficult to utilize these devices given the cost of rolling out to a pool that has reached more than 80 million pallets in the United States.
CHEP has selectively introduced new products to deal with customer requirements or extend pooling to areas outside of its core focus on the grocery market. In June of 2001, CHEP broadened its product range with the launch of the CHEP UNICON Intermediate Bulk Container (IBC) system in the Americas, Europe and Asia. CHEP still operates its IBC business even though it is distinct from the company’s pallet business.
Trying to position itself as more than just a pallet company, CHEP opened its Florida Innovation Center in February 2002. This facility has morphed into a full service packaging testing and unit load lab equipped with the latest equipment. CHEP uses this facility to help customers evaluate CHEP pallets and test other packaging concerns. CHEP offers this service free of charge to its customers as just another way to help remove costs and reduce product damage.
One solution that came through the Innovation Center was the Blue Guardian, a bumper accessory attached to forklifts. The Blue Guardian decreases damage to palletized products and their packaging by redirecting the impact force from the lift truck to the center block of the pallet, instead of the top boards, where products are located. Dozens of shippers and retailers are using the bumper to reduce damage. CHEP licensed the technology, and today, the product can be bought from The Raymond Corporation.
Revolving Door CHEP Management
Having smart executives at the top has been a hallmark of CHEP since the beginning. Maintaining consistency of leadership has been a struggle. While this is not necessarily unusual for a major corporation, it has resulted in some interesting twist and turns in management philosophy. Not only has CHEP been impacted by its own management turnover through the years, it is also influenced by upper management changes at its parent company, Brambles Industries.
Originally, the launch of CHEP USA was led by Mike McCarthy and other senior CHEP staff, such as Andrew Patterson. They led the company for the first five years or so and focused on educating the market about pooling while establishing a controlled, high quality pallet pool. They were tasked with building the brand and did it well.
Bob Moore, who had been a senior executive at PepsiCo North America took over the helm of CHEP International Inc. in 1995.
Moore is a controversial figure who aggressively built up the size of the pool. During his seven-year tenure at CHEP, Moore oversaw the company’s transformation from a $300 million rental company to a $2.5 billion global industry leader. Like him or not, CHEP would not be what it is today without his influence.
Moore followed a grow-at-all-costs approach. He allowed pallets to be shipped outside of the network to non-participating distributors as a way to gain market volume and further extend CHEP’s reach. This led to loss of control and millions of stray pallets. As pallets ended up in all sorts of places, damage went up and collection costs mounted.
Moore left CHEP as a bigger company with some serious issues. But nobody can question his boldness in pushing CHEP to the next level.
Victor Mendes took over as CEO on March 12, 2002. He used his technical background to improve the systems at CHEP and plug its pallet leaks. Mendes championed the use of RFID tags and sought to innovate using a renewed focus on technology.
After successfully getting pallet leakage under control and improving management of the global pool, Brambles jettisoned Mendes in a major shakeup of the organization in June 2004. The entire global management team was axed as Brambles split the CHEP business into three regional units – CHEP Europe, Asia-Pacific and CHEP Americas.
Under the restructuring, CHEP Europe boss Mark Luby ran Europe, Africa and the Asia-Pacific, while CHEP U.S. boss David Mezzanotte oversaw the new Americas arm. Even though no place was found for Mendes, Brambles management credited Mendes for turning around the U.S. and European pallet businesses.
Mezzanotte eventually took over the lead of the CHEP business as COO of CHEP International. He served as COO from 2005-2007. He brought a more measured attitude and sought to improve relations with the pallet industry compared to previous leadership. Kevin Shuba, who had strong sales and customer service experience at CHEP USA, ran the Americas from 2007-2009.
Currently, CHEP USA is run by Jim Ritchie, group president of CHEP Americas. He brought over 25 years of logistics industry experience as the former president and CEO of YRC Logistics. Today, CHEP is run by three regional group presidents instead of having one CEO over all the regional business units.
Key Lessons from CHEP
Despite many challenges and shifts in management strategy, Lee said that “Ultimately, the market prevailed.” Whatever the customers wanted that the business could sustain that is what eventually won out. The difficult thing is when customers want one thing that can take away from something else that they claim they want. This has always been one of the big challenges of pooling – making a system easy for customers while still enforcing rules necessary to make the system work.
For example, when CHEP first started in the United States, pallets could only be sent to the distribution center level not individual stores, then CHEP modified its policies, especially for large retailers. CHEP had to find a way to work with retailers to meet their needs while turning the pallets at a reasonable rate. One of the key measurements of any rental pool is asset utilization. And if you allow pallets to stay out too long in retail locations, you are taking away from the potential financial return on that asset.
CHEP has had to constantly work to plug holes, negotiate distributor contracts, find sources of leaks, and use asset protection staff to look for stray pallets. Managing a pallet pool sounds like an easy job until you actually try to do it. CHEP claims to globally manage over 300 million pallet and container movements each year. That’s a lot to monitor.
Over the last ten years, CHEP has learned the hard way that pallet recyclers can be a helpful ally in getting back stray assets. Through its Asset Recovery Program (ARP), CHEP has turned competitors into partners. While many recyclers would still like to get paid more for their services, at least CHEP has taken a more collaborative approach then it did years ago when it regularly used the police or the courts to force recyclers to play ball. Keeping recovery costs in check through the ARP is one reason that CHEP has been successful through the years. It has successfully harnessed the strength of a large network of pallet recycling partners without having to face the reality of recovery costs connected with fluctuating market prices.
CHEP has left a strong imprint on the white wood industry. Thornton said, “CHEP caused the white wood industry to be more aware of its impact on national supply chains.”
Even though the white wood market has not fully evolved to meet all the challenges, Thornton commented that many of the big players today, such as IFCO Systems, arose in reaction to dynamics that CHEP made possible.
Possibly the greatest lesson that CHEP has learned through the years is that your pool is only as good as your quality standards. The company allowed its overall pallet quality to go down over the last decade. It all began with policies that opened up the pool, creating more damage and loss. This was followed by changing repair ratios to meet financial targets. These actions led the overall pool quality to suffer. Customer push back forced Brambles management to invest millions to improve quality. CHEP responded to stricter customer quality demands caused by increased automation.
In 2008, CHEP announced a $200 million quality improvement program in the United States. These funds were used to improve repair standards, study best practices, develop and educate staff on new quality control standards, and install more inspectors and equipment. CHEP has pumped even more money into its Better Everyday quality initiative, which has boosted repair standards. The company has also launched a tiered pricing and quality structure to offer various standards to clients.
By improving quality and defending its flanks against competitors, CHEP appears poised for another 20 years of solid performance. We could all learn a thing or two from its ability to institute change in one of the most demanding supply chains on the planet.
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