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Thinking Ahead–Letter from Chaille
CHEP Blues: Research indicates that the true cost of pallet logistics may be greater than many recyclers realize when it comes to proprietary pallets. Is it really a smart move to handle transportation for possible competitors? Is it time for a raise. This investigation suggests recyclers should reconsider their true opportunity costs.

By Chaille M. Brindley
Date Posted: 9/1/2013

                The pallet industry is a hard business. Anybody who has survived the last ten years knows that first hand. You have to work hard for everything you get. And that is why it should come as no surprise that if you want to get paid what you are worth, you have to stand up and ask for it. Securing price increases is never easy in the vastly competitive pallet market. Most pallet companies have been able to push through some price increases over the last twelve years. But except for a modest fuel surcharge, the pallet industry as a whole has not been able to secure any price concessions from CHEP USA and other proprietary pallet owners when it comes to recovery and transportation fees associated with returning stray pooled pallets.

                Don’t expect these proprietary pallet owners to offer occasional raises out of the kindness of their hearts. Recyclers will have to band together to demand some concessions.

                In the past, CHEP has used the strategy of divide and conquer to keep the industry from working together to negotiate better terms. And in this situation, CHEP and other proprietary pallet owners needs the recyclers a lot more than recyclers need them. Without a network of independent pallet recyclers, CHEP would have to rely on third party transportation companies or possibly IFCO Systems to handle logistics of stray assets. Can you imagine what this would cost if CHEP had to rely on union truck drivers to recover loads of blue pallets?

                Other pallet rental companies and proprietary pallet owners have followed CHEP’s lead if they offer compensation at all. And as a result, what happens with CHEP will likely impact what becomes the “market price” for these services in the future. Some proprietary pallet owners don’t offer any compensation, such as the U.S. Postal Service (USPS). This policy makes CHEP seem generous by comparison.

                Hear me out. I’m not talking about holding onto CHEP property or converting its pooled pallets. All I am suggesting is that recyclers follow one of the legal means outlined by a research group of legal experts commissioned by the National Wooden Pallet & Container Association a few years ago. This group came up with the following options when it comes to dealing with stray CHEP-marked pallets. Recyclers can allow CHEP to pick up its pallets, help CHEP load pallets onto trucks, or even handle the transport to a depot. It seems like the first two legal options may be the best from a cost standpoint.

                For years CHEP, PECO, iGPS and other operators of proprietary fleets have claimed that they offer fair prices to return stray pallet assets. But a Pallet Enterprise investigation indicates that many pallet companies likely are losing money, especially when they handle the return transport of these pallets. This investigation is based on detailed analysis that researchers Chuck Ray and Judd Michael from Penn State University collected as part of a class action lawsuit against CHEP USA a number of years ago.

                For more information on the research, read the article that starts on page 38.

                By far the largest source of stray proprietary pallets remains CHEP with its millions of pallets in circulation. Although the rental giant offers some compensation for return services through an Asset Recovery Program (ARP), it has remained virtually the same since its inception minus a modest fuel surcharge that some companies receive for handling the transport of stray pallets.

                Other owners of proprietary pallets will negotiate on a case-by-case basis. CHEP offers its ARP nationwide to qualified pallet recyclers for stray pallets outside of its network. This one-size-fits-all approach does not take market dynamics into consideration. CHEP generally sticks to its ARP although some recyclers receive a fuel surcharge, free pallets or payment for doing other functions, such as dock sweeps and depot work.

                Are you really making money collecting and returning stray proprietary pallets, such as CHEP and PECO and other fleet pallets? The real answer may surprise you.

                Pallet recyclers were sold on the benefit of delivering the pallets based on their shipping rates years ago. Most did not consider the total costs, such as opportunity and business costs as well as the real costs that proprietary pallet owners would have to pay if they did these functions themselves or licensed unionized trucking labor to handle the delivery process.  

                Depending on business volumes, the research by Ray and Michael suggests that many pallet recyclers would be better off using their trucks for their own white-wood clients and requiring proprietary pallet owners to pick up pallets instead of delivering them to a pallet depot. This could all change if CHEP were to increase what its offers for delivery by a significant percentage since only minimal fuel surcharges have been added through the years. Other companies would likely follow CHEP’s lead because the rental giant has basically set the “market price” for these services through its ARP.

                CHEP’s ARP is certainly a much better deal for the industry than when it offered no compensation and harassed recyclers with lawsuits and police searches. CHEP has come a long way, and I applaud its progressive approach. But it seems that the time has come for the industry to demand more compensation as well as possibly the ability to schedule specific drop off times at depots. Recyclers continue to complain about having to wait hours at a rental pallet depot to unload and reconcile counts. This can tie up a truck and driver for an entire afternoon or longer.

                The ARP has allowed CHEP to standardize and cap its logistics and transport costs involving the acquisition of stray assets. In essence, it has shifted these responsibilities and some of the cost burdens onto its competitors. 

                Research conducted by Ray and Michael in 2008 estimated that the recyclers it surveyed lost on average after the compensation that they received from CHEP $2.38 per pallet. This research included small and large operations as well as those conducting dock sweeps for CHEP and standard recyclers. It gave a wide range of CHEP-related situations and interactions.

                Stop to analyze what you are doing and whether or not it is in your best interest. If enough recyclers decided to just make CHEP come pick up its pallets, this might be enough pressure to push the rental giant to negotiate better terms.

                One problem is that CHEP has managed to develop special deals with many of the vocal leaders in the industry. This has limited the ability of the industry to organize for better terms. I can’t blame CHEP nor the recyclers for doing what is in their best interest. Many leading companies don’t want to risk any special deal they have with CHEP in terms of dock sweeps, access to cores, etc. But there are enough pallet companies out there that don’t have these deals if they band together to push for real concessions.

                Those companies would have to be willing to forgo the extra $1 they receive for delivering pallets for a period of time. While it could be a short-term hit in the pocketbook, if the researchers are right it would prove to be a true cost saver and efficiency driver for the recycler as well as provide the basis for recyclers to negotiate for better terms from CHEP and other proprietary pallet owners.

                You have to stand up for yourself and demand what is fair compensation. If you don’t do it, nobody else will. Are you ready to stand up? Or will you get run over?

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