Core Crunch Changes Dynamics of Third-Party Management at Distribution Centers
Core Shortage : The growing core shortage is impacting third-party management services that pallet recyclers provide for distribution centers.
By Staff Writer
Date Posted: 3/1/1999
Some recyclers obtain pallet cores by offering a variety of services to distribution centers. However, bidding for these cores has become increasingly competitive in recent years as the core supply has tightened. For this reason, many pallet companies seek used pallets from other sources that are hopefully less contested
But there is a new problem looming for those who provide services to distribution centers: an escalating core supply "crunch." These recyclers are recovering fewer and fewer pallets from distribution centers, a situation that increasingly will aggravate the dwindling pool of cores.
This trend has significant ramifications for these pallet recyclers. It is disrupting the delicately balanced relationships between recyclers and distribution centers.
Recyclers that serve distribution centers are keenly aware of this trend and the implications for their companies. Michael Doyle, president and chief executive officer of the Memphis, Tenn.-based Pallet Factory, and Darren M. Bronco, president of the Anacortes, Wash.-based Pallet Services, discussed this issue at the recent NWPCA Recycling and Repair Seminar & Expo. The two companies collectively serve 11 distribution centers across the country, and their experience illustrates the changing dynamics between recyclers and the distribution centers they serve.
In order to obtain cores, pallet companies may provide a number of different services to distribution centers. These may include on-site or off-site sorting, repair, storage, and transport. The recycler also may provide other services, such as pallet tracking and control, training for dock employees, identifying shippers using substandard pallets, or reporting on trends in pallet management.
In the past, pallet recycling companies such as the Pallet Factory and Pallet Services have supplied these services on a "no cost" basis. In lieu of cash, they accepted excess cores from the distribution centers. The distribution centers, which typically are not permitted much discretionary spending, seem to have widely accepted this practice of trading cores for sorting, repair, and transportation services.
"Everyone does it a little bit different," Mike said, "but in some way we have to be compensated for what we do. They are bartering with wooden pallets."
"That (system) worked fine when Chep wasnt around years ago," Darren added. As rental pallet share increases, however, he believes it is displacing new pallets that otherwise eventually would rejuvenate the grocery pool.
Chep pallets increased to 17-22% of the total volume at one distribution center he serviced between 1997 and 1998, Mike reported. Darren revealed even more dramatic numbers at one of his West Coast distribution centers: within nine months, the number of Chep pallets returned monthly increased from about 8,600 to more than 17,000.
The impact of rental probably was diminished for a few years as grocery distribution centers bought plastic pallets for picking, which temporarily flushed extra cores into the market, Darren said. However, now that temporary source of cores is drying up, too.
Both companies found that payment for their services, which previously could be covered by the excess cores from the distribution centers, increasingly would have to be billed to their customers because of the expanding shortfall of cores.
It has been an eye-opening experience for distribution centers that were used to having various pallet services provided to them at no out-of-pocket cost. One center that enjoyed "no cost" services for three years suddenly found itself facing charges of about $80,000 per month.
Not surprisingly, distribution centers may resist when they begin to be faced with invoices for pallet-related services that they previously paid for in excess pallets.
Mike and Darren emphasized the importance for pallet companies to accurately account for their costs when the dwindling number of excess pallets is not sufficient payment and they must begin charging for services.
"Youve got to keep your figures...If you dont do that, its very difficult to get a price increase from Wal-Mart," Mike warned.
Pallet Services takes a somewhat similar approach to keeping their customer distribution centers informed. "Weve put a cost on everything we do," said Darren. "We sort out their pallets to one grade or two grades; we multiply that by a sortation charge. We handle Chep loads back to the depot and charge them accordingly."
Pallet Services sorts, occasionally stores, and returns Chep pallets to the depot for distribution centers, and charges for this service. Distribution centers typically sign agreements with rental providers that obligates them to return empty rental pallets to the closest rental company depot.
Darren estimated that one distribution center his company services would have transportation charges of $20,000 per billing period, or $260,000 annually if it totally went to rental.
He believes that with increased rental pallet throughput displacing white pallets, distribution centers also are going to be more likely to actually cut checks. Increasingly, there are not enough surplus cores for recyclers to cover the costs of the services they provide to distribution centers.
One tact the recyclers recommend to distribution center clients is to ask their product suppliers to ship on white pallets but not necessarily to offer pallet exchange. Shippers already pay for rental, Mike noted; if the cost of a recycled pallet is similar to what the shippers pay for rental, the distribution center should not be obliged to return it, he argued.
Both men said their data showed that if returned rental pallets had been swapped for white pallets, customers would have both enjoyed healthy pallet surpluses and "no cost" services from the recyclers.
One distribution center indicated that it did not want to increase the pallet costs of its suppliers, but Mike countered that recycled pallet prices were very competitive with rental prices.
While the future is unclear, it seems certain that a core shortage will require that pallet sorting, repair, transportation and tracking activities will have to be paid for out of distribution center operations instead of buried in trading of cores. This will be true whether the services are provided by recyclers or performed internally by the distribution center.
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