Outlook for Third-Party Pallet Management: Growth and Change
Third-Party Providers: Third-party pallet management services continue to grow, but it also is changing; this special report provides a 'snapshot' look at what the big players are doing.
By Rick LeBlanc
Date Posted: 3/1/1999
Third-party pallet management services continue to grow, from the big blue machines relentless march down the field to large recyclers increasingly serving distribution centers and smaller, nimble-footed companies forming custom retrieval networks.
As the pallet industry moves forward, it will be impacted further by such issues as the core shortage and ownership of proprietary pallets.
If white pallet supplies continue to dry up, third-party pallet management services provided for distribution centers such as sorting, repair, and return that previously were paid for with excess cores increasingly will have to be paid "out of pocket" by the distribution centers. It is not clear yet how the cash-strapped distribution centers will respond or how this situation will play out for recyclers with pallet management contracts at distribution centers.
Where recyclers are reimbursed with excess cores for providing pallet-related services, it will become increasingly important for the recyclers to provide itemized details of the services and the actual costs to their customers. This kind of communication will put them in a better position to seek reasonable compensation from the distribution center if core recovery continues to decline.
Other developments, such as the decision by the National Wooden Pallet and Container Association to establish a national registry of proprietary pallets, may help enhance pallet retrieval, thereby making reusable pallet programs more attractive to some pallet users. In a similar vein, Chep announced in recent months that it will begin negotiating with individual pallet recyclers to compensate them for handling Chep pallets. This is another sign that third-party pallet management services may be growing out of their infancy. The loops gradually are being closed, which should promote more reusable pallet programs.
The evidence seems to indicate a surge in the interest of third-party pallet management. The most obvious indicator is the size of Cheps pool: it is at 28 million pallets in North America and continues to grow unabated.
Recent findings by the NWPCA and Modern Materials Handling magazine also indicate a growing third-party market. A joint survey by the two showed a huge jump in customers that want retrieval programs. One of every five pallet users either has or plans to have a retrieval and recovery system, according to the survey; just two years ago, this figure was only one in 14.
The trend also has been reflected among the NWPCAs members. In the 1995 NWPCA membership directory, about 27 companies indicated they participated in third-party management services. In the 1998 directory, the number jumped to 71 companies. Similarly, the number of companies that lease or rent pallets climbed from about 27 in 1995 to 59 in 1998.
Rental clearly is the best established component of third-party management with well understood and increasingly accepted programs in place. Chep, with a reported 94 million pallets worldwide, continues to penetrate the grocery market and to expand into other related segments of the North American food industry, notably produce and perishables.
Cheps most recent initiative moves it into the 48x40 beverage application. It reportedly is not targeting smaller pallets for side-loading soft drink trucks at this time but has not ruled out this market for the future. There is no widespread standardization of smaller beverage pallet sizes, which makes the segment a greater challenge. Chief executive officer Bobby Moore and vice president-marketing Brian Beattie both have many years of experience in the beverage industry. Robert C. Spence, a former executive with Chiquita, was recently named Chep vice president-produce.
Chep faced a major challenge last year when PalEx, a major pallet manufacturer and service provider, stopped building new pallets for Chep and phased out its repair operations for the rental company. " our CHEP business has become far less profitable in recent periods than it has been historically, generating declining margins far below those we achieve in our other businesses," PalEx chief executive officer Vance Maultsby said of the companys decision.
Later, Pallet Management Systems Inc., already a major Chep supplier, opened a new manufacturing plant in Rogersville, Ala., to build pallets for Chep Americas under a new multi-year contract. PMS occupied a plant formerly run by PalEx and also bought the equipment from PalEx, including a GBN pallet assembly system. PMS said it also plans to set up another manufacturing facility in the Midwest. Several other companies have picked up Chep work as a result of the PalEx decision.
As for PalEx, termination of the Chep agreement fueled speculation that the nations largest pallet manufacturing and recycling company would shift resources to the third-party management arena, and it did. PalEx acquired Superior Management Group, the leading Canadian pallet rental and management company. At the time it was acquired, Superior reported owning and managing about 1.3 million Canadian Pallet Council pallets, or about 16% of the CPC pool. The acquisition also fired up the rumor which was dormant the last year or two that the CPC would expand into the U.S.
PalEx recently entered into a multi-year agreement to supply pallets and related services for the North American operations of Armstrong World Industries, a building products manufacturer perhaps best know for its floor covering products. PalEx will provide pallet repair and retrieval services at 18 Armstrong facilities in the U.S. and also is eyeing services for Armstrongs European operations.
"Were excited about our new supplier-partnership with PalEx," said Greg Deascenti, Armstrongs worldwide packaging procurement manager. "They more than meet our criteria for reducing our costs, standardizing our pallets and closing the distribution loop for this very basic, but very necessary product.
"Of key importance to Armstrong is this partnerships emphasis on recycling. Our company has a longstanding policy on the environment, and one of its commitments is to make use of recycling in all our operations," he added.
Third-party providers estimate that rental pallets flowing through grocery distribution centers make up 17% to 36% of in-bound movements from grocery suppliers. The volume may vary for a number of reasons, including the preferences of regional or private label grocery products suppliers and how strongly distribution centers push for rental pallets as part of their in-bound pallet policy. "Many companies (distribution centers) report they are participating in the pallet leasing programs offered by Chep," said the 1998 Food Industry Distribution Center Benchmarking Report. However, the report warned that " most food distributors indicate that their support for the concept is directly related to the manufacturers willingness to pay the
pallet rental fees."
While the support of distribution centers is a prerequisite to making a rental network viable, acceptance by grocery products suppliers largely will determine the rate of rental growth. However, growth will be significantly influenced by the continued availability and pricing of recycled pallets, which remain the dominant platform for grocery unit-loads. (Editors Note: See related article on page 20 about how the core crunch is impacting third-party management at distribution centers.)
Other noteworthy rental companies in the 48x40 consumer products pallet arena include PECO, which launched its program last spring, and National Pallet Leasing Systems (NPLS), the longest-serving rental company in the U.S., which launched a new national initiative for produce in mid-1998.
PECO, the joint offspring of several pallet companies around the country, reportedly went to work in the Midwest with a few retail chains and then expanded to the Northeast. It is using its member companies as well as other contract depots to form its network. PECO was said to be selecting its business carefully so that the pallet loops could be managed effectively within its regional infrastructures.
NPLS, on the other hand, chose to go national, relying on the PalletBanking network of over 400 depots to close its loops. NPLS had over .5 million pallet deliveries last year and anticipates 3 million in 1999. Many other individual companies now offer rental services, too, such as Kamps Pallets in Michigan.
The ability to maintain control of pallets during the expansion stage is the most important factor in the development of a third-party rental program, according to Brad McCormick, president of NPLS. "Controlling growth is the hard part," he said. "The key is to get pallets back." This requires a solid retrieval network infrastructure and tracking system, which minimizes the risk of pallet loss.
Brad believes the challenge of maintaining effective control during growth is the greatest hurdle a third-party provider faces more daunting than raising capital or signing up customers. NPLS has enormous experience in this area, however. "Weve been tracking pallets for well over 20 years," he noted. NPLS started in 1967 and updated its PALCON pallet tracking program last year.
An important issue in maintaining effective control is whether a company should launch a regional program, such as PECO has done in the Midwest and Northeast, or go national, the approach NPLS took with the help of the PalletBanking retrieval network. A nationwide program may offer greater opportunities landing accounts with national consumer products companies, but it may expose the pallet company to more risks and require greater capital investment.
In the GMA pallet market, PalletBanking continues to be the fastest growing division of Pallet Pallet and has met all expectations, according to Steve Clark, sales manager. There are 418 authorized PalletBanking depots in the U.S. PalletBanking made its earliest inroads with the trucking industry, but since then has broadened its client base into shippers and receivers, too.
The following are brief summaries of some of the latest developments about the major companies providing third-party pallet management services, including of the businesses already mentioned above.
Chep USA says it is making inroads into several industries. Following continued success developing the pallet pool concept in the grocery industry during much of the decade, Chep is concentrating on the produce and beverage industries, as well as meat, food service and ingredients.
To strengthen its efforts in the produce industry, Chep recently named a new vice president-produce. Robert C. Spence has 25 years of experience in the produce and grocery industries, most recently as a vice president for Chiquita Brands. His new duties include overall leadership of the produce sector across the U.S. Assisting him will be James A. Vangelos, a veteran of several food companies, who was promoted to Cheps national sales director for produce. Leading the effort on the corporate side is Bob Jantzen, president and chief operating officer of Chep Americas.
In conjunction with these management changes, Chep is focusing resources to better serve produce retailers and wholesalers, market system-wide benefits of plastic container pooling, and assist in the roll-out of the pallet pool. In addition, Chep intends to maintain a support team dedicated to providing improved service to grower-shippers.
"The combination of Bob Spence joining our team, Jim Vangelos move into a position of higher responsibility, and our focused go-to-market strategy will result in improved service to both retailers and grower-shippers, reduced product damage and a decrease in the overall carrying cost of produce through the supply chain," Jantzen predicted.
In the beverage industry, Chep has begun pooling programs at leading companies. The Perrier Group, a subsidiary of Perrier Vittel S.A, itself a unit of the Nestle Company, is shipping the majority of its domestic bottled water brands on Chep four-way entry pallets. This success has led exploration of shipping Perriers brands produced in Europe to North America on Chep pallets. Under current plans, Chep in Europe will contract for pallets built to North American specifications and deliver them to Perrier plants in France, Switzerland, Italy and elsewhere. The Perrier products will be loaded on the pallets and the unitized loads will be shipped to the U.S and Canada, where the pallets will enter the domestic pallet pools. This would replace the one-way pallet program Perrier uses and eliminate waste from the trade channel.
Perriers decision to offer the Chep pallet pooling program has executives from the pallet and container pooling company eager to capture more beverage industry business. The international opportunities are also appealing to the company.
In the food service, meat and food ingredients industries, several major distributors, manufacturers and suppliers are working with Chep and suppliers to improve the overall efficiency of the supply chain through pallet pooling. Initial successes have been reported.
North American rationalization of business is a key market issue affecting the CPC, Belinda Junkin, CPC executive director, said recently. She emphasized that the CPC must be prepared to meet the demands of global competition. CPC pallets currently circulate between Canada and the U.S.
Belinda believes that offering a high quality pallet will ensure CPCs future in the face of stepped-up competition. The CPC technical committee has been active the past year, developing new specifications to improve CPC pallet performance.
Last summer the CPC board of directors decided to remove support stringers from CPC pallets. The board formed a quality committee to ensure that the distribution of these costs would be equitable. Their recommendations are forthcoming.
Due to increased policing of the pallet industry, the number of violations has increased. The violation review committee has taken a pro-active role in detecting and dealing with these problems. The CPC has taken action against non-member companies who make illegal repairs as well as CPC members who deal with them. Increased vigilance is helping to increase the quality of the CPC pallet pool.
The volume of pallet sales and pallet repairs continues to be much higher than anticipated. This clearly signals the competitive viability of the CPC, according to Belinda. CPC pallet sales were estimated to exceed 1.2 million units while repairs were projected to reach 2.5 million units, well ahead of repair activity prior to the commencement of the Enhanced Program.
The next major CPC thrust is a strategic planning initiative. The organization began a planning process last spring and it has been followed by roundtable discussions, membership surveys and interviews with industry experts. The information has been collected, reviewed and discussed by a cross-section of members who convened for an in-depth retreat in late summer. The strategic plan is well underway and will be released to members at the annual meeting next month.
First Alliance Logistics
First Alliance Logistics last year launched a program called the Pallet Clearinghouse and has 175 authorized depots. "It is up and running," said president John Lorentzen, who replaced Phil Deely at the top leadership position last fall. The network is very strong east of the Rockies. First Alliance plans to use the infrastructure to help it manage regional recovery networks, according to John, who formerly was president of St. Charles Lumber in Michigan, an Alliance member. "I think basically we are refocusing on how we can utilize the strengths of the membership in our group. We want to set up recovery loops."
First Alliance plans on building regional networks first. "Our focus is going to be to start it on the ground floor and then start to interconnect those networks," said John.
This represents a shift for First Alliance, which in the past was said to be concentrating on developing its tracking system and national accounts. "Sometimes you get to market with an idea before the market is ready for you," John observed.
In the past, many observers associated NPLS with Sears, which was its main customer before the retail giant went to slipsheets in 1997. In the future, industry watchers may similarly think of it together with K-Mart. NPLS has signed a national pallet management contract with K-Mart that includes 14 distribution centers which in turn serve over 2,000 retail outlets.
NPLS launched its new program in mid-1998, starting with produce and then moving into other perishables and dry goods applications. The company uses a heavy duty 48x40 stringer pallet, mainly softwood but with hardwood lead deck boards. Slats are 3/4-inch thick. Painted orange, the pallet is marked "PEP," which stands for Pallet Exchange Pool.
"A vast majority of the nations retailers have endorsed us as a leasing-rental alternative," Brad said. His company has signed business for over 600,000 pallets and has projections for over 3 million for the next year in perishable and non-perishable.
"Our business plan has been to sign up the receiver," Brad said. "Youve got to get the top 75 receivers in order to get 75% of the volume." NPLS has worked hard to be "receiver friendly," he said.
"The excitement here is that we are exceeding our expectations. Thats because the nations retailers are accepting us with open arms."
Pallet Management Systems Inc.
Pallet Management Systems Inc. is moving its headquarters to the Raleigh-Durham area in North Carolina and is gearing up to go high-tech. Chief executive John Lucy has already moved, and company president Zachary Richardson is scheduled to relocate in the first half of 1999.
John was first attracted to the region because of its schools, but he believes the new location also will help attract technically skilled workers. He expects to hire up to 25 people over the next year to develop an Internet-based tracking system.
PMSI has picked up some Chep supply work since PalEx terminated its relationship with the rental company, including opening a plant in Alabama. In recent years, PMSI has distanced itself from grocery distribution center management deals, which have become extremely competitive. Instead it is concentrating on pallet management in niche markets, according to Zachary.
PECO (the name originally come from an acronym for Pallet Exchange Company) is a pallet rental program for the food industry utilizing a distinctively marked red 48x40 pallet. The company has remained true to its original business plan of instituting a region-by-region roll-out, starting first in the Midwest and recently expanding into the Northeast. There are almost 100,000 PECO pallets in circulation; the company is working with six suppliers and has six repair contracts.
PECO pallets now are now being received into 30 distribution centers, and that number is expected to double over the next few months, according to Mike Tebay, president and chief executive officer. A graduate of the Harvard Business School MBA program with extensive experience as a logistics executive and consultant, Mike joined the company last spring.
"Most of our customers are expanding the use of our pallets as we turn on additional distribution centers," said Mike. "Its fair to say, without exception, they are very pleased with our service. We are keying in on really ensuring that our service is more flexible, more responsive, and more personal than the competition." This includes ensuring that pallets will arrive when requested and in first class condition, he added.
PECO is owned by 29 pallet companies and eight other investors. "Weve got a well-known investment bank leading the search for a major organization, institution or strategic
investor that can commit funds to continue the growth during the next couple of years," Mike said.
Bromley Pallet Recyclers
Bromley plans to grow incrementally into the Midwest, where it plans to open five new locations in 1999. Its most recent acquisition was J&N Pallet in Columbus, Oh. This location has picked up several new accounts from customers Bromley already serviced in other areas of the country.
Bromleys philosophy has been that national or even international companies tend to focus regionally on their distribution requirements. For this reason, Bromley has been able to
consistently provide good service to its customers even through its locations were mainly in the Southeast.
The company performs a number of third-party services, including retrieval and relocation for multiple branch sites, distribution center sorting and repair, as well as working
with Chep at a number of locations.
Bromley Pallet Recyclers is the largest pallet recycler in the Eastern U.S. with more than 750,000 pallets in inventory. It was founded by Del Groene under the name Suncoast Pallets Inc. 20 years ago in Tampa, Fla. Over the next 12 years Suncoast grew into the largest pallet recycler in Florida.
Suncoast entered a second phase of development in 1992 when the Bromley Companies, a New York-based business with numerous interests, bought a majority share of Suncoast. Rapid expansion followed. Bromley, as the company was renamed, now has 16 locations in Florida, Georgia, Tennessee, North and South Carolina, Ohio and Arkansas.
Pallet Pallet recently named Corbett Lenz as interim president and chief executive officer and Thomas Hoefert as chief financial officer. The company is seeking a permanent president and chief executive officer. Doug Moore, who formerly held the posts, will remain as chairman of the board and will pursue opportunities for the company to grow in the marketplace. Hoefert replaced Gary Stanton, who will remain as treasurer and executive vice president.
Pallet Pallet also relocated its corporate headquarters Dallas. In late 1997 the company moved its corporate headquarters from the Toronto area to Fort Smith, Ark.
"The Company has reached a critical point in its return to profitability, and the experience and skills that Mr. Lenz and Mr. Hoefert bring to Pallet Pallet will place increased emphasis on day-to-day operations," the company said in a statement.
The PalletBanking Division continues to be Pallet Pallets fastest growing unit. The PalletBanking system was designed exclusively to help customers with 48x40 pallets. However, sales manager Steve Clark reported the company has a growing business in custom pallet retrieval in the industrial market that also utilizes the PalletBanking network of service centers.
"Weve been long-time innovators for white wood," said Steve. "We offer customized programs that have grown by leaps and bounds, such as in automotive, for example. Thats where our emphasis is."
Steve recognizes the challenge of a deteriorating 48x40 pallet system, but he believes it also provides opportunities for the PalletBanking System. "There is still an incredible pool out there which is not blue," he said. "But if the pool has gotten smaller, it has required people to work smarter."
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