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Markets in Transition: As Grocery Pallet System Evolves, So Does Opportunity
If you think of a DC budget as a lemon, most of us on the inside would insist that there isn’t much juice left to squeeze. Things have changed a lot which present new challenges and opportunities.
By Rick LeBlanc
Date Posted: 2/1/2007
When I’m not moonlighting as a writer for Pallet Enterprise, my day job includes managing a grocery distribution center pallet program. It goes without saying that it is a much smaller component of my responsibility than it used to be 25 years ago.
If you think of a DC budget as a lemon, most of us on the inside would insist that there isn’t much juice left to squeeze. Things have changed a lot at our site, as they have for the industry overall. The changes represent new challenges and opportunities.
Fewer Resources for Managing Pallets
At our DC there has been sustained pressure to eliminate pallet-related work hours. Our pallet repair line was mothballed over 12 years ago. Today our DC is facing increased pressure to reduce time spent sorting pallets.
Looking at the industry at large, I am aware of three approaches to sorting pallets at the DC level. One is the use of a third-party on-site to perform the sorting, which may not be an option for ‘big union’ sites. Another scheme targets the double or unnecessary handling of the pallet; retail staff or warehouse workers are encouraged to accumulate pallets in color specific stacks when they first pick up empty pallets, so they move back through the supply chain pre-sorted. The elimination of double handling is generally a good idea, but it needs to be balanced against the ongoing costs of training and labor, and the space required for it. This is particularly challenging at retail stores.
Another approach is an off-site return model increasingly utilized in the U.S. by Wal-Mart and others. Trailers or containers of mixed loads (pallets, cardboard bales, reusable plastic containers, etc.) are sent to off-site return centers. These centers divert the flow of returnables and recyclables from the DC, where space is very valuable and little labor can be devoted to managing pallets. The goal is not to eliminate multiple touches but to free up space and labor at the DC. Off-site return centers might be a natural fit for some recyclers as they are relatively low tech and pallets comprise a large component of returns.
Pallet Exchange Declines
Pallet interchange, as we call pallet exchange in Canada, has decreased substantially over the years. Canada’s grocery industry overall has a lower percentage of exchange today than 10 years ago, with rental in particular having picked up a lot of ground. Exchange still generally enjoys an approximate 30%-60% market share among Canadian distributors thanks to the well established Canadian Pallet Council program and the popularity of CTSWeb, its Internet-based pallet control software.
In the U.S., pallet exchange seems to have been hit harder, with rental reportedly in the 50%– 90% range, and non-exchange white wood programs supplanting exchange. Many DCs no longer offer pallet exchange. Everybody is looking to get rid of pallet exchange headaches, predominantly through rental, while some find the revenue generation potential for cores to be interesting.
Plastic Still Popular But Losses Increasing
Meanwhile, for assembled orders shipped to retail outlets, the plastic skid, particularly twin sheet thermoform, has also become widely adopted. They have been very successful for order selection at our site and have offered good value the last 12 years.
While plastic pallet shrinkage generally was low in the past in the closed loop environment of shipping from the DC to retail stores, some retailers now are indicating higher loss rates. Probable causes include increased value of plastic pallets to ‘pallet pickers’ and increasingly complex supply chains with more third parties involved and greater exposure to loss.
Grocery Still Fragmented
A study led by Charles Ray of Penn State University a few years ago for the National Wooden Pallet and Container Association (and published recently in the Forest Products Journal) emphasized the overall attractiveness of a white wood non-exchange pallet program versus pallet rental when the core resale value was taken into consideration. When the value of the core at resale is taken in account, this negates the initial higher purchase price of a recycled pallet when compared to pallet rental fees. While in the past some chains have taken a more system-wide perspective on a vendor-by-vendor basis when it comes to pallet requirements, I am not aware that this practice is holding — let alone gaining — popularity in the face of chronic grocery management downsizing.
Opportunities Emerge, Challenges Endure
To the extent that pallet exchange continues to wind down in the grocery industry and is not replaced by proprietary rental pallets, there should be greater access to cores. Some chains are aware that they can increase DC revenue by requesting white wood pallets, and promotion of this at the DC level may influence local or regional DC pallet policy.
There are still some challenges to persuading the DC of this point of view. While some DCs like to make money on a repalletization fee for bad inbound pallets, other DC managers still have concerns about consistent quality of white wood pallets in a fragmented supply environment — where delivery schedules are extremely tight and where the cost of delaying a delivery could be much higher than the potential repalletization charge.
Some DC managers look at the extra hours required to run a white wood pallet alternative versus revenue potential, and when there are no labor hours left to manage or handle pallets, they also have concerns.
The important thing, however, is that whether or not such solutions make sense for a particular DC today, grocery DC managers are aware of their options, as the cost-benefit of any particular way forward will likely change over time.
At a broader level, encouragement of the grocery supply chain to take a less fragmented view of pallet selection might cast a more favorable light on white pallet non-exchange options. Although a collaborative supply chain approach is becoming a competitive necessity in many aspects of grocery distribution, it remains to be seen if pallet procurement is a significant enough concern to get on the grocery radar screen in the short term.