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Market Update: Can the 48x40 Whitewood Stringer Pallet Survive the Coming Paradigm Shift?
Costco's insistence on block pallets is sure to change the complexion of the pallet industry - especially within the pallet recycling world.
By Jeff McBee
Date Posted: 11/1/2010
Can the 48x40 Whitewood Stringer Pallet Survive the Coming Paradigm Shift?
A wise businessman I know used to frequently say, "The little piles make the big piles."
He was speaking of pennies becoming dollars and dollars adding up. It's a solid and sound concept as long as one doesn't chase the wrong pennies. That is what pallet buyers have always done, and the pallet industry has been the facilitator or co-enablers so to speak.
Paul Frank loves to tell the story of Bill Sardo's involvement with the Grocery Manufacturer's Association (GMA) helping in the development of the GMA pallet spec. The GMA was so impressed with his efforts that Bill was made a member of the GMA's Grocery Pallet Subcommittee.
The honor didn't last long as Bill showed up at his second meeting as a member of the committee with evidence in his briefcase of companies cheating on the spec. His intent to expose those cheating on the spec earned Bill the left foot of fellowship from the Grocery Pallet Subcommittee.
That was sometime around 1970. Developing a timeline for the GMA pallet is difficult due mainly to the pallet's origins. The earliest spec that we have been able to get our hands on is dated January 1971 and that is marked "revised spec."
There is a bit of irony in today's grocery pallet, in that the commonly used deck pattern of six-inch lead boards, with four-inch inner deck-boards (five on top, three on the bottom) was never in a GMA spec, because the GMA never required specific board widths.
The last time I called the GMA to see if they had an up-to-date pallet spec, they sent along the GPC spec, (1974-76), which also specified random width.
The earlier versions of GMAs were made from 4/4 material that was planed to required thickness. Another trend developed early in the GMA pallet's history; pallet manufacturers were making lighter pallets as many of the 13/16 -15/16 pallets gave way to 3/4", which were often actually 11/16.
Walt Wallin had a vision...Walt was a Forest Service PhD economist. His concept was to cost-justify building a heavy pallet by looking at the per trip cost. The original model, which came to be known as "Walt's Black Box," was the foundation of the Pallet Design System ™ (PDS).
The concept was about cost savings prior to first repair. By the time the PDS was rolled out, pallet manufacturers were already removing wood from pallets in an effort to appease customers' demands for a cheaper first trip rather than cheaper cost per trip that was Wallin's vision for the PDS. Customers' desires trumped their needs and long term well-being.
In 1989, CHEP announced that it was expecting to bring its pallet leasing system to the United States for a September 1, 1990 launch.
The Grocery Industry Pallet Subcommittee of the Joint Shipping Container Committee commissioned Cleveland Consulting Associates to study the "costs associated with - and alternatives to - the current grocery pallet exchange system," in 1992.
The report that became known in the pallet industry as the "Cleveland Study" was very revealing. The study's findings showed that the lowest cost per trip and most economical "alternative" would be an industry-cooperative pool similar to the CPC in Canada.
The Grocery Industry Pallet Subcommittee ignored its own findings, and once again, short-term desires pushed long-term best interests out of the way.
A large part of this decision was that CHEP had begun to change the mindset of grocery companies. CHEP managed to change the culture of the grocery buying community.
One could argue that CHEP had changed the culture of the grocery industry's buyers twice. The first time was when grocery shippers embraced the rental pallet concept, and the second shift was when CHEP switched its U.S. pool to all block pallets around 2000.
The pallet industry is about to get a second dose of culture shock. Costco Wholesale recently decided to jettison white-wood stringer pallets from its system by the end of the year. The wholesale retailer has adopted new vendor specifications calling for â"iGPS, PECO and CHEP block pallets in North America" as of January 2011.
Costco also says that white-wood pallets must meet equivalent structural and performance standards compared to the pooled standards.
Costco's insistence on block pallets is sure to change the complexion of the pallet industry - especially within the pallet recycling world. Make no mistake, the impact this move will have on the pallet industry will not be small.
The move has placed the whitewood pallet industry at a distinct disadvantage. The higher cost of manufacturing new whitewood block pallets - especially to the heavier spec that leasing companies use - eliminates one-way block pallets as an option. The volume of suitable block pallets that meets the new Costco spec, pales in comparison to the existing market demand. This tremendously limits shippers' options in the short-term. Shippers will be greeted by the open arms of the current pallet leasers.
The situation does not have to be permanent. Some of the shippers who move to rental to ship on block pallets will do so hesitantly. There are some large grocery shippers who tried rental pallets but returned to the whitewood market. There are numerous large grocery shippers who currently embrace pallet rental but do not want the whitewood option eliminated. Some of the biggest names in the grocery prefer at least 20% of their product on a non-leased pallet.
Handling efficiencies were a large consideration that led to Costco's block pallet initiative. A Costco spokesperson who spoke with our staff believes that rental block pallets will be the primary pallet at Costco due to lower costs.
You don't need to look any further than CHEP's recent quality initiative to see the company's commitment to keeping the mass merchandisers happy. The pallet leasing giant just decommissioned seven million pallets. That sort of quality correction to its pool wasn't done whimsically. The push for quality is not only coming from the pallet buyers, but their customers as well. Automated storage and retrieval systems will continue to press quality concerns. The more automation that occurs, the greater the need for higher quality in wooden pallets.
Once one mass-merchandiser makes this sort of move, it isn't a large leap for other mass-merchandisers to take into account the same type of decision. This has the markings of a paradigm shift for the pallet industry. The industry needs to find solutions to the issues that led Costco to this decision. This will not eliminate the whitewood 48x40, but the impact to the 48x40 stringer pallet could be far larger than anyone might have imagined a year ago.
The timetable is debatable but something needs to happen. Like CHEP in the early 90's, the pallet industry has to change the mindset of the using community. The solution may already be in the works. The Pallet Industry Management System (PIMS) could provide the viable whitewood pool that the industry needs.
There are hurdles involved. As mentioned earlier, large pallet users, even some of the pallet rental companies' biggest customers, want a whitewood alternative. At the same time, these same companies are not interested in pallet ownership.
Pallet customers are concerned with ROI and have a view that packaging is not an asset, but an expense. The view comes from modern management styles that focus on managing in 13-week cycles. Other obstacles include start-up capital and being the fourth option available to the market.
It still boils down to changing the culture in the buying community. It's been done before and it can be done again. There's money in it. You don't need to look any further than the P & L statement of the companies that lease pallets.
(Editor's Note: Jeff McBee is an analyst who researches and writes about the pallet industry and its raw material markets for Pallet Profile Weekly and the Recycle Record, the only newsletters dedicated to serving the pallet industry. For information on subscribing to Pallet Profile Weekly or the Recycle Record, call 800-805-0263 and ask for Jeff.)