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The True Cost of Pallet Logistics – Time for a Raise? Recyclers Are Likely Losing Money Returning Stray Proprietary Pallets
Know Your Cost: 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 Brindley
Date Posted: 9/1/2013
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 from Penn State University collected as part of a class action lawsuit against CHEP USA a number of years ago.
Chuck Ray and Judd Michael, who both hold doctorate degrees and are noted industry researchers, studied eight pallet companies with time-and-motion analysis and evaluated financial, logistic and other data from 2005-2008. Judd Michael stated in affidavits filed with the court, “We quantified that the financial burden is above and beyond what CHEP offers to recyclers due to a combination of both direct (ex: transportation, handling, storage) and opportunity costs, and thus each recycler incurs a monetary loss for each and every CHEP pallet they must handle.”
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.
Currently, CHEP offers $3.00 per pallet delivered to a CHEP service center over 200 miles from the pallet recycler, $2.25 delivered per pallet for those under 200 miles, and $1.25 per pallet loaded onto a CHEP provided truck at the recycler’s location.
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. 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, iGPS and PECO and other fleet pallets? The real answer may surprise you.
Researcher Judd Michael said, “There is a lot of variability in cost from the big operation to the smaller, less efficient ones... There may be a big operations that is very efficient. And they have a much smaller burden to process CHEP pallets.”
For example, the cost to deliver pallets can vary depending on the distance traveled, the amount of time you have to wait to get a truck unloaded at a depot, the number of pallets on a load, the cost of fuel and driver surcharges, etc.
Chuck Ray said, “A lot of recyclers don’t have their accounting system set up to track true costs. The average recycler doesn’t understand the cost of alternative actions, called ‘opportunity costs.’ Over time, many were making less money in servicing CHEP’s pallet pool than they would processing non-CHEP pallets, but because these opportunity costs were masked as ‘revenue from CHEP’ on their books, it was difficult to recognize where any loss was occurring.”
Ray pointed out that the largest source of this opportunity cost that went undetected was involved with trucking pallets back to a depot. One of the biggest constraints on most pallet companies is its trucking capacity. You are using your trucks to ship pallets to a competitor all the while tying up key transportation resources needed to ship to customers as well as bring in new core inventories. Given the increasing constraints on transportation over recent years, this opportunity cost has likely grown recently, not shrunk.
But this observation is interesting given the number of recyclers that have chosen to deliver pallets to a CHEP depot for the extra dollar of compensation. Dan Gormley, vice president of asset control for CHEP USA, said “Our most popular level of participation is inside the less than 200 mile delivery range, resulting in a reimbursement of $2.25 plus fuel. This compensates our recycler partners for handling, accumulating and returning stray pallets back to a CHEP service center.”
Pallet recyclers were sold on the benefit of delivering the pallets based on their shipping rates years ago. It can be easy to see how this argument makes sense on the surface. You don’t have to repair the pallets, and you don’t have to pay to acquire it. So, you should be able to make money at $2.25 per delivered pallet. And while you may not pay for blue, red, black and other colored pallets, many recyclers pay a flat fee per trailer. As a result, each rental pallet takes the place of a white-wood pallet, increasing what a recycler pays for white-wood cores. Rental pallets typically have a higher profile than a GMA, so each one takes up more than just the space of one white-wood pallet.
Most recyclers 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 hired unionized trucking labor to handle the delivery process.
Ray added, “Trucking capacity is a big deal because these recycling operations almost never have more trucks than they need. Trucks are among the most expensive pieces of equipment in their operations, so they always have just enough trucks and usually the truck is running all the time. So that turned out to be the big deal in terms of opportunity cost.”
Depending on business volumes, the research suggests that many pallet recyclers would be better off using trucks for their own clients and requiring rental pallet companies and other fleet owners to pick up pallets instead of delivering them to a pallet depot. This could all change if CHEP, PECO, iGPS and others were to increase what they offer for delivery by a significant percentage since these prices have remained flat for years.
CHEP insists that its program is fair and its success is measured by the large number of recyclers that are currently participating. Gormley commented, “Over the past decade, we have increased the size of our team inside asset recovery, to ensure we are out in the market establishing relationships with the recycling community in order to understand their needs and ensure a mutually beneficial value proposition.”
Gormley added, “Our program compensation rates are current, and based on the high level of participation among our recycler partners we feel it provides fair compensation for the service they provide.”
High participation rates are not necessarily proof though that a program is fair. This is particularly true if a free market does not exist to set prices and recyclers are concerned about the legal ramifications of not returning CHEP-marked pallets as well as other proprietary pallets. Many recyclers have told us through the years that they would like to be paid more. But they take what they can get and don’t want to legally fight CHEP and other companies in the courts. And as the research by Ray and Michael pointed out, many recyclers do not completely understand their true costs.
The ARP has allowed CHEP to fix and cap its logistics and transport costs involving the acquisition of stray assets. In essence, it has shifted these responsibilities and the variable transportation cost burdens onto its competitors. Other rental companies have followed CHEP’s lead, which has basically set the price on the market.
Some proprietary pallet owners make CHEP look generous. For example, the U.S. Postal Service (USPS) still refuses to pay for return, storage, logistics and transport fees involved in returning stray postal pallets and packaging. The fact that the USPS has its own police and investigation force has helped it recover assets in the past. But various federal courts have ruled that recyclers are due compensation for services involved in safeguarding these stray assets. Any effort, even by the USPS, to get around these provisions amounts to unjust enrichment, which could put the USPS on the wrong side of the law.
The study finalized in 2008 estimated that the recyclers it surveyed lost $2.38 per pallet on average after the compensation that they received from CHEP. 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.
Michael suggested that every company surveyed was losing at least some money despite the ARP. And it all depends on how your operation is setup. The following are key costs to consider when evaluating your real costs for processing proprietary pallets.
• Acquisition costs if you have to pay for a complete trailer and a proprietary CHEP pallet takes up the space for one or more white-wood pallets.
• Transportation costs from collection point to the recycler.
• Sortation and handling costs.
• Storage costs.
• Admin and paperwork costs.
• Delivery transportation costs.
• Lost opportunity costs associated with trucking and other considerations.
• Equipment costs needed to retrofit your facility to efficiently handle proprietary pallets.
Oh, and you also want to leave some room for profit. Other companies operating pallet fleets surely do.
The study found that most recyclers have space in their warehouses and incoming truck space for CHEP pallets, but the real problem comes when you consider the opportunity cost involved in delivering pallets to a CHEP depot.
Looking at best practice in general for dealing with proprietary pallets, Ray said, “If you absolutely can’t avoid collecting these pallets, presort and stack them out of the way as early in your process as possible, then never touch them again. It would generally be best to have CHEP or other proprietary pallet owners come pick up the pallets instead of the pallet recycler returning them to a depot.”
You really need to look at your operation and figure out if you have a bottleneck area and how working with proprietary pallets impacts the flow of your operation. If trucking is a bottleneck then you certainly don’t want to allow proprietary pallets to reduce throughput, and if you have sorting or forklift or whatever bottlenecks, then operators should always try to keep proprietary pallets away from those areas.
Ray added, “Another thing that we observed is that CHEP pallets were stored out of the way in some odd spot in the yard. When the CHEP truck came to get them, the recycler had to tie up a lot of forklift time to go get them because they were out in the back forty somewhere.”
When asked about the fairness of its current program, Gormley from CHEP said, “We are confident our program is fair. As a result of our 2011 acquisition of IFCO Pallet Management Services, we have detailed insight related to the cost required to perform this activity. Our partners can generate nice profits through our program when they operate efficiently. The high level of participation in our program strongly supports that our compensation levels are fair and profitable for our participating partners.”
Full details of the analysis by Ray and Michael can be found at www.palletenterprise.com/assetrecovery. The Pallet Enterprise staff decided not to include all the details from the analysis because it could be confusing depending on how you analyze the numbers. It can be difficult to figure out these true costs. For this research, Michael and Ray used stop watches and video to measure the true costs/processes at the various plants. But we have developed the accompanying decision tree to help you evaluate the effectiveness of your current relationship with CHEP and other proprietary pallet companies.
Are you losing or making money when you touch proprietary pallets? Don’t be so sure that your assumptions from years ago were ever correct or still hold true today. This is something that pallet companies should investigate. Or else they will keep on being paid the same thing year after year while costs slowly creep up. Is it time for a raise or a complete rethinking of CHEP’s ARP? What about other proprietary pallet operators? This is especially true of those that pay little to nothing, such as the USPS.
Smart pallet companies should calculate their true costs and consider changing practices to reduce liabilities. This may mean telling the rental operators and proprietary pallet companies that they will have to pick up their pallets instead of having them delivered by the recycler. What you can’t afford to do is the same thing you have always been doing because eventually the cost creep will eat away any profit you may have thought that you had.