Strategy 1: Outsource pallets and reduce your operating costs

When it comes to outsourcing, most of us think of turning over warehousing or transportation to a third party to reduce operating costs. But outsourcing pallets can deliver the same benefits.

By Bob Trebilcock, Executive Editor -- Modern Materials Handling, 3/17/2009

Leading manufacturers and distributors have been outsourcing their warehousing and transportation operations to third-party logistics providers (3PLs) for years. The rationale is simple: The company doing the outsourcing saves on capital expenses and concentrates on what it does best; the 3PL, meanwhile, is able to reduce logistics costs for the customer by concentrating on what it does best—warehousing, order fulfillment and distribution.

Those same benefits can be realized by turning over your pallet program to a third-party pallet pooling operation, says Brian Malloy, senior vice president and chief customer officer for CHEP. Instead of buying new or used pallets that are then shipped from a manufacturing plant or warehouse, never to be seen again, a user rents the pallets and pays a rental fee for each trip. As with a 3PL, you’re sharing the cost of the asset across a group of users who participate in the pool instead of absorbing the cost yourself. 

The benefit: The quality and consistency of the pallets are assured, and CHEP assumes the responsibility for pallet management issues like repair and disposal.

The savings: An average of $1 per pallet trip in the supply chain, according to Malloy.

As with outsourcing logistics requirements, not everyone is a candidate for outsourcing pallets.

At least four conditions need to be in place. 

1) You need enough volume to receive pallets from CHEP in full truckload quantities. For that reason, most of the shippers that use CHEP pallets manufacturer consumer packaged goods.

2) You need to be able to ship your product on a standard 48-inch by 40-inch pallet.

3) You ship products in full truckloads rather than LTL. “You need to be able to flow the pallets directly into your customer’s distribution network and then back to CHEP,” says Malloy. “If you’re shipping LTL, it’s possible, but it’s a lot more complicated because an LTL shipment may go through several transportation depots before it’s delivered.”

4) Last, and most important, you must be shipping into supply chains that are already heavily penetrated by CHEP. The reason: Your customer will be responsible for getting the pallet back to CHEP. “If your customers are participants in a pallet pool, they understand how to handle the pallets once they receive them and ensure that they’re returned to a CHEP center,” says Malloy. The good news: The list of participants includes some of the nation’s largest grocers, mass merchant retailers and club stores. More recently, CHEP has been making inroads into the pet supply and home hardware industries as well.

If you meet those requirements, joining a pallet pool is relatively straightforward.

Step 1: CHEP assigns an implementation team to set up the administrative controls; that’s the process for communicating your pallet requirements by location to CHEP. Usually, that will be done by EDI (electronic data interchange). Most companies estimate their requirements and establish a shipping schedule for a set period of time. “We can operate in a just-in-time model,” says Malloy, “but in most instances, we deliver to a schedule and most customers carry a two-day buffer.”

Step 2. The rental meter begins running when a load of pallets leaves CHEP’s depot to be delivered to your plant or warehouse. When the pallets arrive, they go into your production environment just like any other pallets. Each of your customers is assigned a destination code by CHEP. When a load of palletized product leaves your yard, you enter that code and the number of pallets shipped to that destination into the CHEP system. At that point, more or less, your meter stops running and the pallets become the responsibility of your customer. “Once they’re shipped, they’re no longer in your inventory and you’re no longer paying for them,” says Malloy.

Step 3. Once your customers receive your delivery, they make arrangements to get the pallets back to CHEP. In most cases, the retailer or grocer will ship the pallets to a CHEP center, but in some instances CHEP makes arrangements to pick them up.

“The process, and business model, behind pallet pooling is relatively simple,” says Malloy. “It’s the logistics behind the pool that is fairly sophisticated.”