Down economy strategy 1: Outsource pallets and reduce your operating costs

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 its customers logistics’ costs by concentrating on what it does best, which is warehousing, order fulfillment and distribution.

Those same benefits can be realized by turning over your pallet program to a third party pallet pooling operation like CHEP, PECO or iGPS. 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, paying 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 the pallet pooler assumes the responsibility for pallet management issues like repair and disposal.

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

As with outsourcing logistics requirements, not everyone is a candidate for outsourcing pallets. At least four conditions need to be in place.

First, there needs to be enough volume to receive pallets from a pooler in full truckload quantities. For that reasons, most of the shippers that use pooled pallets manufacturer consumer packaged goods.

Second, the company needs to be able to ship its product on a standard 48’ by 40’ pallet.

Third, the company ships its 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. 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.

Last, and most important, you must be shipping into supply chains that are already heavily penetrated by a pooler. The reason: Your customer will be responsible for getting the pallet back. If your customers are participants in a pallet pool, they understand how to handle the pallets once they receive them and insure that they’re returned to a center.

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

With CHEP, here’s how it works:

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. Most companies estimate their requirements and establish a shipping schedule for a set period of time.

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.

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.

In March of 2009, Modern posted three strategies for reducing operational costs in a tough economy on our website. The idea was simple: In good times, distributors and manufacturers focus on processes and technologies that enable growth. In a tough economy like the one we’re experiencing now, the focus is on reducing costs to maintain margins. The best improvements will continue delivering results long after business improves. While those lines are now 2.5 years old, they still resonate today.