Pallets: A core problem
A report in yesterday’s Wall Street Journal said that prices for commodities are plunging around the globe.
Try telling that to anyone who has tried recently to purchase a truck load of cores. That’s the industry term for a used 48 X 40 wooden pallet, the most common shipping platform in North America. In recent years, many CPG, food and beverage manufacturers have relied on cores as a money-saving alternative to new hardwood pallets – known as white wood pallets – and as an alternative to participating in one of the third party pallet pools operated by the BIG Three of CHEP, PECO or iGPS.
Not only are cores in short supply, the prices that pallet operations pay for used pallets that are repaired for the cores market are going through the roof. That is driving up the cost of shipping a load of finished goods, especially for manufacturers who can’t charge their end customer for the pallet.
“The volume of cores available to us is down 25% from 2008,” says John Swenby, the president of Paltech Enterprises, a large pallet operation serving Iowa, Illinois, Indiana, Missouri and Arkansas. “We have fewer cores to repair and sell.” Meanwhile, Swenby says the cost of raw cores for repair has increased about 33% in the last year, especially in urban areas. “Prices are especially high in Chicago, where there’s a lot of competition for pallets,” Swenby says. “In Iowa and other rural areas, we haven’t seen as many problems because there isn’t as much competition.”
While every pallet market is unique, the shortage of cores was confirmed by conversations with the National Wooden Pallet & Container Association and pallet makers in other regions.
There is no one factor driving the shortage. Instead, it appears to be a confluence of events related to what happened in the pallet market during the recession.
Replenish the pool: Historically, manufacturers used a mix of new white wood pallets and cores. Eventually, those new pallets were used to replenish and maintain the quality of the pool of cores. With the recession, the demand for new pallets hit the skids, and there were simply fewer new pallets to freshen up the pool.
Increased exports: Over the last few years, pallet manufacturers saw an uptick in the demand for heat-treated new and used pallets for export shipment. As Swenby points out, that’s great for business, but pallets shipped out of the country don’t come back, further depleting the pool.
Cores put to other uses: From 2008 to 2010, there was a dramatic drop in manufacturing. With fewer people shipping product, pallet repair operations like Swenbys were sitting on pallets that were costing money as they sat in inventory. “I had a bunch of lesser quality number 2 pallets that I used to make remanufactured number 1’s because they were worth more,” says Swenby. “I know of other manufacturers that ground them up and sold them for mulch or boiler fuel to generate cash flow.”
The Costco effect: Costco’s decision 18 months ago to only accept block pallets like those used in pallet pools has also resulted in the production of fewer new stringer pallets.
The success of PDS: In one sense, the pallet industry is a victim of its own success with the Pallet Design System. The pallet design software program has enabled pallet manufacturers to design less expensive pallets that get the job done, especially for customers shipping one way. By removing lumber from the pallet, however, the new designs simply don’t last as long once they hit the used market. “PDS has been fantastic for pallet users,” says Swenby. “But, it’s contributing to a shortage of cores in the used market.”
The shortage may be cyclical. Until then, shippers have a few options.
Buy new: If you are a manufacturer who passes on the cost of the pallet to your customer, that may be a tough sell. But with the delta between new and quality used pallets shrinking, new pallets may be an option. What’s more, that will improve the pool of used pallets in the long run.
Switch to a pallet pool: Costco’s move to block pallets was a boon to the Big Three pallet pool operators. Whether or not the core shortage has been a similar boon is difficult to guage – CHEP did not return calls. Anecdotally, however, Modern has heard of several leading CPG manufacturers that are considering a switch to pooled pallets. That comes with its own set of challenges. They include the fact that a pooled pallet is heavier than a used 48 X 40 and that some customers will not stock pile pooled pallets for return.
Consider an alternative pallet: Niche solutions like presswood and corrugated pallets aren’t appropriate for every application, but they are cost effective when they work.
Consider a combo pallet: All hardwood pallets have been the defacto standard for new pallets, especially east of the Mississippi, for as long as there have been pallets. However, some manufacturers are now offering pallets newly manufactured pallets from a mix of used components and new lumber as well as a mix of softwood decking and hardwood runners. The lumber for either configuration is readily available and the cost is less than a new whitewood pallet.
Create a pool: Some shippers that don’t want to participate in a third party pool but who can control their distribution are creating their own managed pools. If you’re shipping within a 100 to 200 mile radius of your plant and can get the pallets back, a private pool may make sense. For manufacturers shipping across country, the freight may be prohibitive. 9BLOC, a new consortium of pallet manufacturers may provide an answer to this issue.