Logistics Performance: The Total Impact of Pallets

Could something as simple as pallets be holding your supply chain back from the next level of efficiency?


As companies involved with the exchange process have tried to reduce their cost exposure, pallet quality has suffered. The introduction of substandard and poorly repaired pallets into the white wood pool has resulted in severe problems with product damage, inefficient operations, break downs of automated systems, safety concerns and, as previously mentioned, bad feelings.

In the early 1990s a new management process was introduced into these supply chains in the domestic United States: the pallet rental model. The rental model eliminates pallet exchange, thus removing the role of the carrier. This gets the trucking company out of the pallet business, reducing freight costs. In the rental model, the pallets are owned and maintained by a third party, which improves pallet quality.

Improved pallet quality mitigates the product damage and other negative effects of the poor quality in the white wood pool. To date one company, CHEP USA, has been successful with implementing the rental model in the domestic United States and has captured significant share of the market.

However there are significant concerns with this concept. Rental cost-per-trip is significant for shippers, and has caused many companies to decline the service and continue with the exchange program. Efforts by other rental companies to enter the market have failed to gain significant share to date, resulting in a lack of competitive alternatives. This lack of alternatives also has resulted in a single supplier environment, which increases the risk and impact of supply problems. This environment also results in an unfavorable leverage position for cost management. Managing the rental process has been an administrative challenge for many participants, and managing possession and recovery of the rental pallets is a major challenge for the rental companies.

Other management models have been conceived and tried, with limited success to date. Generally these models involve third-party pallet-tracking services that utilize Web-based data gathering and reporting processes, and some involve pallet/asset recovery services. The basic assumption driving these third-party models is a shipper-owner concept, with recover and re-use the goal to contain the cost-per-trip.

Impact on Total Logistics Performance

These widespread problems of ineffective pallet management practices and poor pallet quality in the white wood pool have had a broad rippling effect on performance results in many areas of logistics. Transportation productivity, shipping and receiving dock productivity, automated material handling systems performance, product damage, and even safety are some of the key performance areas that have suffered. Executives with all types of companies involved in the supply chain manufacturers, distributors, carriers and 3PL's are keenly aware of the negative impact of poor quality pallets and other pallet-related issues on their respective operations.

Shipping and receiving are areas that have been particularly hard hit. Disputes over pallets between trading partners and carriers have caused shippers to implement procedures aimed at minimizing pallet costs. Practices such as floor loading or slip sheeting shipments to eliminate pallets completely, combining items/SKUs on pallets to minimize the number of pallets used and transferring product to low cost/poor quality pallets for shipping are all done to minimize pallet costs. These practices add steps and thus inefficiencies at the shipping dock, and can cause inefficient handling on the customer's receiving dock.

While all products and order types do not lend themselves to this type of palletized shipment and delivery, many current shipments could be easily reconfigured for more efficient deliveries if not for the pallet dilemma. With the advent of the new hours of service regulations, shipping and receiving dock time, as well as pallet exchange activities, have taken on new meaning in the cost equation for carriers. These new rules add significant value to the driver-time requirements that are driven both directly and indirectly by pallets and pallet management processes. Undoubtedly, these new regulations have caused even more carriers to resist pallet exchange, and to press shippers and receivers for additional revenue to offset the cost increases associated with loading and unloading dock time.

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