Have you ever thought about pallets? You know, those wood contraptions that can hold a pile of stuff off the floor while letting a forklift easily scoop up said pile? Here’s a snapshot of one that just happened to be lying around the Northwestern campus.
So in many ways, there is nothing particularly special about pallets except that they play a key role in logistics and supply chains. They basically make schlepping stuff modular. What is actually stacked on the pallet doesn’t matter; a guy with a forklift can just pick it up and put it on or take it off a truck. Which is not to say that pallets are uninteresting. The people at Planet Money did a whole episode on pallets (Episode 545: The Blue Pallet, Jun 11) that makes for great listening. Here, check it out:
The key point is that there has in fact been innovation in the pallet market. What you see above is your basic stringer pallet. It consists of 15 pieces of wood and a bunch of nails. Note that with those three pieces of wood sandwiched between the other twelve, a forklift can only pick it up from two sides — either the front or back in the picture above. The alternative is to have a block pallet. A block pallet replaces that those three pieces of wood with nine blocks. Those blocks give extra spacing on the other two sides and a forklift can hoist the thing from any side. That additional flexibility increases efficiency. Go to a Costco. They have essentially mandated all their suppliers send stuff on block pallets. If you unload as many tractor trailers as Costco does, the productivity boost from block pallets really adds up.
Stringer pallets or block pallets, who cares? Well, the action is not so much on just unloading trucks as what happens to the pallets when the recipient is done with them. Costco or Walmart or any large store gets a boatload of stuff on pallets but doesn’t ship anything out. Their customers take stuff home in their cars, on the bus, or however. The store is not piling stuff up to ship out in volume. Pallets could then presumably be a problem. They would be a nuisance to get rid of. But over time, the market provided a solution. The Planet Money report is based in part on an article in Cabinet Magazine (Whitewood under Siege, Winter 2013/14). Here is how that article describes what happened.
The boom ultimately created a problem, because all of these pallets did not disappear when they reached their destinations. They piled up: on loading docks, in stockrooms, in landfills. Beginning in the late 1970s, people realized these used pallets might have value, and the pallet recycling industry was born. There was good money in recycling, especially in the early days. The supply of raw material was cheap, if not free, the capital investment was minimal, and the whole thing had an appealing simplicity: acquire pallets from wherever they end up, fix them up, sell them back to manufacturers. The service this new generation of recyclers provided was called “reverse logistics.”
Many of the early recyclers were truckers, garbage men, and others who worked in proximity to pallets. A young man named Ricky Mock got into the business in the winter of 1983, when he tired of chopping down oak trees on the family hog farm in Covington, Georgia, and saw an ad in the local newspaper advertising free pallets for anyone willing to cart them away. “I told my daddy, ‘We could cut up those pallets and make firewood out of them,’” Mock recalled. “‘We could use them to patch fences, and also to build gates, and do different things.’” Twenty-five years later, Mock had one of the largest inventories of recycled pallets in the country: three hundred thousand of them, maybe more, in stacks thirty or forty feet high, stretching over twenty-eight acres of concrete yard. It was a city of pallets.
The advent of recycling allowed the whitewood ecosystem to multiply in complexity. Recyclers arranged to leave empty trailers at the loading docks of their customers, who filled them with pallets and then called for a pickup. Meanwhile, individual pallet pickers began rescuing pallets from the trash and bringing them to recyclers, earning fifty cents or a dollar per piece. Higher up the food chain, pallet brokers fulfilled orders by aggregating shipments of pallets from smaller recyclers. A trade then developed between recyclers, who swapped pallets of different sizes and styles, and the graph of pallet movements became thick with arrows in all directions.
What do we have? Reverse logistics in action! There is a whole set of firms dedicated to taking back used pallets, refurbish them as necessary and then sell them off again. The article doesn’t say just how big an industry this is, but given the number of pallets used in the US, it seems safe to guess that this is one of the larger reverse logistics industries dedicated to reusing a product (as opposed to taking it apart for recycling). As the Planet Money report makes clear, this business has traditionally been very locally based. The technology involved pretty much tops out at nail guns so there are low barriers to entry. Hence, there are lots of small players hustling for used pallets and selling locally or through brokers.
But all of that applies only to stringer pallets. Those have been the industry standard for many years. They have dominated block pallets because they are cheaper to build, and who wants to pay extra for a block pallet when you are more or less going to throw it away when the goods it is holding get to their destination? That gets to the real innovation behind block pallets. Essentially block pallets have gained a foothold in the US because a deep pocketed player came in with a different business model. Here is how the Cabinet Magazine article explained it.
CHEP, a subsidiary of Brambles Limited, an Australia-based multinational corporation, is the largest pallet business in the world. The company earned $3.5 billion in pallet-related revenues during fiscal year 2013, and in many markets has achieved pallet monopoly. CHEP’s roots stretch back to World War II, when the American military shipped millions of palletized loads to Australia. At the end of the war, those pallets were abandoned, and CHEP was formed out of this accumulation. After four decades of growth and expansion, the company entered the US market in 1990, in what amounted to an obscure case of military blowback.
CHEP doesn’t sell pallets; it rents them. This means that, in contrast to the world of whitewood, where a pallet may change ownership many times, CHEP maintains control of its pallets throughout their lives.
Stated another way, the logistic innovation of the block pallet was only viable with the business model innovation of renting pallets. Note that CHEP cannot really control where its pallets go. It’s not for them to say that P&G can only send its pallets to Costcos in the midwest. If P&G needs to ship to the west coast, they’re going do that. This necessarily means that CHEP needs to be able to retrieve its pallets from around the country. And if you are going to set up a system like that, you might as well as go big. CHEP owns 78,000,000 pallets in the US. That’s a scale that disadvantages small pallet yards. At a minimum they cannot offer national service they way CHEP can. As I said, Costco now uses block pallets, but that really means they use CHEP pallets who can service Costco stores from one coast to the other. Still there is a role for stringer pallets. Not every shipper needs national service or is moving so much stuff that small productivity gains are worth that much.