Charles D. Ray Judd H. Michael The Pennsylvania State University Center for Wood Innovation and...

Charles D. RayCharles D. RayJudd H. MichaelJudd H. Michael

The Pennsylvania State UniversityThe Pennsylvania State University Center Center for Wood Innovation and Strategyfor Wood Innovation and Strategy

Challenges & Opportunities in Challenges & Opportunities in the Pallet Industrythe Pallet Industry

Recent Penn State Pallet StudiesRecent Penn State Pallet Studies

Financial Analysis of Alternative Pallet Financial Analysis of Alternative Pallet Systems (2004)Systems (2004)

Prod A

Prod B Dist X

Dist Y

Dist NPD

WWP

RPS

WWP

RPS

$5.00

$3.00 $0.45

$5.00

($1.80)($1.80)$0.90 + $0.75

$0.71

$0.25

Total RPS Cost

$3.00 Acquisition

$1.65 Rental + Transfer

$0.05 NPD surcharge

$0.71 Operational

$0.25 Return Cost

$5.66 / pallet trip

Total WWP Cost

$5.00 Purchase

$0.45 Operational

($1.80) Return Credit

$3.65 / pallet trip

$0.25

$0.71$0.25

Prod A

Prod B Dist X

Dist Y

Dist NPD

WWP

RPS

WWP

RPS

$10.00

$3.00 $0.23

$10.00

($1.80)($1.80)$0.90 + $0.75

$0.71

$0.25

Total RPS Cost

$3.00 Acquisition

$1.65 Rental + Transfer

$0.05 NPD surcharge

$0.71 Operational

$0.25 Return Cost

$5.66 / pallet trip

Total WWP Cost

$10.00 Purchase

$0.45 Operational

($1.80) Return Credit

$8.65 / pallet trip

$0.25

$0.71$0.25

System Simulation 1System Simulation 1

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8

10

12

0 20 40 60 80 100 120 140

Scenario

Pal

let

Sys

tem

Co

st

WWP Random RPS Random WWP Average RPS Average


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2

4

6

8

10

12

0 20 40 60 80 100 120 140

Scenario

Pal

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Sys

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Co

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The Cost of Bark-Free Palletized Unit The Cost of Bark-Free Palletized Unit Loads (2006)Loads (2006)

Bark-Free Wooden Pallet Economics

Charles D. Ray, February 2006

Based on our investigation, we can Based on our investigation, we can assume…assume…

A “debarked” requirement will not significantly A “debarked” requirement will not significantly reduce the amount of “bark occurrences” on reduce the amount of “bark occurrences” on export palletsexport pallets– Debarking not a “complete” processDebarking not a “complete” process– Stats on current pallets made from debarked lumber Stats on current pallets made from debarked lumber

show significant bark occurrences show significant bark occurrences Debarking does not, by itself, yield desired Debarking does not, by itself, yield desired

results!results! Thus, we can assume that EU definition will Thus, we can assume that EU definition will

eventually land on “bark-free”eventually land on “bark-free”

What if it doesn’t?What if it doesn’t?

““DB” marked pallets will be requiredDB” marked pallets will be required Pallet customers will pay for export-grade Pallet customers will pay for export-grade

and marked pallet with assurances of and marked pallet with assurances of problem-free shipmentproblem-free shipment

EU port inspectors will find bark EU port inspectors will find bark occurrences on DB pallets, and quarantine occurrences on DB pallets, and quarantine or return shipmentsor return shipments

Pallet customers will be “put out”Pallet customers will be “put out”

Variable component #4Variable component #4

Economic consequence of rejectionEconomic consequence of rejection 67 of 200 found to have bark67 of 200 found to have bark

– Each pallet carries $250,000 (US) in goodsEach pallet carries $250,000 (US) in goods

– 67 * $250,000 = $16.75 million in goods sitting in 67 * $250,000 = $16.75 million in goods sitting in quarantine (or returned) in various ports of the worldquarantine (or returned) in various ports of the world

Plus,Plus,– Another 9.5% (19 pallets) go undetected,Another 9.5% (19 pallets) go undetected,

And,And,– An additional 13% (26 pallets, or $6.5 million in goods) An additional 13% (26 pallets, or $6.5 million in goods)

may be may be incorrectlyincorrectly quarantined quarantined



Variable component #5Variable component #5

Pallet replacement potential Pallet replacement potential The Likely End Result?The Likely End Result? Companies will never risk this scenarioCompanies will never risk this scenario

– Higher value products will move away from wood Higher value products will move away from wood (85% of export business by value)(85% of export business by value)

– Plastic pallet prices are only .3% – 1.6% of the Plastic pallet prices are only .3% – 1.6% of the average product value on the palletaverage product value on the pallet

– Loss of higher margin pallet marketLoss of higher margin pallet market



So, how can bark-free be attained?So, how can bark-free be attained?

SortationSortation– Pallet cants Pallet cants

» Araman et al, 2003, found that 55% of 823 hardwood pallet Araman et al, 2003, found that 55% of 823 hardwood pallet cants had 1-30% unsound defectcants had 1-30% unsound defect

– Pallet lumberPallet lumber– Pallet componentsPallet components– PalletsPallets

» This study finds about 20% of 5584 of North American pallets This study finds about 20% of 5584 of North American pallets have at least one occurrence of barkhave at least one occurrence of bark

Square-edging to clear lumberSquare-edging to clear lumber Or a combination of bothOr a combination of both

Cost of bark-free regulation to US producers Cost of bark-free regulation to US producers Scenario 1: Bark-free pallets – export onlyScenario 1: Bark-free pallets – export only

VariableVariable CalculationsCalculations Per ExportPer Export

PalletPallet10-Year Cost10-Year Cost

Labor & Admin Costs Labor & Admin Costs

(#6a)(#6a)

4,668 additional employees 4,668 additional employees over 10 yearsover 10 years

$2.54$2.54 $1.05 billion$1.05 billion

Capital CostsCapital Costs

(#6b)(#6b)

412.5 million pallets*412.5 million pallets*1376 companies @ $0-$100,0001376 companies @ $0-$100,000

$0.09$0.09 $36.85 million$36.85 million

Environmental Cost in Environmental Cost in Lumber – Export Only (#6c, Lumber – Export Only (#6c, #7 & #8)#7 & #8)

No impact due to sortationNo impact due to sortation $0.00$0.00 $0$0

Economic Transaction Costs Economic Transaction Costs (#9)(#9)

10% of Total estimated cost10% of Total estimated cost $0.26$0.26 $108.6 million$108.6 million

Total 10-yr Cost Estimate: Total 10-yr Cost Estimate: Scenario 1Scenario 1

$1.05 billion + $36.85 mm + $1.05 billion + $36.85 mm + 108.6mm108.6mm $2.90$2.90 $1,195,535,000$1,195,535,000



* This 10-year total production capability of debarked wooden export pallets is only 55-70% of current export pallet demand, due to productivity losses.

Scenario 2 Simulation of Raw Scenario 2 Simulation of Raw Material Cost IncreasesMaterial Cost Increases

0%

20%

40%

60%

80%

100%

0 20 40 60 80 100

Simulation Hardwood S imulatedHardwood Average

Softwood S imulatedSoftwood Average

Functions shown represent cost impact of Functions shown represent cost impact of yield lossyield loss andand estimated estimated lumber price lumber price increase*increase* on a typical lumber pallet of 20 bf on a typical lumber pallet of 20 bf



The Cost of Bark-Free Palletized Unit The Cost of Bark-Free Palletized Unit Loads (2006)Loads (2006)

Environmental Analysis of Alternative Environmental Analysis of Alternative Pallet Systems (2008)Pallet Systems (2008)

Environmental Impact – Energy Environmental Impact – Energy ConsumptionConsumption

WoodWood PlasticPlasticDiesel for harvesting and transport of timberDiesel for harvesting and transport of timber Diesel and electricity for drilling and Diesel and electricity for drilling and

pumping of oilpumping of oil

Electricity for lumber productionElectricity for lumber production Electricity and natural gas to refine oilElectricity and natural gas to refine oil

Electricity, and wood or natural gas for Electricity, and wood or natural gas for lumber dryinglumber drying

Electricity and natural gas to produce resins Electricity and natural gas to produce resins and convert to pelletsand convert to pellets

Diesel for transport of lumber to pallet Diesel for transport of lumber to pallet producerproducer

Diesel for transport of pellets to pallet Diesel for transport of pellets to pallet producerproducer

Electricity for pallet productionElectricity for pallet production Electricity and natural gas for pallet Electricity and natural gas for pallet productionproduction

Wood or natural gas, and electricity for pallet treatment (optional)

Not needed

Diesel for transport of pallets Diesel for transport of pallets

Electricity for pallet recycling at nth usage Electricity for pallet recycling at nth usage

Environmental Impact – Energy Environmental Impact – Energy ConsumptionConsumption

WoodWood PlasticPlasticDiesel for harvesting and transport of timber

Diesel and electricity for drilling and pumping of oil

Electricity for lumber production Electricity and natural gas to refine oil

Electricity, and wood or natural gas for Electricity, and wood or natural gas for lumber dryinglumber drying

Electricity and natural gas to produce resins Electricity and natural gas to produce resins and convert to pelletsand convert to pellets

Diesel for transport of lumber to pallet Diesel for transport of lumber to pallet producerproducer

Diesel for transport of pellets to pallet Diesel for transport of pellets to pallet producerproducer

Electricity for pallet production Electricity and natural gas for pallet production

Wood or natural gas, and electricity for pallet Wood or natural gas, and electricity for pallet treatment (optional)treatment (optional)

Not neededNot needed

Diesel for transport of palletsDiesel for transport of pallets Diesel for transport of palletsDiesel for transport of pallets

Electricity for pallet recycling at nth usageElectricity for pallet recycling at nth usage Electricity for pallet recycling at nth usageElectricity for pallet recycling at nth usage

SustainabilitySustainabilityFactor*Factor* WoodWood PlasticPlastic

Renewable energy use

Renewable or Recycled raw material

Clean production/best practices

End-of-life scenario

Design and Mfg Optimization

Recovery & Utilization

Health & Safety

Market Criteria (Cost)

Market Criteria (Env. Acceptance)

Market Criteria (Availability)

*Sustainable Packaging Coalition

SustainabilitySustainabilityFactor*Factor* Wood PlasticPlastic

Renewable energy use

Renewable or Recycled raw material

Clean production/best practices

End-of-life scenario

Design and Mfg Optimization

Recovery & Utilization

Health & Safety

Market Criteria (Cost)

Market Criteria (Env. Acceptance)

Market Criteria (Availability)

*Sustainable Packaging Coalition

lumber produced utilized

Date?

FALSE!

FALSE!

…waste is being converted to mulch and chips for bio-energy contributing to our nation’s energy self-sufficiency and greenhouse gas-reduction efforts.

1998

2006?

Lesson…Lesson…

He who controls the study, controls the He who controls the study, controls the message…message…

He who controls the message, establishes He who controls the message, establishes the science…the science…

He who establishes the science, controls the He who establishes the science, controls the minds of the bureaucrats…minds of the bureaucrats…

He who controls the bureaucrats, controls He who controls the bureaucrats, controls the market!the market!

Is there a common thread?Is there a common thread?

These challenges are coming from These challenges are coming from corporate and bureaucratic forces on the corporate and bureaucratic forces on the marketmarket

Appeals to the economic common sense of Appeals to the economic common sense of the market have limited and short-term the market have limited and short-term impact, and tend to match wooden pallet impact, and tend to match wooden pallet companies against each other, not against companies against each other, not against the real, common threatsthe real, common threats

2121stst Century Pallet Business Century Pallet Business

Being in the pallet business in the 21Being in the pallet business in the 21stst century means much more than producing a century means much more than producing a good pallet or providing customers with good pallet or providing customers with good service…good service…

It means influencing the bureaucratic forces It means influencing the bureaucratic forces that are irresistibly modifying the free that are irresistibly modifying the free market into a globally-controlled marketmarket into a globally-controlled market

Influence is a function of sizeInfluence is a function of size

A few large always determine the fate of the A few large always determine the fate of the many smallmany small

Consolidation happens in all industriesConsolidation happens in all industries Bureaucrats make great show of listening to Bureaucrats make great show of listening to

small constituents, but they legislate for small constituents, but they legislate for their large constituentstheir large constituents

Legislation determines your Legislation determines your competitivenesscompetitiveness

How will that consolidation take How will that consolidation take place?place?

One extreme – existing large companies One extreme – existing large companies acquire the resources/production capacity of acquire the resources/production capacity of most of industry and put the rest out of most of industry and put the rest out of business.business.

The other extreme – Competitive warfare The other extreme – Competitive warfare between local/regional pallet companies between local/regional pallet companies resulting in the winners (20%) growing into resulting in the winners (20%) growing into large companies, and the others (80%) large companies, and the others (80%) going out of businessgoing out of business

The Optimal ScenarioThe Optimal Scenario

American pallet producers modify the industry American pallet producers modify the industry model to encourage collaboration through pooling model to encourage collaboration through pooling of resources, products, services, and management of resources, products, services, and management expertiseexpertise

National pools, large and small, differentiated by National pools, large and small, differentiated by customer typescustomer types

Manufacturing capacity, production and service Manufacturing capacity, production and service systems, and logistical costs all optimized through systems, and logistical costs all optimized through the use of the poolsthe use of the pools

Profits differentiated by how well each participant Profits differentiated by how well each participant functions with the business parameters of the pool functions with the business parameters of the pool and constraints of the company’s resourcesand constraints of the company’s resources

And these Pools do what, exactly?And these Pools do what, exactly?

Strive for lowest-cost, highest-quality pallet Strive for lowest-cost, highest-quality pallet service to their target customer group service to their target customer group – under the full intent and compliance of international under the full intent and compliance of international

regulationregulation

– Through the continuous improvement of both its pool Through the continuous improvement of both its pool and individual company management systemsand individual company management systems

– Through the relentless pursuit of design and Through the relentless pursuit of design and manufacturing improvementmanufacturing improvement

– and through increased market control achieved in and through increased market control achieved in part by…part by…

Environmental MarketingEnvironmental Marketing

Regular, ongoing, complementary industry Regular, ongoing, complementary industry studiesstudies

To ensure that the environmentally and To ensure that the environmentally and commercially sustainable advantages of commercially sustainable advantages of woodenwooden pallets are continuously fine-tuned, pallets are continuously fine-tuned, communicated, and legislatedcommunicated, and legislated

ProFlowers is an e-commerce marketplace that sells products shipped from growers, suppliers and distributors to consumers.

The Company's platform combines an online storefront, proprietary supply chain management technology and

established supplier relationships to create a market platform that includes growers, manufacturers and distribution

warehouses.Through their network of suppliers, ProFlowers claims that they

have eliminated some intermediaries from the legacy supply chain, realizing cost advantages and higher margins.

They also claim that their platform reduces or eliminates many of the typical costs associated with traditional retail businesses

including inventory, capital expenditures, labor and administrative expenses.

ProFlowers is headquartered in San Diego, California.

The Bottom LineThe Bottom Line

Complement existing association lobbying effortsComplement existing association lobbying efforts Increase its power in the marketplaceIncrease its power in the marketplace Simplify its interaction with the customerSimplify its interaction with the customer Unify the efforts of unique and individual pallet producers Unify the efforts of unique and individual pallet producers

and recyclers into a cohesive industry strategyand recyclers into a cohesive industry strategy Eliminate unnecessary supply chain costsEliminate unnecessary supply chain costs Provide data to battle the enemyProvide data to battle the enemy Leverage the resources and existing infrastructure to create Leverage the resources and existing infrastructure to create

a whole greater than the sum of its partsa whole greater than the sum of its parts

The WWP Industry needs a common system to…The WWP Industry needs a common system to…

Charles D. Ray Judd H. Michael The Pennsylvania State University Center for Wood Innovation and...

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