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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let
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WWP Random RPS Random WWP Average RPS Average
System Simulation 2System Simulation 2
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let
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tem
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WWP Random RPS Random WWP Average RPS Average
System Simulation 3System Simulation 3
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let
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WWP Random RPS Random WWP Average RPS Average
System Simulation 4System Simulation 4
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Pal
let
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tem
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WWP Random RPS Random WWP Average RPS Average
System Simulation 5System Simulation 5
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Pal
let
Sys
tem
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WWP Random RPS Random WWP Average RPS Average
System Simulation 6System Simulation 6
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Pal
let
Sys
tem
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WWP Random RPS Random WWP Average RPS Average
System Simulation 7System Simulation 7
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Pal
let
Sys
tem
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WWP Random RPS Random WWP Average RPS Average
System Simulation 8System Simulation 8
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let
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tem
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WWP Random RPS Random WWP Average RPS Average
System Simulation 9System Simulation 9
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Pal
let
Sys
tem
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WWP Random RPS Random WWP Average RPS Average
System Simulation 10System Simulation 10
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Pal
let
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tem
Co
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WWP Random RPS Random WWP Average RPS Average
Recent Penn State Pallet StudiesRecent Penn State Pallet Studies
Financial Analysis of Alternative Pallet Financial Analysis of Alternative Pallet Systems (2004)Systems (2004)
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
Bark-Free Wooden Pallet Economics
Charles D. Ray, February 2006
Bark-Free Wooden Pallet Economics
Charles D. Ray, February 2006
Bark-Free Wooden Pallet Economics
Charles D. Ray, February 2006
Bark-Free Wooden Pallet Economics
Charles D. Ray, February 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”
Bark-Free Wooden Pallet Economics
Charles D. Ray, February 2006
Bark-Free Wooden Pallet Economics
Charles D. Ray, February 2006
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
Bark-Free Wooden Pallet Economics
Charles D. Ray, February 2006
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
Bark-Free Wooden Pallet Economics
Charles D. Ray, February 2006
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
Bark-Free Wooden Pallet Economics
Charles D. Ray, February 2006
* 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
Recent Penn State Pallet StudiesRecent Penn State Pallet Studies
Financial Analysis of Alternative Pallet Financial Analysis of Alternative Pallet Systems (2004)Systems (2004)
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…
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