Odd Lots - What Wooden Pallets Have to Do With Russia's Invasion of Ukraine

Episode Date: April 5, 2022

Most people don't think much about wooden pallets -- and that might be true even of people conducting large-scale military invasions. Recent reports claim that Russia's invasion of Ukraine has been hampered by a lack of pallets, making it more difficult to move the vast amounts of supplies needed to support soldiers and tanks. Meanwhile, the disruption of Ukraine's lumber industry could make a global shortage of wooden pallets even worse. On this episode of the Odd Lots podcast, we catch up with Marshall White, Professor Emeritus at Virginia Tech, to talk about the role of the humble wooden pallet in warfare.See omnystudio.com/listener for privacy information.

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That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Hello and welcome to another episode of the Oblots podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, I feel like if we've learned one thing over the past year or two, it's that supply chains rule everything around us. Yes.

That's exactly right. Everything, I mean, you can't talk about. There's something I've been thinking about a lot, actually, which is that you really can't talk about a good, any sort of good, whether it's a washing machine, or a piece of lumber for a house or something like that without talking about the system that brings it. And so to some extent, even to talk about like goods and services as distinct categories of economic spending or whatever is kind of a fallacy because in the end, there is nothing without the services that brought the good to you or brought the good to the factory or brought the sort of like the parts to the factory. It's all intertwined.

I agree with that. So one of the things that we're realizing right now is that supply chains also play a very, very big role in military conflicts. And to some extent, I guess that would be expected because in a military conflict, essentially you're moving lots of goods and people from one area into another area. But in another sense, it's kind of surprising when you read headlines along the lines of shortage of pallets is hampering Russia's invasion of Ukraine. Right. There have been a lot of people talking about how, like, wars are very big exercises in supply chains and logistics planning. And I guess it stands to reason, but it's not something that had occurred to me up until very recently, that a lot of the supply chain stresses that we're seeing across the economy would also affect the ability of nations to conduct war, which, of course, needs a lot of metal and other goods and food and energy. and oil, the same thing everyone else needs. And there was a Twitter thread by talking about palates. And of course, we've talked about palettes. We have indeed. So I'm pleased to say we are going to be continuing our conversation about pallets in today's episode. But we are going to be focusing on military applications of palettes, which there are a bunch, apparently. We are bringing back Marshall White. He is, of course, a professor emeritus at Virginia Tech. And, you know,

considered America's leading expert on wooden pallets. So Mark, thanks so much for coming back on the show. Tracy, Joe, thank you very much for having me back. Thanks for coming on. Yeah, absolutely. So maybe just to begin, can you explain what exactly, what role do pallets play in the military, in offense slash defense? You know, I work with the corporate world in supply chain efficiency design and the role of the palette, which of course is the interest. between all of the materials handling equipment and the product being shipped. So the component is critical, and thus I've devoted an entire career to it. But there's a difference in the goals and objectives of military supply chains and corporate commerce supply chains.

In the corporate world, we're continually focused on reducing cost, keeping it as lean as possible, but still versatile and reliable. So it's cost reduction. The military is very different. Number one priority is what they call preparedness. That is making sure the soldiers are prepared on the battlefield and therefore getting them what they need, when they need. And cost, and I appreciate this, is a secondary issue in the military supply chain. So when you look at designs and efficiencies, there are significant differences between military and corporate. karma's supply chains. And then, if I might, just continue by saying that the way we make either

supply chain more efficient is we delay as much as possible downstream the handling of each's. In the case of the military, individual boxes of munitions, what you want to do is unitize as far down the supply chain as you can, quite frankly, as the military says, onto the integrated battlefield. You want palletized products all the way down. That's how you gain efficiency. Ironically, it's the same in the military world as in the commerce world and those we design. But we will have very specialized equipment to do this in the military. I'm not an expert on Russian supply chains, but I've worked with our military, both the Department of Army and the Department of Navy, in designing components of the supply chains.

So that's how I respond in a general sense to the differences between military and commerce, but also the similarities. And one more comment, you both are absolutely correct. Supply chains win wars. And I think it's Dwight Eisenhower. who made that quote back at the end of World War II. You know, it's really interesting this point, and I hadn't really connected it, that fundamentally military supply chain strategy is going to be a little different and less focused on cost. And of course, sometimes that's infamous.

I recall in the 1980s, who was the huge scandal of the Pentagon purchasing $900 ash trays for airplanes. and that seemed excessive to everyone, and it probably was, but there was like some argument that, you know, you couldn't just have a typical glass ashtray on an airplane because, you know, in a dangerous situation, it could shatter and create all kinds of problems. Still, $900 seemed excessive, but it does seem as though military procurement, military goals are clearly not about costs. For the vendors into the military supply chain, for the experts and consultants, how does that sort of like change the thinking in terms of what the military needs?

You know, it does dramatically. Now, don't get me wrong, the military is focused on cost, and it is part of the priority, but it's not the highest priority, as I mentioned. Okay, so in our world of pallets, there are standard munition pallets, the 1085 pallet that's been around for a long, long time. It's a wood pallet. Something a little bit different, though, we had a research project with the Department of Army here at Virginia Tech years ago to, quote, harden the wood palate. And what we mean by hardening it is to make it so you could decontaminate it from chemical or biological weapons in this theater of war.

or radioactive fallout in dust. And to that end, we developed a procedure of treating wood pallets so that they could be easily decontaminated of these weapons on the future. And you have to understand a chemical weapon is delivered as an aerosol through the air. And generally, it is designed to soak into tissue. I mean, these are very, very lethal weapons. And by the way, in the news, we heard a little bit about concern of these weapons use of mass destruction in this theater. I certainly hope it never happens.

But that's giving you one difference here. And that is a performance level of a palat that's very different that can be decontaminated. Now, obviously, in commerce, that's not necessary in the corporate world. So there are differences. the chemical agent resistant coating, which you see on all the military vehicles, that's the purpose of that coating. It could not work on wood pallets. We had to get a different treatment. But that coating is used on almost everything so that should these weapons be used, the area around these soldiers can be easily decontaminated. So there are some very significant performance differences.

Can you go into that a little bit more? So obviously, pallets matter for a military conflict, and the U.S. Army seems to be actively thinking about this because they're investing in particular coatings that will protect pallets from chemical or, I guess, nuclear fallout, that sort of thing. What are we actually seeing in Russia in terms of its palette capabilities? And how do they differ from an army, like, like the U.S. Army, and what does it mean for the Russian Army's efficiency? Yeah, again, I'm going to have to be careful here, Tracy, in claiming to have an expertise in the supply chain, the military supply chain of the Russians. I really don't know. I saw the images on roads that we've all seen of these stalled vehicles, right, on these roads in the Ukraine or outside the Ukraine leading into the Ukraine. It indicates to me, clearly, to anyone. That's a failed supply chain. For one reason or another, fuels weren't delivered. And so these vehicles are stalled. Clearly, those vehicles were intended to be part of

a supply chain to transport stores and munitions. I mean, that's what the military moves. Munitions, I think you understand what those are. But stores are everything. else. Clothes, shoes, food, those are what's called stores. And that looks to be a clear failure. Now, I don't know, I didn't get close-ups on the vehicles. I did read the article that you cite regarding pallet use. Listen, wood pallets used in Russia, in commerce, are similar to what we use here. there's nothing different. Perhaps they're metric and dimensions compared to U.S. customer units, but they're the same availability of pallets could be a problem in this Russian supply chain.

I cannot comment as to why that is. Okay, I find it strange, maybe lack of planning. But to take, and I don't want to bend your ear too much for the listeners, but take the U.S. military, They have specialized equipment. The M1075 is a vehicle that literally takes palletized loads all the way to the soldier on the battlefield. It's a rough terrain vehicle. You can find it described on the Internet. These are extremely efficient ways to deliver munitions in stores all the way downstream.

Again, the key is to stay as far away from handling each little. box independently, which we saw in some of those articles you cited that the Russians are having to do. It indicates clearly some inefficiencies in their supply chains and movements. Can you actually explain that a little bit further? And for listeners, there's actually a Wikipedia page on the M1075 and other palletized load system trucks for the United States Army. So you could pull that up while you're listening. But can you just expand on that last point?

What do you mean by like, you just clarify and build out what you're seeing and what's a bad way of handling munitions and stores? If you have 90 boxes on a pallet and they're consolidated on a pallet, one could assume set aside cost of handling equipment. But one can assume it's 900 times more efficient than handling each individual box. Right. And so eventually at some point, you have to handle that munitions. But now here's another story, and I just enjoyed so much working with the military and learned a lot from them about logistics. You know, the 120mm shell in the tank, a rearm tank, if you do it manually, loading boxes to the tank and then loading and rearming the tank could take 30, 40 minutes. The system of tubes and resupply is automatic.

you can resupply a 120 millimeter tank in five minutes. That's how efficient these processes and devices are that the military uses. Now take the Navy. Okay, the Navy has this whole group of what they call Lewis and Clark over the water resupply vessels. These are warehouses on the water, handling unit loads, palletized loads. If you walk into the Lewis and Clark, the holds, the stowage holds in there, looks like a warehouse, highly automated, ASaurus, automatic stacking retrieval systems, robots inside these vessels, the efficiencies are remarkable. And as Eisenhower said, you know, supply chains win wars. Take Dwight Eisenhower, he's president in the 50s. What did he do? He put in the interstate highway system. He thinks logistics. He thought and understood how important the interstate highway system was going to be to commerce in this country.

Goes way back. A little bit of a history list. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it. a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your

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So the last time we had you on, Mark, I think it was in December to talk about the general shortage of pallets and the fact that prices had gone up quite a lot. I think they were, they used to be something like $9 or $12 per wooden pallet. And back in December, they'd gotten up to something like $15 per pallet. there's another supply chain strain that emanates from the Russian invasion of Ukraine. And that is that apparently Ukraine exports a lot of the wood used to make wooden pallets. And so, for instance, before we started the show, I saw the European Federation of Wooden Palette and packaging manufacturers. They basically warned that the conflict in Ukraine is expected to cause significant pressures on the supply of wood. there for palettes and packaging. Is that something that's on your radar? Yeah, you know,

that is really fascinating. This is something I learned. The eastern part of the Ukraine is a wood bread basket. I was astounded to learn from, for example, a client I have in the Czech Republic, where they said, Mark, and this is not the military now, they said, you've got to realize we have lost that entire source of wood. And it was critical to Europe, that supply of wood. So your point is well made. I don't expect the Russian supply chain to depend on indigenous collecting of pallets. Maybe they are. Okay, there. But yes, so goes wood supplies. So goes the pallet supply. Is that a global, fungible market? If Europe is facing a pallet shortage because European countries get a lot of their wood from Ukrainian timber, will that theoretically, if it becomes acute enough, spill over into either availability or price in the United States?

Don't think so. We are a woodbred basket. Clearly, we have had historically the last time I was on. You know, you asked, why the prices? It's supply and demand. But the lumber industry that feeds the wood pallet industry is rubber band. They can come back online relatively quickly. And with housing demand still fairly high, we have a lot of woods available here.

I don't believe that's the case. The other thing, when wood supplies become critical in a region or a country, and this was true of the U.S., over the years, in the past decades, what do they do? They go elsewhere in the world in import. Does that increase the price of the pallet? Sure it does. Sure it does. But it is remarkable how resilient long-term, long-term wood supplies are to a huge consuming sector like the wood pallet sector. Will there be interim times in which there is some impact on supply and demand? Yes. But we're seeing the prices of pallets stabilized now in this country. And one of the reasons is the clear adaptation of the raw material side of that supply chain.

So, yes, short term, my friends, for example, in the Czech Republic and Melnick, that company told me, yeah, it's hurting them short term. They're a veneer company, so they're buying very high-quality logs. but long term, actually one of the reasons I'm working with them is to bring those logs in from the U.S. Sorry, can you go into prices in a little bit more detail? So I mentioned back in December, I think prices were at almost $15 a pallet, something like that. You say they're stabilizing at what level and how low do you think they might go or how long might it take to normalize? Yeah. Supply and demand is it's still tight.

It is still tight. So when I said stabilized, they've moderated at that level. Okay. Will they come back in price? Very slowly. Will we recover, let's say, the $10 to $15? No, that's not going to happen. That is more the nature of the market, okay? It, just like oil prices. The price of barrel goes down. Maybe it takes a little while to reach the pump. It's the same in the palate sector. Okay? There will be a lag.

So when I say that the prices are moderated or stabilized, excuse me, that is correct. How much have they come down? Only a little. How much will they come down? A little bit more than a little. Okay. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, cleanup, and half your Sunday gone.

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Other than prices, is there anything that this whole period of intense stress on either pallet company or users of pallets are going to, that will lead to fundamental change, either in terms of construction techniques to become more efficient or usage techniques. Are there any productivity gains that we're going to see come out of this in your view that will pay off lasting dividends even after this sort of like intense supply chain imbalance that we're saying?

Yeah, I think we see a migration towards more reusable. I think it makes sense. And to make reusable, even in the world of pallets work, we have to manage them. That becomes a key. Okay? So we're going to see that continued expansion of reusable in the case of wood pallets, like the rental pallet. They, Jeff and Peko have been having trouble keeping up with a number of issues. Okay, that's fine. But those pallets are reused. And of course, in the plastics and the non-wood, We continue to see that growth. Okay. So, yes, I think we'll see a trend towards more reusable slowly in this world.

And that does enhance efficiencies, okay? If you can manage them and not lose them in this big country, in this big country, that's a challenge. But I think that's one of the things we are going to see occur. Well, Mark, we're going to have to leave it there. But thank you so much for coming back on all. really appreciate your insights into military applications of palates. Thank you. Great to see, Joe.

It's been my pleasure. So, Joe, that was a fun catch-up with Professor White. It is amazing how all these supply chains just operate in the background, sort of hidden, and you never really think about them until something actually happens, and then suddenly they come to the forefront. Absolutely. And it's interesting, like, look, we don't really have tremendous visibility into many aspects of the current war, let alone the specifics of Russian pallet supply.

I mean, I think a lot of people are just speculating. But based on some of the images and the broader issues, it stands to reason that this is like a source of stress for the military as it is for many others. And thinking about some of these principles at play about unitizing military goods, palletizing them, and whether that's being done effectively and how important that is to the sort of execution of a war is really interesting. Yeah, I mean, look, it wouldn't be the first time that a battle is won or lost based on supply chain issues. And you do see some of these photos of Russian soldiers bringing out boxes from tanks and trucks and things like that.

And it does seem like they're, I don't want to say, disorganized, but pallets do seem to be missing from some of those images. It seems extremely inefficient. It's also just interesting, like hearing Mark talk about the sort of the differences in working with the military versus both in terms of, you know, just the priorities are different. It's not always about finding the absolute cheapest and there are issues of sustainability and durability and being able to weather different kinds of environmental conditions than a commercial palette. So very interesting to get a little bit of taste. It's not our normal thing, but again, a little bit of a different. taste for how the supply chain story fits within the military context. Yeah, also wild to hear about the U.S. Army developing a coding for military pallets to protect from chemical warfare.

Absolutely. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. A big thanks to our producers, Colin Tipton and Magnus Henrickson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca today, and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening. On April 4, 23, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm.

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