Odd Lots - Why the Price of Wooden Shipping Pallets Has Soared

Episode Date: December 13, 2021

The humble wooden shipping pallet is probably not something that most people think about too much. But it's a huge deal. At Virginia Tech, there's a whole center that focuses on pallets and packaging. And like many other things right now, the price has surged, and now everyone is aware of them. So what caused the price to soar and when will things normalize? On this episode we speak with Marshall White, a Professor Emeritus at Virginia Tech, and the country's leading expert on the wooden pallets. We talked about the history of the industry, its market structure, and where things are headingSee omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. And welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, I am really excited about this episode. Are you always excited about episodes? Aren't we both always really excited about episodes? Yes. They are like my children. and I love them all. But I have to say, this one, we've been trying to set up for a while,

and it fits very squarely into, I made a pun, it fits very squarely into our supply chain and logistics episodes from this year. We are going to be talking about pallets. So those wooden crate-like things that you use to actually move goods around the world. I'm very excited about this. As you said, you know, we've been talking so much about logistics and supply chains. Obviously, everybody knows that.

But one of the things that sort of makes the story fun or interesting is there is an infinite amount of depth. And so, you know, it's like, okay, you talk about ships. And then you talk about containers. And then you talk about warehouses. And then you think like in warehouses, there's forklift operators and forklifts lift up things that are on wooden pallets. and the supply chain for wooden pallets themselves, as we know, has been stressed. There's been a huge surge in the price of wooden pallets. Availability is an issue.

And as we know, for many of our episodes, all it takes is one little thing to go missing, and you can't sell it. It's like, you know, you're like, think about a house. If you don't have faucets, you can't sell a house. You know, if you don't, if you have a shortage of wooden pellets, that disrupts everything. And that's sort of one of the lessons from 2022. One thing that you hardly ever think about if there's an issue, It creates problems. Totally.

And I don't know about you, but one of the great things of doing these episodes is you always sort of learn new things. And one thing I learned in doing the prep for this episode is that there is a subcomponent of the producer price index for wooden pallets. And as you might imagine, given all the anecdotes about shortages and what we saw in the price of lumber earlier this year, it's been shooting up. And I think our trade correspondent over at Bloomberg, Brendan Murray, he. actually reported that, you know, depending on where you are in the world, the usual price tag of a wooden palette is something like $9 or $12. And now it's getting up to $15 or more. So clearly some interesting pricing dynamics going on there. And I am very, very pleased to say, we really do have the perfect person to discuss this. He has been described as the elder

statesman of the pallet world. We're going to be speaking with Marshall White. He's a professor emeritus at the Department of Sustainable Biomaterials at Virginia Tech, which I just learned also has a giant statue honoring the palette industry. So, you know, learning tons of new things already. Marshall, thank you so much for coming on. My pleasure. So I'm thinking of a way to phrase this, but, you know, I think a lot of people wouldn't necessarily assume there to be a specialized palette professor at a university dedicated to technology. So why is that? Why are you there? What do pallets have to do with tech? We have an industry and university cooperative that back in 1976 led to the establishment of the Palatent Container Research Laboratory at Virginia Tech.

And basically, the justification when people come by this facility and kind of comment, you mean there is a laboratory dedicated to pallets, is that the statue indicates, the statue you reference indicates palates move the world. It's the largest consumer of wood. And so it has an impact on natural resource and natural resource availability. has a direct impact on the cost of consumer goods. It is, if you will, the critical component in the unit load portion of supply chains

for product moving around the world. It's the interface between all of the handling and shipping equipment and the packaged product. So its performance is critical to success of supply chain. So, God, can we go three hours? I already have like a billion questions about,

no, maybe it won't go that long, I already have tons of questions just literally based on that first answer. Did you say it's the largest consumer of wood? Yes. When you look at the total volume of wood, basically the combination of corrugated packaging and the wood pallet itself really becomes the largest use of wood fiber. Good news is most of its recycled fiber, but it is a huge use. And it makes an impact on decisions in terms of stewardship of fiber. our natural resource. You mentioned research and development of pallets, and I'm curious what that

actually looks like, because when I think of palettes, you know, I think of some pieces of wood that are stuck together. I think I used one of them, like when I was 10 years old, as the floor of a treehouse that I was building. I tend to think of them as a very low-tech item, but what sort of design process or research actually goes into them? It's extensive. Obviously, that's been the prime mission of this pallet and container research laboratory here at Virginia Tech. When you look at that pallet, you don't recognize, you know, from the 10,000 foot view, they all look the same or similar. But in fact, there are subtle differences in each. And we custom design pallets to optimize the supply chain for which it's intended to be used for certain products and certain packaging systems to move through certain supply chains.

We custom design them. We specifically select wood species, the moisture content of those wood species. The dimension of every part that goes into a palette to optimize its performance are critical decisions in the design process. And so a lot of the research we do at Virginia Tech is just studying the relationship between these characteristics of palette design and their performance as, they move through the supply chain. Now, we've done a number of episodes on shipping containers. And, of course, shipping containers, one reason that they're perceived to be revolutionary is there, I guess I would say, fungibility.

They can stack very nicely on a cargo vessel. They can go on a truck. They can go on a train, et cetera, and they all fit together. Do these, do the different types of pallets, and I want to get into the variations, do they all, are they all, like, interchangeable from a supply chain? chain perspective such that any given forklift or any given system to move materials can move, like, are they basic specs of all the different pallets such that they don't need their own handling equipment?

You know, really what you're referring to, Joe, is standardization. Yeah. There is this two broad categories of pallets in use throughout the world. And one of those is a general purpose palette. That is the palette that's designed to support a wide variety of product and packaging systems through a wide variety of supply chains. Our rental pools, such as the CHEP or PECO or IGPS in this country reflect that. That's a general purpose design that's to be used to support many. Sorry, could you just back up? What were the names of the design? The rental, the pallet rental, CHEP is one example, Peko, another, IGPS, another. Okay, they rent pallets.

They maintain title to those pallets as they are being used. But, you know, in terms of total shipments, in total number of pallets, that's less than 50%. Then we have this huge volume of custom design pallets. Those used basically in the industrial goods sector. And in that regards, software are used to optimize those designs for that broader part of the market, which is the industrial sector and non-standardized sector. So there are those two broad categories of palette designs out there. So you mentioned companies which produce and rent out pallets. could you maybe walk us through what the typical, I guess, life cycle of a pallet would actually be?

So if I'm a company of some sort or a business and I order my palette from one of these rental businesses, could you walk us through what the process looks like from production to pallet death, I guess? The pallet rental organizations will often tell you that the life expectancy of the pallet is infinite, and that is because they continually repair and maintain them in the marketplace. Life cycle would be these pallets are aggregated into warehouses, either owned or operated by the rental organizations or subcontractors. their sales organizations have a contract with their customers to supply pallets. It's a supply chain that's very front-end loaded for the rental industry, and that is that the manufacturer of the product, the soap, or whatever, pays the bulk of the rental fee.

They basically pay an issue fee, they pay a palletization fee, and then after a period of time, they pay a certain amount of money per day, if you will, for using that. When that pallet moves through the supply chain, after the product is offloaded, then those pallets are inspected. Some have to be repaired, and they go to a repair facility, and then end up back in a warehouse ready to be reissued. Some are, of course, all not in bad condition and can be reissued right away. Some of the big receivers now, such as Walmart, receives these pallets. If they're in good shape after inspection, they'll be reused immediately within their system. And so that repair continues and continues. Now, in reality, there is a final. Once basically, treating it as a capital asset, sorry to get technical here. No, please. You should retire the palette when it is amortized, right?

and that's the point at which its average cost per use is a minimum, and that includes depreciation and capital asset, includes maintenance costs, and then it also includes the original price of the pallet when it was put into the system. And so at the end of the day, yes, even the rental pallets become fully amortized such that it is better now because of its condition to replace it, okay, and continue to maintain the new structure rather than continuing to maintain the old structure. And these rental organizations understand that very well. One short question, how many years is that, or how long is that typically that full amortization? It might be a $64,000 question.

You know, it varies tremendously, number one. Number two, you're going to love this. It depends. Okay. Very helpful. You know, seven years. eight years, maybe longer. Depending on the number of times, it is reissued and reused. It could be 10 years a longer. Can you talk a little bit further about why the industry emerged with this market

structure of a handful of rental players as opposed to, say, like, why doesn't Walmart just own a bunch of pellets? It takes money to get into that business. You have to capitalize it. It is not an easy business to get into because initially you have to purchase a lot of general purpose pallets, which, by the way, are expensive. Okay, these pallets are expensive. There have been attempts to set up similar programs where people or companies buy in with a certain number of pallets. And there, the title is not maintained and such the responsibility of repair is not maintained. those have not been successful. So we come back to the companies that have been able to find the money to capitalize this and who have the expertise, and there are very few of them.

So this leads into the next question quite nicely, but what are the cost inputs that actually go into making pallets? So I imagine wood would be one of them. And then it sounds like, given the fact that you're repairing these things continuously, it sounds like labor would be the other big one. Well, we have to separate rental and reuse from pallets that are owned and the title changes. You know, there is this whole world where you buy a palette, generally not standard, custom design for your product, for the supply chain, it moves through. And that title gets transferred to the custom, essentially.

And that's one world. And then there's the rental world. But you have in the manufacturer of pallets, Over 50% of the cost is raw material, and that's the wood that goes into it, probably closer to 60 to 70%, depending on the design. You have, of course, all the direct and indirect labor, which could be on the order of 20%, 25%. And then finally, you have things like fasteners, which is really only about 5% of the cost. But as I'm telling everybody, the quality of the nail you use to assemble a wood pallet, has as much impact on performance as does the wood, but it's only 5% of the cost. Don't get me

started on that subject. What kind of wood goes into it? Everything that's generally available, but it's low grade. We do not, and this is important, there's a lot of misleading information out there in the marketplace that we cut down trees to make pallets. You couldn't afford to do that. We cut down trees for housing purposes in the whole softwood sector. We cut down hardwood for millwork. We cut down hardwood for furniture. This is high grade. You want to extract.

A sawmill needs to extract a maximum amount of value out of that log, okay, to justify cutting it down and sewing it. You cannot do that by selling to the pallet sector. So the pallet sector, every tree, every log, has quality wood on the outside of that log, and then the inside, the quality is lower. And so after these mills sell off the high-grade material, then the lower grade ends up going into the palette market. And that's important. But in terms of species, it's whatever's available. In the Pacific Northwest, it's Douglas fir, it's hemlock. In the east, it tends to be. more hardwood. In the central U.S., you'll find the aspens. It's whatever tree grows in that region

that is used by the pallet sector. Marshall, you mentioned the importance of nail quality in addition to the quality of the wood. And I'm curious, again, going back to the sort of life cycle or purpose of a palette, what are the stresses on the actual pallet structure that are most likely to occur? Is it stuff like damp storage conditions leading to wood rot or, you know, just planks basically breaking from the load of stuff that they're actually carrying? Like, what is most likely to happen to these pallets such that they might need to be repaired or replaced? As I explain to my students, every semester, if we could get rid of forklifts, pallets would last forever. It's the impacts primarily of the pallet to handling with devices like forklifts that do most of the damage.

Not all of it, but most of the damage. Palettes after they're unloaded, generally they can be manually handled and carried around and prep for the next use. They're dropped. And that breaks pallets as well. it is not necessarily the load level on top of the palate that breaks the pallet. It's the rough handling it receives as it moves through the supply chains that causes most of the damage. Interestingly enough, though, to get back to your point, fasteners have the biggest impact on resistance to damage.

Because why? Because most pallets, when they're impacted, fail at those connections between the parts of a pallet. And so if we use more and higher quality fasteners, such as the rental companies do, right, to lower their repair costs and lower their damage, it reduces the overall cost significantly of using a pallet, while the cost of the fasteners only 5% of the cost of the pallet. I want to ask a question, you know, you'd talk about at the end, you know, there's a, the rental company owns the palette. sort of a two-part question. But A, how does one know who owns it?

Is there an identifier on every pallet that makes it very clear who the rightful legal owner is or which rental company is behind it? And B, I'm not maybe it's kind of related to this. But can you talk a little bit about the role or how RFID and chips that sort of, you know, could track an item or a palette have changed the palette industry by making it so that you can look up on soft. or where any, or is it the case that you could look up anywhere and know exactly where a pallet is? Well, first of all, the identifying characteristics on the rental pallets are very clear. They're color-coded so that you know which rental company you're dealing with, and there is printing on that palette that declares ownership and title of those palates. And the users of those pallets are well aware of this, because if in the paper,

they lose a pallet, the rental organizations can issue a reconciliation, which means you lost this many pallets, this is what you owe me. So they will keep track of them. With regard to tracking the asset, okay, you've got two issues in the world of ID, whether they be barcodes or whether they be tags, passive or active. And that is, are you tracking the capital asset of the pallet? itself, or are you tracking the product on it that's being shipped? Right now, that technology, as applies to pallets, is in its infancy. We have a lot more tagging going on the packaging and barcoding going on the packaging than we do on the pallets, okay? But it is clear that the growth in that sector of tracking these assets using electronic technology, based on the

palette, whether it be the product on it or whether it be the asset pallet itself, is growing. And it is inevitable that will come. But that is in its infancy at this point. Has anyone proposed blockchain for pallets yet? I've heard it said, and that's all I know. So why don't we get into what's been happening over the past year? I feel like we have a pretty decent lay of the pallet land, so to speak. So we've been hearing these anecdotal reports of a pallet shortage. I mentioned our Bloomberg colleague, Brendan Murray, reported a good story on this a couple months ago.

And we do know that prices have been going up per the subcomponent of the PPI that I mentioned. So what exactly is going on here? In your opinion, is there a pallet shortage and have prices been going up? There is an imbalance between supply and demand. And you can trace that back to the winter of 20 and 21 and the COVID and the shutdown or turn down of our supply chains, all components of our supply chains. And then the resurgence in the spring and the perfect storm of, of, number one, labor shortages.

Maybe the unemployment add-ons were good ideas, but they certainly made it difficult for companies to tool back up with labor. Okay. Number two, climate factors in here. The fires on the West Coast shut down mills. We had a lot of timber that was unavailable for harvesting out there, and that's a huge amount of timber.

And that came on. Then all of a sudden in the spring, guess what? Agriculture comes back in. The harvest is coming. It was a perfect storm of wood raw material, a lack of availability because the mills tooled down over the winter because demand was low. The only pallet sector that really did well during that critical period of the pandemic was the food sector. And of course, that happens to be the largest user of pallet. So those folks continued well, but all other sectors, construction sector, et cetera, phased way down, and it came on gangbusters in the spring. And so we had these huge increases in pallet prices, which you mentioned earlier, indices on pallets doubling in the spring and in the summer. It was even more critical on the West Coast with softwood wood availability and the pallet on the West Coast being made out of softwood indices more than quadrupled on the lumber sector,

and that reflected all the way down. Now, in the softwood sector, they've come back considerably. Pricing has moderated, but in the hardwood sector, the pricing at best is stabilized and still remains very, very high. And what we're trying to do is get back to a balance, okay? Most of the prognosticators are fingers crossed sometime in the mid to late 2022 before we get back to the balance there. But it was a perfect storm in the spring and summer. You have actually noted that previously in the writings I have seen. No labor, no wood for the pallet sector, demand going through the roof. one of the reason softwood came down over the summer and into this fall was because housing starts

came back up. But now you're going to see the price of even softwood lumber and pallets start to come back up gradually into next year and over the winter. So it was that perfect storm. My crystal ball is no better than anyone else's, I believe. So when you say, I just want to walk through some of these factors, the labor shortage, that means just literally the workers at the factories to build pellets, right? Yes, and also the lumber industry.

And again, during the turn down, mills shut down, and people were laid off. Right. And, of course, the government came in and ordered an unemployment stimulus. I think that's great. But people were slow to return to the workforce. I think that's well documented. So, and then you mentioned the fires on the West Coast. And then you said something about agriculture as being.

effector. But I missed that. What was, what's the element of agriculture in this story? Well, agriculture comes back online seasonally in this country. You know, over, over the winter, we are importing from the South, South America, predominantly. But all of a sudden, in the deserts of Arizona, in the early spring, harvest start in the very early spring. And that migration occurs from the deserts into Southern California. And throughout the summer moves north up to the Pacific Northwest, gradually as harvest come in. That was all coming online when all the other demands, non-food demands for pallets and the construction industry was increasing dramatically. That seasonal aspect of agriculture further pressured pricing. You've noted some of the

stories of the produce industry scrambling to find pallets. CHEP, its inability to supply. pallets to its customers scrambling. It was a massive scramble imbalance between supply and demand that was just a little bit crazy. So this is also something I wanted to ask you, but, you know, when there is a shortage of pallets or a scramble for them, as you just described it, and prices are going up, what can companies actually do to cope? And what did we see users? of pallets actually do over the past year? Yeah, first of all, they switch wood supplies. They find they import wood or lumber that's available to make up for the deficits domestically.

So it's basically the pallet industry trying to find raw material dealing with labor, automating as best it can to replace labor. But it's that scramble for wood. Now, as far as their customers are concerned, They also scramble for pallet supplies. They start moving between vendor suppliers. You know, they have incumbent vendor suppliers of pallets. They have to change around and find it, but there's no magic there.

There's no magic. Are you saying, oh, they're going to start using a palletless system in their supply chain? No. Supply chains are designed around pallets. You can't all of a sudden switch to slipsheets. which might be available, which is a so-called palletless system. You can't do that. You certainly can't do that overnight. Could you switch to clamp loaders because there are no pallets available? Very little opportunity to do that because your packaging is not designed for clamp loaders. So it was a fantastic

scramble for pallets going into bone yards, salvaging broken pallets and repairing pallets that we wouldn't not have repaired before because it was uneconomical, but now it became economical. And so that helped fill some of the gap there where we saw these piles of pallets, which historically would never be repaired. We're starting to be repaired and put back into the market. That's what was going on. You know, when we talk about supply chain issues overall, I mean, that, and people talk about supply chain logistics problems, stress, you know, it encompasses. is a few different things. There's maybe high demand for goods, as you've said, that puts stress on the system. There's obviously just sort of issues with production, as you described with the shortage of labor and the fires and so forth.

One of the other elements, though, that comes up in some of the other episodes is the goods, the logistics material being in the wrong place at the wrong time. And so there are stories of, you know, the ship's going back to China without containers because they didn't want to wait around because there weren't many exports. or there might be a bunch of truck chassis that wind up at one port outside Chicago, but that's not where they're needed right now. Has the pallet industry seen anything similar such that because of changing consumption patterns, that there are pallets that are idle at the same time. There is extreme demand for them somewhere else in the country. Haven't seen that.

It's interesting. It's an interesting point. Again, for the industrial sector, pallets are generally, not warehoused and reused. They're often just one way. Why? Because those pallets are a unique design, which cannot be used in any other supply chain. The rental folks, sure, they had inventory of pallets, but those are located strategically around the country. So to the extent they had palettes, they were available, I don't note that there were any regional issues. Now, one fact you need to be aware of, we do not palletize much product in freight containers. Freight containers are what we call

floor loaded predominantly. Why? Because that pallet takes up space and that space is very expensive. In fact, right now, it's extremely expensive. And so when that container reaches its destination, it's at that point it is palletized. And that could be East Coast, West Coast, anywhere in the country. And generally, there are going to be pallets in those regions in order to palatize the floor-loaded material upon arrival. I didn't realize that previously. In my mind, I was envisioning, like, say, like a bunch of iPhones. or teddy bears or whatever is in a container sitting on pallets and then being removed from the containers.

And I hadn't thought about them being floor loaded. So this might be a good time. Can you just actually walk once again through like the very basics of like where in the supply chains the pallets sit and move? And so the ship comes to the port and then what happens? When does the pallet enter the picture and where does it go and where does it wind up? Well, that's not the right place to start. What you do is you start at the manufacturing site for the phone. And I won't mention names, but let's say a phone.

And quite frankly, let's face it, it's China. And so we have at the manufacturing site, the product is packaged. There it is put on pallets. And it will be moved to the port on pallets, preparation for export. But it's at that point that the product is floor loaded into the container for shipment to whatever the destination country is. And then once that container arrives at a port, of course, it's not going to be unpacked at a port.

It then has to leave the port on trucks, and we all know the availability issue on trucks, has had a huge impact on our supply chains here. That chassis, with the freight container on it, goes to a destination. Generally, it's going to go to a distribution, center or a regional distribution center of the retailer or the distributor. It's at that point that it's at a loading dock. It is unloaded and palletized again. And then it is moved into storage in that

DC or if it's a cross dock on that pallet, it just moves from one side of the cross dock to the other and ships to the brick and mortar store, if you will. Or in the case of Ammoner, to a fulfillment center, and of course, the last mile typically is store door and that is not palletized. It's a very typical supply chain I just described. Real quickly, the palletization process of moving an item onto the palette, how manual is that? Is that something that takes a certain number of workers, like get it right on the palette? Or is that fairly, is that somewhat automated or is there are a range of that process? Well, obviously, it depends on, number one, the country we're talking about and the availability of labor. Historically, in China, they'd had huge availability of labor.

So there was a lot of manual palatization, and their supply chains were somewhat manual. That's changing very, very rapidly, even in Asia. Korea has always been that way, where now, instead of manual, because of the cost of labor. They are automating palletization. And in this country, it's becoming pervasive. And generally, we have what's called row strip palletizing, where we push layers of packaged product onto a palette, and then we change the elevation of the palate, push another layer on and another layer on, et cetera, et cetera, until we fully palletized. Those are highly automatic. We even use robotics where you want to miss, mix skews on a pallet. You use robotic picker stations, and these are literally robots that we see on television all the time. That is in this country and most countries rapidly replacing manual

palletization. So this relates to something else that I wanted to ask you, which is what are the economic decisions or factors that go into a customer deciding whether or not to actually use pallets. And I'm guessing for a lot of them, palettes would be the de facto way to move things, but you did mention that there are palletless systems in the world. And I imagine you could probably also go the other way where instead of putting things on pallets, you're putting them in full-on wooden crates or something like that. So how do companies that make and ship goods actually make the decision to use pallets or not? Yeah, set aside crate. that's going to be unique structure for fairly unique, if you will, package product or product,

heavy equipment, for example, et cetera. If we set that aside, the decision is along these lines. What is the cost of storing and moving my product, palletized or not palatized? For example, on slipsheets, the cost is the rate at which I can move, product from actually if the customer wants it on a pallet to use the slip sheet to move it to a palette and remove the slip sheet or leave it on there. Okay? That's a slow process. Number two, with slipsheets, it's the weight limiting. You can't put very, very heavy loads on a slip sheet, which is corrugated sheet or sometimes a plastic sheet. So you have the slow cost of movement

and you have limitations on what you can put on slipsheets. Clamp loaders, another non-palatized. You have to invest more in your packaging system to withstand the compression of clamp loaders, and you don't want to use or move fairly fragile products, although a lot of widescreen TVs are moved around with clamp loader systems. Also, you have to retrofit your forklifts with slipsheet devices, or clamp loading devices, and again, clamp loading is slow. We can move product a lot faster on palliative.

How are you storing your product? If you're going to use drive-in racks or rack storage, you can't use a slip sheet, and it has to be palletized to withstand the bending stresses within a rack of the load on top of it. So those are the factors that go into the decisions. And so what we find, is that by far, the products being shipped and moved, unitized, are on pallets, very small percent, one, two percent, maybe in the world of clamp loading and in the world of slip sheeting. Appliances are moved with the baseload system. That is a non-palatized system. So there are a few out there, but they're very small. Why? The cost and the limitations of the capability of non-palletless systems. Can you say what was the name? How were, how did you say appliances are moved?

Baseload. B-A-S-A-L-A-L-A-D. Basilode is a unique patented process where you lift a corrugated crate from the top with a special device on the forklift. A lot of appliance comes. A lot of appliance companies use that. It's palatless, but some of them use pallets as well. I'm going to use the, I already know I'm going to spend the rest of the day just looking at YouTube videos of these different kinds because these are all new ideas to me and I have to visualize them. And I already see on YouTube there's a bunch of, they show the different versions. Let me ask you another question. I looked at one of these pallet rental places and they also offer plastic pallets. And one of the IGPS, which you mentioned,

mention, they have a big thing on their website. Plastic pallets are strong and durable. What is the limitation on there? How big of the market is there? And what is the opportunity for going something other than what? The opportunity is there to justify. And my friends at IGPS will be first to tell you that they can't afford, that's a more expensive pallet. They can't afford to have it idle and sit in warehouses. So if you look at where the IGPS or plastic palette fits, it's where you have a lot of turns. You're going to reuse that palette more often. That then can justify the added expense of a plastic palette. It is more durable. Some are repairable. Some are not. Okay. And your repair costs go way down. If you look at rental companies on wood pallets, and by the way, IGPS, what's their

highest cost? It's moving empty pallets around, okay? The second highest cost on the wood side is going to be repair, repair and maintenance cost. And in the world of IGPS, there's much less of that because the pallets are more resistance to shocks and impacts in the field. But it's a significantly more expensive pallet. And please understand, you know the price of wood went up. Well, the price of plastic is high as well. So they're dealing with the same raw material issues that the wood pallet are. And that's the majority of the cost in these pallets. But plastic pallets are growing in terms of their use in this country. Still a small percentage. Quite frankly, there's not enough plastic resin if we wanted to make any wholesale switch. There's just not enough resin around to do

it. So that's another limitation as well. Let me give a plug to our blog here because anyone who was reading it, any oblot subscribers would know about the plastic shortage and what's been going on in resin prices a couple months ago because I wrote about it. But this also brings me to another question. You know, in terms of weighing plastic versus wood, there is this interesting Australian company called Brambles that I think is supposed to be partnering with Costco to make plastic palettes. And you can imagine that Costco would be a very, very big customer of palettes given their business model. But my understanding is that Brambles has yet to make a decision on whether or not

it's going to do a full conversion from wood to plastic. And I'm curious, like, why the hesitancy. I know you mention the cost, but it kind of feels like for a big customer like Costco, it might make sense. And yet there seems to be some reluctance to do it. Well, they have to prove that in that supply chain, the pallets will not be lost. And that's a critical issue. This is a very expensive palette and losses which do occur. It's just a question of what percent losses occur. Look, Costco sees for their supply chain a significant advantage of a plastic pallet.

And CHEP is, CHEP, which is a division of Brambles, obviously, you know, is going to respond to that because Costco uses a lot of their wood rental pallets. Okay, they are a big customer. When you get into pulling a plastic pallet, you have to track those. You can't lose them because of the cost of replacing that asset. So Costco, which is a significant chunk of CHEP's business, obviously wants to respond to their customer's desire. What is it about Costco's business model per se? And you mentioned that plastic pallets, they kind of are only economical when there are a lot

of terms. What is it about Costco, particularly where they might view this as their future? I'm going to say it simply, the store, the Costco entity you go to as a warehouse. Right. that supply chain is collapsed, if you will. There are DCs, but most of it's direct, unitized directly to the store from which you buy from the pallet. And so they can turn more quickly. Number one. Number two, it's a little more of a closed loop because you have one less stop, if you will, along the way in their supply chain. So it could work. Chepp's idea is that

as the supply of a plastic pallet, if it does work, the test is successful, exceeds maybe Costco's demand. They could start to filter that outside of Costco. It gets risky, though. It gets very risky because then the potential for losses increase. But the test is ongoing, and we'll see the result, hopefully, in a few months. So I guess I just have one last question. I mean, what's exciting to you? What's the future? I mean, we were just talking a little bit about plastic pallets, but in terms of areas of research, and one of the things that probably surprises both of us is that, you know, the idea of like a whole institute for the study of pallets, the institute goes on. What is like the hot new thing or the thing that people in this

space are excited about for the next generation, the future of palates? Don't just focus on the palette. That's the future. What we need to do is design the packaging and the palette and the equipment used to move unit loads together as a system of interacting components. I call that systems-based design of the global supply chain. It's more important to understand how does the palette mechanically interact with the packaged product and mechanically interact with all of the unit load handling equipment, including trucks and trailer floors. It's understanding those mechanical interactions and using that understanding to go from

component-based design, where we're just focused on reducing the cost of a conveyor in a DC without thinking about how it interacts with the palette. And we're all focused about reducing the cost of that plastic. bottle without thinking about how does the palette design affect that design. We have three design communities that are not interacting enough. And therefore, we need to move from component-based design to systems-based design of our global supply chains. Yeah, this kind of feels like a recurring theme with supply chains where one aspect of it is just not talking or efficiently interacting with another aspect of it.

It's true. Can you just give, just to help conceptualize this, can you just give an example of like, I mean, it sounds very good, how the product interacts with the palette. But can you give an example of an industry or a product that has sort of like, there's a unique solution that's different?

Like, just walk us through an example of what you're thinking about. The OEM supply chain of the automotive industry has been pretty good to implement systematic design. They have done a very excellent job, and I've been involved through AIAG, the Automotive Industry Action Group, in assisting the industry to implement this philosophy. And they've done that by using a returnable packaging system as part of the OEM distribution supply chain. Many of the returnable packaging systems are plastic, and the palette is plastic as well.

and they've modified how they handle this through the portions of the supply chain. That's an example of a pretty significant success of implementing this very strategic approach. And it's a closed loop, so it's easy to do it, isn't it, between OEM and the assembly plans? Right. The beverage industry, to some extent, and the brewers have the similar capability because we're not going down to retail. We basically have a shorter supply chain where we can just focus on the brewer down to distribution centers and the brewer distributor, and then the packaging components go back in the case of a palette. The automotive industry has expanded that to go towards reusable packaging systems

as well, you know, unless we've got a bottle bill, we don't do much in the brewing sector. Marshall, I think that's a great place to leave it. Really appreciate you coming on and explaining the palette industry in so much depth and detail. But really fascinating conversation. Thank you. Yeah, that was fantastic. Thank you so much. It is my pleasure.

As you can tell, I enjoy these forums. I'm a teacher at heart. And so don't hesitate to call upon me again if it's appropriate. So I'm so glad that we finally got to do that. episode. And it does feel like, I don't know, I'm just thinking we sort of started with the shipping industry and then we got into containers specifically. And it's only now that we're sort of getting into even smaller subcomponents, which would be pallets. And I kind of, I'm wondering what comes next. There must be another thing. I mean, you talked about connectors in the metal connectors.

And of course, that came up. The steel trust plates, of course, came up with stints and dean on lumber, So I don't know whether we want to go fasteners or trust plates, but I did speak to someone in the trust plate industry who had some very strong thoughts on the phone. So I think maybe the next one is a trust plate one. On the other hand, someone on Twitter said there's like some nozzle that they can't get for like a gas thing that's like messing up like all home gas heating. And it's just like one little piece. So there's a million stories still to do on just all. all the little things that we're supposed to, that we usually never think about, but this year we're all very aware of. Yeah. And I guess the theme that keeps emerging is a, yes, this is the year that we all suddenly became aware of supply chains and how normally they work.

Yeah. We don't really think about it. But this year we are thinking and talking about it a lot. But then secondly, all of these things are sort of isolated industries unto themselves. And again, to Marshall's last point, that. that seems to be problematic when there is an issue. It doesn't feel like, you know, the guy that's making trust plates is necessarily talking to the lumber company or the home builders. And it doesn't feel like maybe the palette makers are talking to, I don't know, like the forklift drivers about how to ring better efficiencies out of the entire system.

I thought that was really interesting. The idea of like the future is not necessarily like, changing the palette per se, though there are, is evolution and palette design, but in communication. And that is like, right, like, as you said, and, you know, we had that episode with John Porcari, the White House Ports envoy, and he made the case that, like, communication alone is maybe, you know, not can increase throughput, even if you're sort of like physical stock of capabilities is fixed.

And granted, you want to improve the physical stock of capabilities, but sometimes there's gains to be made from communication. So, like, long term, just the idea that, like, well, instead of just thinking about making a better palette, thinking about how the bottle companies or the TV companies or the whatever food companies can think about integrating the products with the palette as like the next thing that communication is a very, like, a very fascinating thing to think about, I think. Yeah, totally. And definitely a recurrent theme on these episodes. Shall we leave it there? Let's leave it there.

All right. This has been another episode of the Odd Lots 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. Follow our producer, Laura Carlson. She's at Laura M. Carlson.

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.