very day, trucks back up to the dock at Tanimura & Antle's cooling operations and load up with fresh vegetables. Underneath this steady flow of lettuce, carrots, and broccoli runs another, often ignored, asset stream: wooden pallets.

Six years ago, the West Coast-based produce grower decided to take a closer look at the platforms they were using to ship their products. At that time, says Eric Wexler, senior vice president of supply chain and operations, the company was using one-way or limited-use pallets. But managers were unsure that those pallets were the best choice for the company. For one thing, they were growing concerned about pallet waste disposal in landfills. Another concern was the quality and cost of the pallets. And finally, customers were clamoring for Tanimura & Antle to use Orlando, Fla.-based CHEP USA, the rental pallet pool company.

The produce shipper needed to decide: Were rental pallets right for them? Wexler and his colleagues eventually decided to rent pallets from CHEP, but they found that the question wasn't as simple as they'd thought. Instead, they had to weigh a number of factors before they could make the right choice.

In fact, every warehouse operator should take many factors into consideration before making the rent-vs.-own decision. Here's what you need to keep in mind.

In North America today, shippers have five options for managing their pallets. The most popular option is to buy limited-use (also known as white-wood) pallets, which are shipped to the customer and are not returned. Shippers can also buy reusable pallets and arrange for their customers to return or exchange them. Pallet guru Stewart Richardson, co-author of the book Pallets, A North American Perspective, estimates that about 90 percent of all pallets are owned by the user.

For example, CHEP, which currently dominates the pallet-rental market, charges users a base fee plus additional charges based on how long the pallet is in use. Nyack, N.Y.-based PECO, on the other hand, charges users a flat fee for each pallet. Both CHEP and PECO use a one-way rental model, with the shipper renting pallets for one trip and the provider collecting the pallets afterwards.

Another company, Ithaca, N.Y.-based Ongweoweh, offers a buy-back option under which customers can buy the pallets, use them for a specified period, then sell them back to the vendor.

A third scenario involves the user owning the pallets but relying on a third-party provider to manage them. Management services may include tracking, repairing, retrieving, sorting, and storing the pallets. Many regional and niche pallet management companies and some pallet recyclers offer these services. CHEP is also beginning to move into this market with its Total Pallet Management system for its own and other providers' pallets.

The fourth possibility is to join an exchange system. In this setup, a group of companies forms an agreement to circulate pallets of a certain size and construction. Exchange members pass pallets from one to another, and the pallets are credited and debited to their accounts. The best-known exchange system is the Canadian Pallet Council (CPC), a cooperative of 1,400 Canadian companies, mostly in grocery and consumer packaged goods. CPC members can either rent or own their pallets, and the council provides a strict administrative structure and management process. (Attempts to form similar programs in the United States have failed.)

Finally, a shipper can employ a "hybrid" approach, supplementing a large number of owned pallets with rentals. Vincorp, North America's fourth-largest producer and marketer of wines and related products, for example, rents pallets to cover seasonal peaks in the summer and around Christmas. Vice President of Supply and Logistics Diane Fitzgerald says that about 70 percent of her company's needs are covered by owned pallets and 30 percent by rentals.

Keep in mind that many industries, such as textiles and printing, don't have rental options. The main reason is cost. To be economically feasible, a large number of companies must use the same type of pallet. "Rental only works when all users agree to use a standardized pallet," says Mike Tebay, president of PECO. "Essentially, you need an industry where enough players can get together and agree on a standard, and you have enough volume."

Indeed, pallet rental has succeeded in penetrating the consumer packaged-goods market largely because of the widespread acceptance of the Grocery Manufacturers Association standard pallet size of 48 inches by 40 inches. It's not just size that matters, though: Pallet rental companies typically only provide wooden shipping platforms, but if you need to use plastic, metal, or paper pallets, then renting may well be out of the question.

Once you know what the options are, it's time to make a fair comparison among them. To start, find out what your current costs are. There are two ways to look at it: cost per pallet trip and annual cost per pallet in inventory. (See chart on page 65.) Richardson recommends using cost per trip because that's the equation used by some pallet rental companies.

To calculate the cost of owning pallets, you'll need to factor in a number of other expenses beyond the pallet's purchase price or rental fee. In Pallets, A North American Perspective, Richardson and coauthor Rick LeBlanc advise companies to calculate total acquisition costs. If you use one-way pallets, for example, you would include the pallet purchase price. If your company uses reusable pallets, you would include annual depreciation.

Be sure to also take into account the total costs for sortation, repairs, return freight charges for reusables, lost pallets, and waste disposal. Other considerations include operational, administrative, and labor costs. Labor includes the cost to unitize a shipment, load it onto and unload it from a truck, and palletize it at the distributor or retailer downstream. (For more factors worth considering, see "Beyond Price" on page 66.)

When calculating the cost of renting pallets, keep in mind that there's much more to rental costs than a simple per-pallet fee, Richardson points out. Those costs can include issue and de-rental fees for one-way pallets, daily inventory charges, freight charges for transportation to and from the rental company's pallet depot, and administrative costs.

Consider, too, whether renting pallets will require you to change internal processes, and what the cost of those changes might be. One example: Because CHEP charges daily rental fees, some companies do not store product on those pallets. Instead, explains Geoffrey Sisko of warehousing consultants Gross & Associates, they build loads on their own pallets and then transfer them to CHEP pallets when they're ready to be shipped. The cost of that transfer, he notes, needs to be factored into your total cost calculation.

And don't make the mistake of overlooking administration costs for rental pallets. "The big misunderstanding," says Belinda Junkin of the Canadian Pallet Council, "is that companies think that if they outsource to a rental company, their administration costs are going to be zero. But that's a purely logistics mindset. You might have taken away work from logistics but you've dumped it on finance."

Junkin points out that when companies are paying $1 to $3 million annually for pallet rentals, they should audit those transactions just as they audit freight bills. "If it's an asset, you are accountable on some level for that asset. If you don't keep track of it, how are you going to audit the time-and-use bill that you get from the rental company?…You have no business renting if you can't manage your assets," she insists.

Vincorp's Fitzgerald agrees. "[If you don't manage pallets well,] you can start renting, and renting and renting and you have no idea where those pallets are or who owns them," she says. "Pretty soon, you are renting something that doesn't exist." To prevent that from happening, Vincorp makes pallet tracking a key part of one associate's job, even though the wine wholesaler belongs to the CPC, which enforces standards for pallet quality, repair, return, and retrieval.

U.S. businesses, though, lack an industry organization that enforces pallet standards. When U.S. warehouse operators pool pallets, then, someone must spend time settling disputes with customers, suppliers, and transportation providers. Those kinds of administrative issues drive many companies to employ a third party to manage their pallets for them.

"Cost aside, it's a real headache to have to call up your customers and carriers and ask them, 'Where are my pallets?' Because of course, one is going to blame the other," observes Richardson. "Customers will always say they gave them to the carrier, and the carrier will say they didn't. Who wants to deal with that?"

That turned out to be a major consideration for Tanimura & Antle. The company wanted to switch to a reusable pallet, but didn't have the information systems and resources to track, recover, repair, and return them. Nor did they want to invest in those systems. "It's not our core strategy," explains Wexler. "We are a customer-driven business. We need to be able to add value to our customer and part of the way we do that is by helping to control and reduce costs."

Rent or own? The decision must be based on your company's specific needs and business management approach. Even CHEP USA President Dave Mezzanotte acknowledges that pallet rental doesn't work for everyone. It's more efficient, for example, to own pallets in a closed-loop system, where a shipper makes regular, large-volume deliveries to a single retailer or distributor, he says.

Ultimately, the decision to own or rent pallets can't be made by one person. Instead, experts suggest creating a cross-functional team to study the problem. Tanimura & Antle, for example, formed a team that included representatives from finance, field operations, shipping and distribution, information technology, and sales. "All of these groups touched pallets in some way," Wexler says. "They all needed to be on board."

In short, to make the right decision, your team should look closely at how the rental and ownership options will affect both operations and total costs, Mezzanotte says. And consider the big picture rather than just individual segments, he recommends. "What may be low cost to one person may not be to the total supply chain," he notes.

The team also needs to make sure management understands the impact that a seemingly simple item like pallets can have on costs. "People don't think that pallets are important," reflects Vincorp's Fitzgerald. "They don't see them as a major cost and they don't want to allocate resources to them. They don't want to spend a lot of energy on pallets when there are a million other things they could be spending their energy on. But if you administer your pallets well, it pays off."