Pallet Procurement Guide: Managing Costs & Supply Limitations
When it comes to smooth business operations, pallet procurement may not come to mind. But from the moment products leave the production line to their arrival at the retail store, pallets are the uncelebrated heroes that keep supply chains moving forward and businesses functioning. Understanding how pallet sourcing works and ways to optimize its costs can help you drive additional value for your business.
Pallet market trends
In the past, pallets were considered a fairly stable commodity item. Not anymore. Steep price fluctuations, widespread lumber shortages, and surging global demand now make the pallet market unpredictable. Wooden pallet prices soared as much as 120% in 2022 alone.
The demand for pallets doesn’t seem to be slowing down either. Global sales are expected to increase by 6.9% annually between 2022 and 2030 — fueled by e-commerce, manufacturing, consumer spending, and rising energy costs. Industries heavily relying on pallets, such as food and beverage, retail, manufacturing, consumer electronics, construction, and pharmaceuticals, must navigate the market’s turbulence by examining how they source this commodity. In this guide, we’ll explain how to do just that.
It’s important to note that these pallet market trends can be seen across different commodities, and the information throughout can be applied to various sourcing needs.
Understanding pallet cost drivers
Pallet costs vary depending on many factors. Understanding these cost drivers is essential for businesses to make informed decisions during their pallet procurement process. Some of the most common pallet cost drivers include the following.
The type of material used to create pallets is a significant cost driver. The two primary categories are wood and plastic, each with its own advantages and disadvantages. Other pallet materials include metal or corrugated paper but have specialized use cases. We’ll focus on wood and plastic since they are the most common materials used across industries.
Wooden pallets are the most common pallet type, are about 3x less expensive than plastic, and hold more weight. They are also easier to repair, and their thickness makes items less likely to shift while in transit. However, because nails are used, there is an increased risk of splintering. Generally, wooden pallets are a good choice for businesses with budget constraints.
Plastic pallets are more expensive but offer better longevity and durability than wood. They are also lighter and easier to clean — making them popular among the food and beverage, pharmaceuticals, and chemical sectors. Plastic pallet demand (and price) is expected to increase significantly over the next eight years due to their ability to handle fragile items, high performance in different weather conditions, and strong longevity.
Pallets come in various specifications and treatments that impact their quality, performance, and costs. Businesses should carefully consider and balance both their logistical and budget needs when choosing.
The moisture content of wood pallets is an important consideration when choosing pallet specifications. Pallets with lower moisture content are less likely to warp, crack, or grow mold but are more expensive.
Heat treatment (HT)
For international shipping — particularly when pallets are used for export — heat treatment is required to eliminate pests and pathogens and ensure regulatory compliance with the International Standards for Phytosanitary Measures (ISPM 15). Pallets treated with heat need additional steps and monitoring, leading to higher costs.
Pallet grades are a classification system that categorizes wooden pallets based on their quality and condition. The most common grading system is Pallet Grade A, Grade B, and Grade C (although Grade C is typically not used since these pallets are usually of poor quality and nearing the end of reliability). The grading criteria usually depend on the material quality, structural integrity, and appearance of the pallets. The grades' advantages and disadvantages include the following:
- Grade A pallets are typically of the highest quality and have minimal defects, hence why they are the most expensive option. Even with minor damage, the pallets are usually reinforced with closed metal plates — making them extremely durable. They are best suited for automated systems since they are well-constructed with consistent dimensions. The appearance of pallets in this grade makes them a good choice for displays, too, but overall, they require the most up-front costs.
- Grade B pallets are also of good quality but have minor cosmetic flaws or damage. Oftentimes, these pallets have repairs to their stringer boards where a bracing piece has been nailed to the broken or cracked stringer. Most repairs of this kind are reliable and sturdy and only impact the cosmetic look of the pallet. However, it’s important to consider that some repairs may impact how forklifts and pallet jacks can handle them during transportation. Overall, these pallets are reliable and cheaper than grade A but are not good options as displays since they look worn down.
Choosing the right size pallet helps you maximize load capacities and reduce the number of truck deliveries. It’s ideal to go with the smallest option since it’s usually the most cost-effective strategy, but some products may require larger sizes. The most common pallet sizes include:
- 48’’ x 40’’: This is the most common and recognized size, making it compatible with most pallet handling equipment and storage systems. Since the size is considered an industry standard, pallets of this size are popular, cheaper, and easy to source. Keep in mind they are not optimized for international shipping containers and may require more loads, increasing shipping costs.
- 42’’ x 42’’: This size is designed to optimize space in shipping containers, and its square shape makes handling easy — especially for certain products like appliances. Since it’s not a standard size, it may be more difficult to source and incur higher costs.
- 48’’ x 48’’: This larger pallet size is widely used in North America and is compatible with most handling equipment, but is less common in international markets and may pose a challenge in certain shipping containers. They are best for heavy loads but cost more due to their size and sometimes limited availability.
Buying vs. renting pallets
Many businesses opt to buy pallets, rather than rent since the pallet’s extended lifespan and multiple use cycles will offset the initial investment. And since owning the pallets reduces the need to review and approve ongoing rental agreements, there is less administrative work. However, businesses will be responsible for maintenance and repair, which may lead to additional costs.
Renting, on the other hand, is a good option for businesses looking for lower upfront costs and more flexibility to adjust pallet usage based on demand — eliminating the need for storage when demand is low. The disadvantages include logistical dependence on the supplier for timely delivery and return and increased long-term costs for businesses with frequent pallet needs.
Strategies for cost savings in pallet procurement
There are many strategies businesses can use to drive down costs when procuring pallets. Which ones you choose will depend on many factors, such as the state of the lumber market, sawmill capacity and output, and labor costs associated with the management and maintenance of the material of your choice.
Use group sourcing
Group sourcing — which involves collaboration with other businesses, industry partners, or purchasing teams to make bulk purchases from pallet suppliers — is a great strategy since the increased volume through group purchasing gives businesses better leverage in the market.
In addition, businesses gain access to a vetted list of suppliers. Unlike sourcing each individual supplier yourself, experienced partners will have extensive networks that enable you to compare pricing from a variety of suppliers. Group insights on the best service level agreements (SLAs) to use, preferred terms, and more, improve non-cost factors (like service levels) significantly.
Consolidate demand and specifications across locations
When demand for pallets is spread across many locations, factors like lead time (the first effort to acquire a good or service to the time of its arrival) significantly impact which suppliers can be competitive. It’s possible to attract better bids from suppliers by consolidating demand.
To achieve that, first do a detailed specifications analysis. Is it possible to switch to used pallets? How about reducing heat treatment or moisture content requirements? While this may not suit all industries, options to modify specifications can maximize savings opportunities.
The next step is to try to use the same set of specifications for all locations within your network. By doing so, it becomes easier to negotiate volume-based discounts and streamline procurement processes.
Implement a repair and return program
An effective pallet repair and return program can greatly reduce costs by extending the life of pallets and preventing new purchases. It’s important to keep in mind additional considerations, like on-hand inventory requirements and repair expertise when considering this approach.
It’s also important to ensure used pallets are graded properly to prevent undamaged pallets from being processed for repair — which leads to more costs. Set quality standards or create an easy checklist to help team members determine which pallets actually need repairs.
To determine if a program like this is right for your business, consider implementing a scoring methodology that evaluates your ability to administer the program against the potential cost savings generated. Another benefit is that the repair and return program helps reduce your overall environmental impact.
Optimize across qualitative and quantitative criteria
What-if scenario planning via a decision matrix can help businesses make better award decisions. This decision matrix should consider a variety of qualitative criteria like lead times, service levels, on-hand inventory costs, cost of change, and other service requirements that impact the business at a location level. And be sure to evaluate the overall best cost — not just the lowest item price — after factoring in the volume/spend discounts and the impact of the award criteria.
Participate in a pallet procurement event
Coupa’s Sourcing Advantage community sourcing program helps businesses source pallets more efficiently and at the best price because it works differently than a typical sourcing event.
First, we analyze your data, create a baseline price, and eliminate any unnecessary specifications to lower your overall costs. We then search within the Coupa supplier ecosystem and receive bids. To determine the best option, we run a robust analysis of bid data comprising several what-if scenarios and enable supplier feedback between round 1 and round 2 of bidding. This ensures you’re getting the best deal. Once you determine the best option, you create contract terms directly with the supplier. With Coupa procurement, your contract loads directly onto your business spend management platform and is applied to all procurement processes — automatically.
Unlike traditional group sourcing events where contract terms are pre-determined by the vendor, Coupa Sourcing Advantage puts the power back in your hands. Other benefits include:
- Maximizing category savings. Coupa customers participating in a Sourcing Advantage event on average see strong double-digit savings. For example, return on investment can be 3x–6x or more based on an average customer’s spend of $4 million at a sourcing event. ROI typically rises with higher spending.
- Reducing sourcing workload. Businesses avoid the cost and extensive time of sourcing and procuring through spreadsheets and email. Offloading the work to Sourcing Advantage frees procurement staff to focus on higher-value initiatives, such as negotiating better contract terms.
- Running better sourcing events. Quality and value increase from sourcing with personalized service that fits any business need. Using Coupa Sourcing Optimization (CSO) software, our team analyzes your data and bids, helps rationalize SKUs, runs what-if scenarios, and utilizes combination bidding strategies, conditional offers, and bid feedback to get you the best deal.
Coupa Sourcing Advantage community sourcing program runs several pallet procurement events for the North America and EMEA markets — all managed by Coupa sourcing experts.
Check out upcoming events