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Renting Pallets? Burning Cash?

The humble pallet has become an inevitable link in modern supply chains. Vertical storage and unit load movement are the two biggest tangible assets that makes the pallet an indispensable innovation.

In India, post the taxation reforms, larger and efficient warehouses will be the main cost competitive edge that no company can ignore. It will not be an overstatement to say that in the next 5-7 years, everything will be palletized.

Storing and moving goods on Pallets saves over 60% of the costs involved in handling. The primary reason being that you can move about a ton of goods in one trip, rather than a maximum of 20 kgs if you move material manually.

If you are an user of pallets, you would probably own your pallets or you would have hired it from a Pallet pooling company like CHEP, Peco, Loscam, Leap, LPR and the likes. In this article we will see how buying pallets is a far superior option and how renting pallets is akin to burning cash. Let us see how.

When you hire pallets, they call it pooling and renting too, you typically pay Rs. 1.5 per day + Taxes per pallet. So we will see in what follows, that over a 5 year period, you would have incurred 4 times the cost than you would have otherwise had if you had bought the pallets!

BUY Vs RENT CALCULATION

Let us say you need 1000 pallets.

  • Cost of 1000 pallets @Rs. 800 per pallet : Rs. 8 Lacs. Life of pallet with in-house maintenance : 5 Years.
  • Cost of Renting 1000 pallets for 5 years: @ Rs. 1.5 per Pallet 1000 X 1.5 X 365 X 5 = Rs. 27.37 Lacs
  • After 5 years, in case you bought the pallets, you will be able to get at least a couple of lacks back by selling the old pallets. In case you rented, you have zero assets.
  • So the total cost of buying 1000 pallets is Rs. 6 Lacs and the total cost of renting pallets is 27 Lacs. GREATER BY OVER 4 TIMES.

If this is not enough, let us look at some other points.

  1. Rental expense hurts company's profitability, and therefore the valuations. The more your operating costs, the lower is your PBT. Lower earnings = lower return on net worth. Buying however strengthens the balance sheet.
  2. You are dependent on the pooling company for repair , maintenance and supplies.
  3. All the pooling companies have lock-in periods and minimum contract quantity, thereby not giving you the advantage of shorter duration and small quantity.
  4. You might be thinking, in that case, the pooling companies are earning in crores, at your expense. Nor really, because for them to manage a pool of a million pallets is a very big cost.
  • Transportation of damaged pallets to their warehouses and back to you involves cost of handling , storage , labor and movement. All these costs are incurred by the pooling company. Therefore, the fact is that the overall cost of the pooling model is higher, so every one is adding more cost into the system. You are paying for the additional cost, just to offset an initial upfront investment.
  • The stocks that you do not want to carry are carried by the pooling company. That cost is incurred by them, and subsequently passed to you.
  • The pooling companies are spending a lot of money in tracking their complete pool of pallets, which is unnecessary cost as far as you are concerned.

5. There may be arguments and disputes regarding the cause of damages on pallets. The cause of damage and therefore repairs are the primary costs for pooling companies and both them and you will try to save on that. This creates lot of disturbances in the work environment.

6. Often, costs can be greater than just the quoted monthly fee for a comprehensive service of rental, maintenance and tracking.

Why are so many Companies renting pallets?

Some of the reasons why big companies end up renting pallets and loosing lacks of Rupees :

  • They do not want to take the liability of selecting the right pallet.
  • They generally have a short term view of the total picture, because, they do not want to mess up with existing practices. Many multinationals have worldwide policies, that are not possible to change at local levels.
  • They have got used to the way of functioning and even top management has "rationalized" the cost into their P&L.
  • Adequate research is not warranted by people towards understating Pallets, which remains an unimportant product till it becomes a burning issue.
  • The statement that " Pooling companies don't rent pallets, they manage the supply chain" is a trap that many companies fall into, ultimately paying much more.
Summarizing the article, we can only say that if pallet is a regularly used item for you, it does not make sense to hire them.

For more information on pallets, visit www.ashokindustries.biz. Or call us/ Whats-app us on +919830277479 for a detailed discussion.

 

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