How the Humble Wooden Pallet Paralyzed Big Pharma and Now Faces Extinction
Pfizer (PFE)'s recall of some of its Lipitor cholesterol drug supply is the third this year in which pharmaceutical companies have called back products due to contamination from the wooden pallets they are shipped on. The recalls spotlight an issue that most managers have spent zero time thinking about: The importance of pallets to any industry that ships products -- which is to say, virtually every industry that makes anything smaller than the size of a pallet.
Yet the drug industry is dependent on pallets in the same way that it's dependent on oil or electricity: Nothing can be moved without them. There are 1.2 billion pallets circulating in the U.S. at any one time. (Some companies, such as Brambles Industries (BIL), are entirely reliant on the fate of their pallet stock.)
Pfizer has promised to switch from wooden pallets to molded plastic ones to solve the contamination problem, setting up a potentially interesting global paradigm shift in the shipping world. Could the wooden pallet, the workhorse of the 20th Century, go the way of the buggy whip and the steam engine?
Like Pfizer, Johnson & Johnson (JNJ)'s troubles with Tylenol started over a musty, moldy smell caused by TBA (tribromoanisole), a treatment used to make pallets fire retardant. Depomed had the same problem in its recall of a Glumetza, a diabetes drug.
A long time ago, I worked as a forklift truck driver at a packaging supply warehouse. J&J was one of our big clients. We shipped empty boxes and glue to J&J, and all those loads were stacked onto wooden pallets so that they could be loaded and unloaded by a forklift driver.
The warehouse workers didn't care what was on each load: Our main concern was, Who gets to keep the pallets? Every driver leaving our company was given strict instructions not to come back unless the delivery they were making was exchanged for an equal number of empty pallets for the return trip. Woe betide the driver from another company who arrived at our depot and forgot to ask for empty pallets after unloading. We kept them. All this took place with very little input from management -- they weren't the ones doing the loading and unloading.
Of course, everyone else in the system was doing the same thing, which created rampant pallet hoarding and a chronic, permanent shortage of pallets. Our warehouse developed a side business: With pallets in permanent short supply, they became correspondingly valuable. So we sold spare pallets to other warehouses who weren't as good at hoarding them as we were. Often, those facilities ended up buying back the pallets we had removed from their trucks the week before.
Pallets are a relatively recent innovation in the shipping industry, arriving on the scene to standardize load sizes in the early part of the 20th century. The entry of the U.S. into World War II, and the consequent need to ship goods and arms quickly, sped up the adoption of a standard pallet size. Here's what life was like before the pallet:
According to an article in a 1931 railway trade magazine, three days were required to unload a boxcar containing 13,000 cases of unpalletized canned goods. When the same amount of goods was loaded into the boxcar on pallets or skids, the identical task took only four hours.Even damaged wooden pallets have value: You can break a couple of slats on them and they still fulfill their basic function. They are such a simple device that even a rube like me can repair one with a hammer and nails. If a plastic pallet breaks it cannot be repaired. It must be discarded whole. Plastic pallets prevent hoarding to some extent because workers can't keep broken ones from unlucky drivers and repair them later.
On the flipside, the shipping business is slowly transferring to plastic for environmental reasons and because plastic pallets are stronger. Business may save money by going plastic. Pfizer is actually behind the curve in this innovation.
Which is why Pfizer's switch to plastic pallets could be so interesting, and expensive: Pfizer -- like J&J and Depomed -- must now supply its entire system with new plastic pallets. As anyone who has worked in a warehouse knows, a supplier of pallets is not only supplying their own operation but those of any other storage facility whose workers have the guile to hoard them. And those facilities transfer them on to everyone else. So Pfizer's plastic pallet experiment is likely to pour new pallets into the hands of unrelated and sometimes competing businesses, worldwide, who will welcome the freebies with open arms.
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