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Is Paying A Price Per Pallet Wrapped An Effective Option For Industry?

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Paying a price per pallet wrapped is an option for industry which means they pay a fixed price for every pallet they wrap. This may seem to be an appealing and cost effective way to manage their pallet wrapping costs but how cost effective is this compared to other options?

What does this include?

Some suppliers are providing this as an option to industry as it appears to overcome capital expenditure restrictions. It would seem that this offering has developed since the Global Economic issues of recent years and has allowed industry to renew old pallet wrapping machines or even install new pallet wrapping machines to companies that haven’t used them in the past.

What happens is that the supplier installs a machine “for no charge” and supplies pallet wrap film and maintenance on the machine for a fixed price per pallet wrapped (or for every time the “go” button is pressed) based on a minimum number of pallets per month.

This can, in some ways be likened to the SaaS (Software as a Service) model in technology where, in effect, the customer has the potential to reduce capital and support costs by outsourcing hardware and software maintenance and support to the SaaS provider. And they pay a set monthly fee. The biggest difference is the capital amount (Software is generally high and pallet wrapping relatively low) and the complexity (software very high complexity and pallet wrapping low).

Traditionally a company has been able to buy a pallet wrapping machine from their preferred pallet wrap machine supplier, the film from their preferred pallet wrap film supplier and the question is whether paying a price for every time I hit the “go” button is an effective way of buying pallet wrapping equipment and materials? My answer is “no”, let’s look at the options….

Option 1: Buy A Pallet Wrapping Machine

When you buy a pallet wrapping machine you have the capital outlay which obviously can be bought for cash or financed. Finance becomes a monthly cost (depending on the type of finance) or the machine is written off over a period of say three, five or ten years. As an example let’s assume you spend £4,000 on a pallet wrapping machine which is written off over 5 years resulting in a fixed cost of £66.67 per month. If we add a high maintenance estimation of £75.00 per month average over the lifetime of the machine (which is far higher than we will expect) and a film only wrap cost of £0.55 per pallet. Below is a table detailing what the expected costs would be for an operation that see some seasonality to their work.

Month 1 2 3 4 5 6 Total
Pallet Wrapping Machine Fixed Cost £66.67 £66.67 £66.67 £66.67 £66.67 £66.67 £400.02
Maintenance Costs £75.00 £75.00 £75.00 £75.00 £75.00 £75.00 £450.00
Number of pallet wrapped 520 560 480 300 350 700 2910
Cost of film only per pallet £0.55 £0.55 £0.55 £0.55 £0.55 £0.55 £3,760.02
Cost of pallet wrap film £286.00 £308.00 £264.00 £165.00 £192.50 £385.00 £1,600.50
Total Cost £427.67 £449.67 £405.67 £306.67 £334.17 £526.67 £2,450.52
Average Cost Per Pallet Wrapped £0.82 £0.80 £0.85 £1.02 £0.95 £0.75 £0.84

So this shows that you will have some variation in costs over the month due to the leverage but it balances itself out on the higher months.

Now if you rent the machine you will achieve a similar variation but the figures will be slightly different due to the difference in cost structures.

Option 2: Pay per Pallet Wrapped

Based on the same number of pallets wrapped per month and on a contract of 500 pallets per month you will have the following costs:

Month 1 2 3 4 5 6
Monthly Rental Cos £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
Maintenance Cost £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
Number of pallets contracted 500 500 500 500 500 500 3000
Number of pallet wrapped 520 560 480 300 350 700 2910
Cost Per Pallet Wrapped £1.20 £1.20 £1.20 £1.20 £1.20 £1.20
Total Cost £624.00 £672.00 £600.00 £600.00 £600.00 £840.00 £3,936.00
Average Cost Per Pallet Wrapped £1.20 £1.20 £1.25 £2.00 £1.71 £1.20 £1.35

Now these are figures that we have seen in the market but it varies on the number of pallets that you are contracted for but if you have any seasonality at all you will have these increases or wastages of costs of either paying for pallets you hadn’t wrapped or paying for the cost of machine more than once.

Now imagine if you were contracted for 300 pallets and wrapped 600 or contracted for 600 and only wrapped 300!

Other considerations

There are other considerations in this:

  • You are contracted in to one supplier and they have control over the type of pallet wrap film you use.
  • Technologies in pallet wrapping change and you may have to wait to the end of the contract for you to be able to benefit from these advances.
  • Your circumstances change and you may not be able to adapt your pallet wrapping operation to meet these changes due to being in a fixed contract.
  • Do you have control over the price you pay, what happens if cost of the raw materials used to make pallet wrapping films increase? Or decrease for that matter!
  • What happens if the film breaks and you have to start the machine again? Do you have the inconvenience of the film breaking as well as paying for that pallet twice?

So What are the Options Available?

My first recommendation if you are tempted by the pay a price per pallet wrapped is do your sums. Have a look at the three options, talk to your suppliers about how they can help you maintain a competitive advantage. Companies who supply both machines and materials have an advantage that they understand both, they should (if they are good) be up to speed on the latest technologies and they should understand how to get the best from both the machine and the materials.

In my experience, renting or buying your machine is always cheaper and choosing a supplier who understands both machinery and materials will always give you the best result.

Blog by Robert McEwan. To contact Robert to discuss any of this blog please email robert@jemacpacking.co.uk.

Date posted Fri 20 May 2016by Robert McEwan in Blog

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