Monday 18th Dec 2017 - Logistics Manager

Net winners?

Retailers used to take a huge volume of product into their regional distribution centres and then move large volumes into store prior to start of season – say, lawn mowers or watering systems.

Andy TurnerAs with most industry sectors the pallet network business was adversely affected by the recession, with most network operators experiencing a drop in business volumes by between seven and 15 per cent. For the first time the sector saw a decline in volumes – previously, every year had seen year-on-year growth.

Now, eighteen months on from the start of the downturn, and in line with a recovering economy, business has picked up for most with volumes reaching peaks not seen since early 2008.

Although last year was uncomfortable for the transport sector in general, the pallet networks fared comparatively well, buoyed in part by a shift in retail strategy away from bulk deliveries to a more flexible arrangement of store replenishment using the pallet networks to deliver small consignments but on a more frequent basis. When demand on the high street is unpredictable, retailers are reluctant to hold inventory, a situation which has benefited the pallet networks.

However, there is evidence to suggest this was a trend already well underway. “We saw a major change with retailers two years ago,” says Andy Turner, managing director of Palletways. “Whereas retailers used to take a huge volume of product into their regional distribution centres and then move large volumes into store prior to start of season – say, lawn mowers or watering systems.

“Now they are avoiding those big hits of inventory going to the store, they are only moving the inventory they think they will sell, using their epos systems to see ‘what have we sold today, what are we predicting to sell next week?’ and then only replenishing next week’s stock. They are replenishing far more frequently in smaller quantities.”

Graeme Wilson, commercial development director, UK Pallets believes that although pallet numbers dropped off during the recession, many are now looking at pallet networks as a way of saving costs. His understanding is that third party logistics companies are still being tasked with delivering goods frequently but in smaller quantities, so putting pressure on 3PLs to find more cost effective alternatives.

“Order volumes have dropped in general, so people want one or two pallets now as opposed to ten or twelve, so they [3PLs] are turning to pallet networks to enable this to happen,” he says. “We’ve attracted interest from a lot of the 3PLs. They are now collaborating with pallet networks rather than treating us as competition.”

For many transport companies the dynamics of the market during the recession placed the economics of running a large national fleet under great pressure. Adrian Russell, managing director, Pall-Ex explains the harsh reality: “During the recession the reductions in consignment size squeezed margins on fleets, making the pallet network model even more attractive from a cost effective point of view. The majority of casualties in terms of transport businesses were those with a relatively high focus on running national fleets – rather than those embracing the network philosophy.”

Kevin Buchanan, managing director of Palletline throws further light on the difficult balancing act transport operators face when business falls away. “Typically in a downturn everyone in the transport sector downsizes their fleets in accordance with the order books of their customers and then use the pallet networks as a cheap way of moving freight,” he says.

“Back in October 2008 the unexpected downturn caught most operators with more fleet capacity than they really wanted and even if they wanted to sell vehicles nobody wanted to buy them.

“So, left with more capacity than they wanted, for a period of 12-18 months they didn’t use the network as they traditionally would have – they were running more freight around on their own vehicles, albeit less efficiently. Now with a return in confidence in the market they have been able to resize their fleets – it’s a different picture.”

Rebound

Palletline saw only a seven per cent decline in business over the recession and the company has experienced a strong rebound in recent months. Buchanan considers it fortunate that the company had only just moved to a new hub, which was “massively more efficient than our previous facility and the most efficient in the sector in terms of how the handling works, so we were able to reduce headcount and handle freight more efficiently.”

From the middle of January Palletline has seen rapid and dramatic volume growth, to now at the end of March where “we are 15 per cent up on last year – which when coming from a large base like ours is substantial,” says Buchanan. “In fact, we had the biggest ever night last night [Wednesday before Easter].”

However, Palletline was not the only pallet network to make a timely move into a new hub. Palletforce opened a 380,000 sq ft facility in Burton-on-Trent in January 2009, right in the depths of the recession. At a cost of £30 million the state-of-the-art “single warehouse” concept hub was designed to deliver rapid turnaround of vehicles and a fast throughput.

Dave Holland, sales and marketing director, Palletforce says, “We invested at the height of the recession but it’s been the best thing. It’s the right thing to do and is fully supported by our members – the vision of our members was to grow and provide a high quality of service.” Presently running at 60 per cent capacity the facility has plenty of room for growth, but says Holland, “the sector has still got a long way to go”.

The pallet network concept was originally developed in the UK and is now considered by many to be a mature market. The model was designed to help hauliers exchange freight and move small consignments more economically across the country. As most networks are run on the basis that member transport companies take a shareholding, the benefits that accrue are shared among the membership.

There are nine major networks in total and there are a large number of independent transport companies that are members of networks.

“During the recession, yes, we saw a reduction in volumes, and yes, we took action to overcome that,” says Andy Turner of Palletways. “However, a lot depended on the strength of the individual members in terms of their finances and how they reacted. Our members are independent distribution companies, they have full load business, they have storage business, they have express distribution business – and the pallet network fits into that.

“Some of those members have seen the order cycles from their customers change. The sizes of the loads have changed and the number of consignments or pallets per load have diminished because customers are ordering less volume but probably in the same frequency – so at times, the pallet network has gained from the recessionary environment.”

“However,” says Turner, “it’s not always straightforward. It all depends on individual customers and individual members and you see some members’ volumes growing because they have taken their own vehicles off the road and have put more into a network.

“With others you can see the reasoning – ‘I’m using a network today, but I have a configuration where I can do a milk-run with my own vehicles. Therefore I am going to freight out of the network and reconsolidate onto my own vehicles and not use a network anymore.’ You see those two extremes taking place, but the net effect was a downturn in business, but we took appropriate action.”

The pallet networks have grown rapidly in recent years, spurred on by a shift away from dedicated services. Neil Hodgson, managing director of the Fortec Pallet Distribution Network believes that this trend has been going on for some time. “It has continued and it has caused people to look at their own fleet operations,” he says.

“It is a growing trend for reasons of cost and efficiency. The advantage to our licensees is that they can run their vehicles in their own post code area rather than all over the country, which is a big overhead. Being part of a nationwide pallet network they can have the flexibility of access to a national network without the extra cost of a fleet of vehicles and drivers.”

The average size of consignment across the sector is 1.3 – 1.5 pallets. But all the networks have solutions from a single pallet up to multi-pallet, ten-plus pallet consignments, and many are now offering added value services.

Buchanan of Palletline has seen a “big, big, big uplift” in the number of people who are becoming disenchanted with “cost-plus 3PL solutions”. He says a growing number of companies are asking themselves “I don’t get great value for money – there must be a better way of doing this?”

Like any recession, it’s a reality check, says Buchanan. “Everyone is charging along in the good times, and they lose sight, now they are asking ‘what is my failure rate?’ One company said they had a 70 per cent failure rate from a big 3PL – and I thought at 99 per cent we could do a bit better. Networks can do much more these days than just small pallet consignments. We can offer full load arrangements, warehousing, pick and pack – anything a 3PL can do and we can do the small pallet loads much more efficiently.

“A large company may think they need to deal with a big 3PL because they wonder what working with a small regional haulier would be like… people are starting to realise that if you take a group of really strong regional haulage businesses and you bind them together with this common ethos of the network, more can be accomplished than through working with a 3PL,” adds Buchanan.

Stuart Lloyd, sales and marketing director at Norbert Dentressangle Transport Services, which operates a UK pallet network from 12 sites, believes the trend to move from dedicated to network services is set to continue – particularly in the current economic climate as companies seek more cost efficient distribution models.

“One of the great advantages of a network distribution model is a variable cost line, which directly flexes in proportion to sales volumes. Businesses find this extremely attractive as it doesn’t tie them to fixed costs during peaks and troughs but is entirely activity based,” he says.

“Where manufacturers and suppliers have complex transport requirements it’s important to understand the needs of the customer and the demands of their customers,” Lloyd says. “Nothing is ever 100 per cent predictable but the aim is to establish a platform that can deliver the flexible service required to meet fluctuations, whether in volume or product type.”

On the question of possible consolidation in the market, just about all those asked thought there was little likelihood of mergers or acquisitions.

Graeme Wilson of UK Pallets says, “What do you buy when you buy a pallet network? You buy the infrastructure but then you’ve got all the membership – in our case we’ve got 80 different individual operating companies as members. So consolidation would be very difficult. And if two networks were looking to consolidate, membership areas would undoubtedly overlap.”

However, Adrian Russell of Pall-Ex holds a very different view: “As we emerge from the recession, no doubt the success of the pallet networks will attract interest from large international supply chain groups – I would expect one or possibly more acquisitions over the next couple of years.” Now there’s something to think about. Bradford-based Redhead International is not only a member of the Palletforce network in the UK, it is also a member of Palet System, France’s equivalent pallet service.

Redhead runs a daily overnight service between the two network hubs in Burton-on-Trent and Paris.It also operates a groupage service from its own depots in Bradford and Paris.

Redhead then runs directly out of the Palet System hub into the Palletforce network for goods destined for the UK and Ireland from the French market.

The company also represents Palletforce in Northern Ireland and is part of the Once Distribution network in the Republic of Ireland. Redhead can now deliver goods from Dublin into the Paris city limits, and vice versa, in 24 hours.

The Palet System network in France can handle more than 3,500 pallets per day and the Once network in southern Ireland around 600 pallets per day.

Marketing manager Austin Duffy says: “We can align ourselves with pallet networks in the UK, Ireland and France to ensure a smoother operation and that goods are transported even more quickly and efficiently, with fewer problems.” Typically

in a downturn everyone in the transport sector downsizes their fleets in accordance with the order books of their customers and then use the pallet networks as a cheap way of moving freight.

Kevin BuchananIt is a growing trend for reasons of cost and efficiency. The advantage to our licensees is that they can run their vehicles in their own post code area rather than all over the country, which is a big overhead.

One of the great advantages of a network distribution model is a variable cost line, which directly flexes in proportion to sales volumes.