Pallet Networks feature – A vested interest in making it work

Palletforce, the UK's newest pallet network, has been in existence for just six months, but has serious ideas about matching or even surpassing its longer established cousins.
The four main players are happy to co-exist and can boast phenomenal year-on-year growth rates, at least for the time being. They claim, diplomatically, that they are mainly taking business from small, unaffiliated local hauliers rather than from each other, although Palletforce claims to have recruited some disaffected members from its rivals.

There are two distinct ideas as to how network members should deal with one another and manage their business. As shareholders, the members have direct ownership of Palletline and Palletforce. The two main competitors, Pall-Ex and Palletways, are privately owned companies which work on a straight transactional basis, awarding operating contracts to chosen hauliers.

The Palletforce network now extends to 60 depots, which are handling 1,500 pallets a night.

By the end of this year, MD Mick Scarlett aims to have built volumes to 2,000-2,500 pallets and expects to add another six or seven depots "to give the right territory sizes".

Scarlett says: "We looked at the top three networks and did quite a bit of research. What transport operators wanted was to join a member-owned network on the Palletline model. That meant total commitment and they have a vested interest in their success." In the transport business for 15 years before launching Palletforce, Scarlett says the focus is on quality of service rather than price. Members invested between £10,000 and £50,000 (€16,000-€82,000) to join the network. "We developed it on the basis of what the depots would want. We have medium to large members which had shied away from joining other systems – reluctant to join a smaller network, but with limited opportunity to join a bigger one, " says Scarlett.

While the networks have been fuelled mostly by organic growth of the market, he claims to have recruited a third of his members from other networks, "where they weren't happy with the terms".

Palletforce has three directors and four members who sit on the board in a non-executive capacity. There is also a members' committee representing the network's six regions.

A network manager monitors performance and acts as an arbitrator on late arrivals and other "non-compliances".

Palletforce demands 99.8% ontime delivery and any complaint is logged as a noncompliance.

Scarlett sees the four major players surviving, but says the smaller networks could struggle. "There are only a limited number of quality transport operators, " he says. "Over our nine-month set-up period we put 500 companies through our vetting procedure." Palletline was the first network to be set up, 10 years ago, and as its shareholder structure has evolved and profits have grown, it has paid a dividend for the last two years.

Like Scarlett, Palletline chairman Bob Russett emphasises quality over price and sees this as a cornerstone of the shareholder model.

"We never set out to be the biggest. Quality of service is the angle we come from. Our philosophy is that we're all one and all benefit from the strength of the centre, " Russett says. "Our rivals make their profit from what the depots put through.

Our interest in the depots has to be that much deeper." How big can the networks grow? "It's difficult to put a finger on the size of the market.

Everyone is bigger and better as a result of their membership, and for some, Palletline represents 60-70% of their business.

Work is gained from the traditional general haulier, not from each other. It's the guy who loads up on a Monday and works his way up the country, dropping a pallet here and there who can't compete, " Russett says.

Palletline had four owners initially. It started, he admits, as "a dumping ground for family businesses when national delivery was wanted and they couldn't deal with it. But we quickly realised this was a business of its own." The industry was sceptical at first, Russett recalls. "I was told I was mad if I thought I could get competitors working together. Some were not suitable to start with, but at least gave us cover. We were able to offer full UK coverage from day one. Over the first year we started easing those out and replacing them with betterquality businesses. It began with 19 depots covering large areas. As volumes grew, the sizes of territories reduced and this will still go on." The four founder companies were funding the whole expansion of the Palletline network at first and could not keep pace with the cashflow demands. It was in 1994 that the company was opened up, allowing depots to buy shares. Today, the depots own between 1,000 and 20,000 shares each.

"Everyone has a vested interest in making it work, " says Russett. "It's more of a family feel than the companies which control everything from the centre and make their money from what goes through the hub. They will bring in as many depots as they can to get the volume." Would-be members regularly approach Palletline. If the network decides a territory needs to be divided, preliminary checks include three years' accounts and discussions with customers about the quality of service the company provides.

"If we decide to progress it, they join on a six-month probation. They pay on a sliding scale, with a proportion of revenue going to the person giving up territory, " Russett says. "If, at the end of this period, they're right for us, they are invited into the system permanently and buy in at a level of their choosing. There's an internal market four times a year." As with all the networks, quality control is vigorous. "We monitor every delivery that's made. There is no percentage requirement, but the depot principals meet six times a year and the three worst in terms of service failures are 'named and shamed'. They have to stand and explain why a delivery was late or there was no POD on time. They're all entrepreneurs and they don't like to do it, " says Russett.

It is six years since a member voluntarily left the Palletline network. The last one not providing the quality of service was voted out around three years ago.

The legal and practical difficulty of removing underperforming companies which own their chunk of the network is cited by Pall-Ex as one of the key benefits of a non-shareholder structure.

Alan Cramley, sales and marketing director, says: "PallEx members are not shareholders in the hub, nor the hub in the members. But we have a formal legal member service agreement that locks them into specific administrative, financial and operational procedures.

So although they're out there offering a disparate range of services, they work to a common platform.

"When we make a decision, nobody carries more or less sway than any other. We make decisions that benefit the network as a whole. There is no hidden agenda. We're keen on each member doing well, " Cramley says.

In truth, Pall-Ex is as stable as its non-shareholder counterparts – remarkably so when you consider the volatile nature of the road haulage business.

Twenty-five of the 29 companies which founded Pall-Ex are still in the network.

The key is in the initial vetting, which looks for financial stability, service ethos and back-up resources. It's a long process, but if you get it right at that stage, it minimises problems later, says Cramley.

In five years the network has expelled only two members – but there are a whole series of service parameters, and if members fail to meet these, they can be fined and Pall-Ex has the right to expel them.

Southampton-based Meachers is a prominent PallEx member and MD Bob Terris says: "The pallet networks are absolutely necessary. We could not be without them. The days of trucks running round here, there and everywhere are over.

"Until four years ago, we were doing everything on our own vehicles, but with timed deliveries and shorter lead times it was all getting more difficult, " says Terris. "We had resisted previous approaches, but Pall-Ex came at the right time in 1998. We have reduced our empty running by 300,000km a year and have been able to go for business we would not have quoted on before. And we now physically go out and sell network services." The Working Time Directive, with its implicit requirement for more staging posts and more trunking with short overnight hops, will lend further weight to the pallet networks, believes Terris.

But he voices concerns over how quality can be maintained in a depot-owned network. "It's more difficult to demand a level of service, because you're criticising yourself. If companies can't grow with an organisation, you've got to be able to move on.

"We have a members' service committee which gives a consensus view. But how do you dispose of a non-performing member if it is also a shareholder? It's a potential quality control problem. Running a company jointly with other people rarely works."

Julie Phillips, MD of Cranleigh Freight Services, a founder member of Pall-Ex, emphasises the importance of maintaining quality across the network. "Service levels are very high, and if someone cocks up, they're out. We produce weekly stats and it is expected that 99.5% of deliveries will be on time with a clean signature and no complaints. If that 0.5% is consistently from one depot, they're out. One apple can rot the whole barrel." Phillips says that although members are linked only by a service agreement and not a shareholding, they have a close relationship which other networks lack. "The fact that there are 77 of us gives us huge buying power, " she says, quoting a group insurance deal recently negotiated by Pall-Ex. "As one business on our own we could never have achieved that. Now think of all the fork-lift trucks, luminous jackets and hard hats we buy – even stationery.

The possibilities are endless." Added-value logistics services from Pall-Ex include storage, secure warehousing, pick-and-pack, order fulfilment and just-in-time deliveries for stockless logistics companies.

Pall-Ex is a nominated carrier for a retail chain, delivering to one of its distribution centres, and also runs a pick-and-pack operation at its Nottingham hub for a power tool manufacturer. Cramley says: "Our members are happy because we run no vehicles of our own, so they get to do the deliveries." Pall-Ex also has a trust fund which operates rather like an insurance premium, so that if a member should go into liquidation, members will be relaxed about continuing to make deliveries and receiving their due payments. "The customer gets a seamless service and it would allow us to reorganise in the short term and recruit a new member, " says Cramley.

Membership of a network improves members' margins – "they handle more freight and earn more, " he insists. But service is key, and Pall-Ex will expand the network if a company becomes overburdened and service levels are suffering – "in discussion with members in a particular area, " Cramley emphasises.

Julian Maturi, who took over as MD of Palletways just over a year ago, rejects the idea that a central company financed, rather than owned, by its members is tempted to subdivide regions unnecessarily.

"The strength of the networks is that we all have regional specialists – someone who speaks the right dialect, knows the holidays, the traffic patterns, the labour market. If that logic is correct, then you start off with a big specialist in London and he will become even more specialised, serving just north London or west London. You're controlling your output, " he says.

"The market is growing at such a rate that you can ask members to concentrate on a smaller area. We added 10 depots last year and nine of those were voluntary discussions. We don't just add members willy-nilly, but to grow at the rate we've been going, year-on-year, would put strain on any organisation. By adding to the membership we ensure quality of service is maintained.

That's how the parcel companies have coped with growth." An increase in congestion can be as much a factor in deciding to re-draw a member 's territory as an increase in business activity. There is no theoretical upper limit to how big a network could be, says Maturi, who managed oil, brewing and packaging contracts for Wincanton before joining Palletways. He expects to have 90 or 100 members by the end of this year.

Palletways members are contracted to operate at a certain level in respect of service standards, schedules and standards of buildings and IT.

"If they fall below that, we have the right and the power to ask them to leave. It would be more difficult in a memberowned network, " Maturi says.

"Our type of network focuses on the member 's customer, and making their life easier. I accept that what's good for the customer is good for the member too, but the rival structure is designed to give service primarily to the member." A 7,500sq metre extension to Palletways' hub is nearing completion and will enable the network to double its throughput. Like Pall-Ex, Palletways has been able to build in extra functions, perhaps because it is able to view the hub is an entity in its own right, rather than a means to an end. Hence Stargate Logistics, a centralised stockholding facility based alongside the Lichfield hub, is designed to enable retailers to consolidate freight from several suppliers and deliver into the regional distribution centres or direct to store.

Manufacturers can store their products offsite, reducing overheads, while still allowing them to respond rapidly to customers' requirements. Clients can place an unprocessed order up to 4pm for next-day delivery by 10am.

Maturi is loath to discuss nightly volumes – the figure in our table is an editor 's estimate – and also says it would be wrong to single out one measure of acceptable performance.

What he describes as "a parcel of indices" dictates whether a member is performing to an acceptable standard.

He is more comfortable talking on behalf of the whole sector than giving detailed figures for Palletways. "There are more important issues than sitting in our ivory towers saying 'we've got this many members' or 'we have moved this many pallets'.

We may all claim to be the best, but the important thing is that pallets have been recognised as a market sector in their own right. We're all driving the integrity of that. Everyone knows what contract logistics and parcels are, but until recently, we've not had that recognition." He thinks the big four networks can co-exist. "There won't be rationalisation, but I expect a clear distinction to emerge between the commercial and the member-owned organisations. [The latter 's] ability to grow with the market will come under focus, " he says.

Gearing up for the hi-tech battle to provide added value

IT development and expansion into Europe are likely to be two of the key battlegrounds as the four networks vie for supremacy . In November, Palletways decided on some market research to find out what customers really want – and got a clear -cut answer.

"Europe is nice to have, but it's not the issue at the top of customers' agenda in 2002, " Maturi says. "It is in IT where customers perceive you to have added value.

They're saying 'make my life easier'. They assume the physical movement from A to B happens naturally . It's the paper flow , or in our case the paperless flow , of information, that counts." P alletways' IT system, designed and written in-house, offers full consigment track and trace and allows members to produce labels and allocate barcodes from one screen.

Special requirements such as tail-lift vehicles can be specified. The web-enabled system will provide additional benefits in the next phase of development, including scanned POD images the day after delivery.

Pall-Ex has also invested extensively in its IT system. Members are linked via the Pall-IT system, developed in-house over a two-year period, which provides PODs, track-and-trace capabilities and warehouse management functions.

A sub-system, Pall-IT Customer Implant, is available to network members' own customers, who can directly enter consignment data and print off pallet labels, consignment notes and manifests at their own premises. This data can be transmitted for automatic update into their local Pall-Ex depot's Pall-IT system.

PODs are already available via the Internet and the next phase of IT development is a barcode scanning system. This will make consignment tracking "event driven", as in the leading parcel businesses, with scans carried out as the pallet goes onto the vehicle, in and out of the hub, into the delivery depot and so on. Pall-Ex will be rolling this out from April and is also looking at an image scanning system.

"The perceived wisdom is that the parcel networks are way ahead in terms of customer facilities, and some of these companies have been at it for 15 years, " says Pall-Ex's Alan Cramley . "But from the end of this year , we will have the same sort of services." A Vigo IT system is in place at P alletforce and the network is now working towards live data, in a virtual private network which the depots will co-fund. T racking will be barcode-based by June. Longer term, Mick Scarlett sees radio tagging being introduced "as the technology gets there and the price becomes more realistic".

Palletline last year adopted HaulTech's document handling system, Archivist, which allows information to be printed, faxed, e-mailed or viewed over the Internet.

Operations director John Soltys says: "We are already seeing the benefit through savings on time, paperwork, filing and storage space. It is ideal for our type of multidrop operation in which we invoice daily and were previously dealing with a mountain of paperwork." P alletline, which has four depots in Ireland, two in the Netherlands, one in Belgium and another, operated by a UK company, in Spain, is rapidly increasing its presence in Europe. At the end of last year , the company tied up with networks in Germany and F rance, which comprise 90 and 70 depots respectively .

Bob Russett, who chairs the Road Haulage Association (RHA) as well as P alletline, says movements will be carried out nightly between the countries' main national hubs. "But the sad bit – with my RHA hat on – is that the trucking will be by foreign hauliers, " he says.

Palletline is talking to networks in "several other countries" and Russett ultimately envisages a truly pan-European pallet network.

Palletforce has also been quick out of the blocks internationally . Individual members were already offering daily services to France, the Netherlands, Germany and Spain, and shortly after going live in September , the network formed a strategic alliance with Belgian transport and logistics organisation Gillemot, a subsidiary of Giraud.

There are now daily departures from P alletforce's Lichfield hub to Belgium. "They have a full European structure we can tap into as the first stage of our international development, " says Scarlett.

"To run a true European network, we would want eight regional hubs across the UK.

We're trying to get members to co-load and co-operate, " he says. "Longer term, we're looking to co-operate with Germany and Austria on a more formal basis. The key to this is daily departures and standard services." Pall-Ex has also historically sent consignments abroad via those members with direct links to Europe, but Cramley says: "We're looking to put this on a more formal basis and control it from the centre on a Pall-Ex template." The network is not talking to networks in Europe, but is in discussion with a number of individual companies with a view to recruiting them as members.

Posted: 04/03/2002
IFW

Factfile: (table in article)
Pall-Ex – founded 1996, hub-Nottingham, depots-75, volume/night-4,000-5,000, annual growth-25%
Palletforce – founded-2001, hub-Lichfield, depots-65, volume/night-1,500, annual growth- –
Palletline – founded-1992, hub-Birmingham, depots-49(UK), volume/night-7,000, annual growth-32%
Palletways – founded-1994, hub-Lichfield, depots-80, volume/night-4,000-5,000, annual growth-40%