Nigel Parkes, director of Pallet-Track, calls for focus on profitability to drive the future.
There is a lot of noise about capacity and growth potential in the pallet networks, but this din is all about growth in volume and it is drowning out what should be the focus of the debate – profitability.
I sometimes feel like the child in the fable of the Emperor’s New Clothes. Everyone knew that the king is naked, but they don’t want to expose his gullibility, so it takes an innocent boy to point out the blatantly obvious. Applying this the pallet network, there is a misguided and confused view that the sheer volume of traffic going through a network amounts to a buoyant market, but like the fable, the argument is threadbare.
For every multi-million pound contract, there are businesses facing the real risk of financial peril because the figures, unlike the pallets do not stack up and there is little or no profit to be made in the deal. Indeed, it would be cheaper to walk away from the contract than lose money of each pallet, just because there is guaranteed work there.
I compare what is happening in the logistics sector with what dairy farmers have recently experienced in terms of return on yields. It does not take an economics graduate to work out that if a supermarket is selling the milk cheaper than it costs to deliver it from the farm gate – and the supermarket is not carrying the cost – there is not only no cream by way of profit for the farmer, but their business is also paying for the privilege of honouring the contract.
There have been a number of factors that have driven this obsession with cranking up the volume and all of them have created a perfect storm of poor returns. Firstly, there has always been the volatility of fuel costs and the seeming inability of the industry to pass on any rises to customers. Secondly, there is a chronic shortage of drivers driven by an ageing and shrinking pool of talent and experience. The average age of a haulage driver is 53 – an age akin to the average age of a crossing patrol warden or a member of the clergy, according to a recent poll.
The shortage has meant that businesses have to pay grossly higher fees for agency drivers, which has artificially inflated the cost of doing business which once again, cannot be passed onto the customer.
Thirdly, there is the ‘race to the bottom’ in terms of the cost of moving a pallet and worryingly, this reflects a general devaluation of the service provided. It was not long ago that we would get around £50 per pallet delivered, which would yield around £10-£15 of profit. Today, the margin on the same pallet load would be at the low end of single digits, or even at just break-even point by the time the truck has gone to the hub to collect. In which case what is the sense of running at cost or at a loss? The constant noise about volume masks all of these issues because, as we come out of recession, we have never been busier, but we have also never been poorer or more put upon.
As an industry we should all turn down the talk of volumes and focus upon the margins in order to drive value through the supply chain. We can do this simply by filtering out the profitable form the non-profitable clients and walking away from tenders that do not deliver a reasonable enough return to warrant the investment in people, technology and trucks to deliver it. This is no longer an argument about volumes, but about the long-term sustainability of the networks.
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