Voice concerns over the impact of any new technology and you risk being branded a Luddite. But in raising question marks over on-line reverse auctions for pallets, European manufacturers totally reject the label.
On-line auctions have gained a major foothold in the US pallet market and producers this side of the Atlantic are clearly not naive enough to think they could stop them spreading into their backyard.
‘Like it or not, they’re going to be a part of the future of this business and it’s pointless to bury your head in the sand and pretend they’re not,’ said Paul Davidson, immediate past president of the UK timber pallet and case manufacturers’ organisation TIMCON. ‘But we are concerned about their potential effect on quality and safety in our industry and what we’re proposing to the market operators is that we work with them to take this business forward and maintain standards.’
An on-line reverse auction does exactly what it says on the tin. Instead of sellers putting their goods under the hammer on the internet, the purchaser of pallets, or any of a huge range of other goods, flags up what they want to buy on the auctioneer’s website. Suppliers then log their bids to fulfil all or part of the order. All the bidders know the other prices being quoted, although not who is quoting them.
In the US, this has become a multi-billion dollar market overall and a multi-million dollar business for pallets. The biggest player in the sector – and a company now spreading its net to the UK and the rest of Europe via offices in London, Brussels, Paris and Frankfurt – is FreeMarkets. Formed in 1995, the company’s reverse auctions topped US$9.9bn last year and now encompass 165 different product sectors.
FreeMarkets is loathe to divulge how much its clients (the buyers) spend, but according to the American industry magazine Pallet Enterprise, BP Amoco took part in one auction for US$2.4m worth of pallets. Other big on-line buyers have included Quaker Oats, Owens Corning, Honeywell and Mack Trucks.
Leading players in the American pallet market have expressed similar anxieties to their European counterparts about the auctions. They say bids are being made at way below cost. This is attributed partly to the ‘hot-house’ atmosphere of the events. According to Frank Falzone of FPF Pallets Plus of Chicago, it’s also because companies aren’t used to their mechanics. ‘Most pallet companies don’t know how to calculate costs [on-line] and some are bidding at ridiculously low prices.’
According to Pallet Enterprise, US pallet bids have been up to 23% under FreeMarket’s ‘reserve price’ – and the latter already tends to be 3-5% below general market levels.
In Europe, companies known to have used FreeMarkets or German competitor Portun’s on-line pallet auctions include 3M, BP and Jewson‘s parent company St Gobain. Like the Americans, European pallet producers say the auctions skew the market more towards the customer.
‘And as the buyers tend to be much bigger than the pallet makers, it is already heavily weighted towards them,’ commented Mr Davidson.
According to TIMCON vice-president Gil Covey, the anecdotal evidence is that prices in some European auction prices have been 25% below the market. ‘They create a very fervid and competitive atmosphere to the extent that prices are quoted which I cannot believe are profitable. You couldn’t buy the timber for what some companies are bidding.’
The key worry of TIMCON and the European industry body FEFPEB is that such low prices could result in suppliers cutting corners on quality, particularly in the ultra-competitive Europallet market.
‘It mustn’t be forgotten that the pallet is a safety critical product,’ said Mr Covey. ‘If one fails under load, the consequences could be disastrous, even fatal.’
Another concern is that third parties are intervening in on-line auctions between buyer and seller.
‘We want to be sure that the quotes are coming from bona fide producers,’ said Mr Covey. ‘The auctions already affect the usual liaison between buyer and seller on quality and specification. If third-party dealers are moving in, the situation is exacerbated – and prices are likely to be more depressed.’
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“We’re quite happy to co-operate so the system works fairly for everyone – not least our customers |
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Gil Covey, TIMCON vice-president |
FreeMarkets’ UK and European offices pointed TTJ in the direction of their US headquarters for comment. From there John Maholtz, director of market-making and supplier services, refuted the view that the company’s auctions ‘commoditised products’.
‘We’re working with products as complex as custom-machined aerospace components, so we appreciate the importance of quality and specification,’ he said.
Buyers, he maintained, provide in-depth specification information when they put out a ‘request for quotes’ (RFQ) and do not necessarily go for the lowest price. ‘They opt for the source of supply that best suits their needs and the best value. That doesn’t always mean the cheapest. They take into account pallet design systems, mode of transport, recycling and recovery systems and so on. Our role is to be a market facilitator. It’s not our objective to drive down prices,’ said Mr Maholtz.
FreeMarkets also stresses that it puts together ‘data-rich’ profiles of suppliers. ‘Our on-line registration system entails companies supplying us with several tiers of information to differentiate them and find out exactly what they do and how they do it. Data includes everything from their location, to the markets they serve, their transport and retrieval systems, fumigation and treatment facilities, design and delivery parameters. We then serve all this information up to the buyer. We believe the system involves no more inherent risk on quality or safety than traditional trading.’
FreeMarkets also maintains that it would be difficult for third-party intermediaries to infiltrate auctions. ‘The first safeguard is our information gathering about suppliers. Also, their quotes are legally binding and they’re obliged to fulfil them. If they don’t, we put them in a penalty box so they can’t participate in auctions for nine months.’
But TIMCON and FEFPEB want greater assurances from the auction operators and are proposing a ‘quality charter’ for everyone involved.
‘We’re quite happy to co-operate so the system works fairly for everyone – not least our customers,’ said Mr Covey.
Among recommendations for the ‘charter’, FEFPEB proposes that all suppliers using auctions should define pallet specifications in a set format. It says they should identify timber species, dimensions, fixings, nailing patterns and manufacturing systems. Markings should be listed, as should proof of ownership and quality systems. Suppliers should also confirm that their pallets are new, give performance criteria, testing procedures and detail permitted moisture content and the method used to achieve it.
In the case of certified standard pallets, like CP or Europallets, manufacturers should provide proof they are licensed to make them.
FEFPEB also recommends that all suppliers using the auctions should belong to national pallet associations They should additionally detail call-off procedures and payment terms, transport arrangements and other contract terms and conditions.
The final, and arguably most important recommendation, is that there should be precisely defined on-delivery procedures for checking pallets bought in auctions to ensure suppliers do not cut specification.
Mr Davidson wrote to FreeMarkets’ UK office several months ago proposing talks about these ‘basic and fair ground rules for pallet auctions’. If an agreement were reached, he said, TIMCON might give the company a list of its members, together with details of accredited standard pallet producers.
‘This would ensure FreeMarkets has access to bona fide pallet manufacturers in which you could have confidence to meet exacting product and service requirements,’ wrote Mr Davidson.
FreeMarkets has not responded to the invitation. However, Mr Maholtz told TTJ that he would be willing to talk to anyone ‘with suggestions that would enhance our auction systems’.
TIMCON said it would try again to establish a dialogue with the company.
