Longtime investment analyst John G. Larkin understands how supply chain performance can boost shareholder value. Here are some of his thoughts on how to do that.
Masterful supply chain management can have a positive impact on the value of a company's stock. No one recognizes that more than longtime investment analyst John G. Larkin, who has made a career out of following the transportation and logistics space.
Recognized as an all-star analyst by Institutional Investor magazine and The Wall Street Journal, Larkin has been tracking transportation stocks for two decades. He's currently managing director and head of transportation capital market research at Stifel, Nicolaus & Company Inc.
Larkin began his career in the transportation industry in 1977, at the Center for Transportation at the University of Texas at Austin. After graduating from Harvard University with a Master of Business Administration degree in 1984, Larkin joined the rail carrier CSX Transportation. From there he went to the investment bank Alex. Brown & Sons, and from 1998 to 2001 was chairman and chief executive officer of RailWorks Corp., a railway construction and maintenance company. He then returned to the investment field, joining the asset management firm Legg Mason to lead its entry into the transportation market. Legg Mason's capital markets group was sold to Stifel, Nicolaus & Company in 2005.
In a recent interview with Editor James Cooke, Larkin discussed how supply chain executives can increase shareholder value.
Name: John G. Larkin Title: Managing director and head of transportation capital markets research Organization: Stifel, Nicolaus & Company Inc. Education: Bachelor of Science in Civil Engineering, University of Vermont; Master of Science in Civil Engineering, University of Texas?Austin; Master of Business Administration, Harvard University Work History: Research assistant at the Center for Transportation at the University of Texas at Austin; Transportation systems consultant at Day & Zimmermann Inc.; various positions in planning, and economic analyst at CSX Transportation Inc.; Managing director at Alex. Brown & Sons; Chairman and chief executive officer of RailWorks Corp.; Managing director at Legg Mason CSCMP Member: Since 2012
As someone who follows transportation and supply chains from an investor's perspective, can you describe a couple of ways a company can use its supply chain to boost its shareholder value?}
First, shippers can create shareholder value by harnessing their supply chains to reduce the cost of goods sold. A lower cost of goods sold will expand margins and increase earnings, EBITDA (earnings before interest, taxes, depreciation, and amortization), or free cash flow—all three of which happen to be the basis for most equity-oriented valuation models.
[There are many ways to reduce the cost of goods sold.] By optimizing product packaging—thereby wasting less space on a transportation vehicle—and optimizing product design—making it less bulky and more concentrated—shippers can fit more product on a single vehicle. These changes can reduce the number of vehicles used and, in turn, the cost of transportation.
Next, shippers can optimize their modal mix by making sure that they are using the right blend of parcel, less-than-truckload, truckload, intermodal, rail carload, barge, or pipeline services. Then they can optimize the number and location of distribution centers with the idea of optimizing modal mix and fully utilizing lowest-cost capacity. And of course, shippers can rationalize and optimize their supplier base with an eye toward minimizing transportation costs, improving the quality of finished goods, and fully leveraging purchasing economies.
Secondly, shippers can create shareholder value by improving their capital-employed ratio. They can do this by minimizing the amount of inventory transiting the supply chain while simultaneously reducing the risk of stockouts. They can also minimize their transportation/logistics department overhead—outsourcing to a 3PL (third-party logistics service provider) or a 4PL (fourth-party logistics service provider) may help here. Another option is leasing facilities where there is a dearth of demand or a surplus of facilities exists, and they can lease any rolling stock. Less capital employed typically translates into less money borrowed and less interest paid. Less interest expense, in turn, enhances margins and free cash flows, either of which are often used by investors to value companies.
When you look at a carrier's balance sheet, what catches your attention first, and why?
It is usually the degree of financial leverage found on a company's balance sheet that I first examine. Highly leveraged companies pay more to access capital than do more conservatively capitalized companies. They often make short-term decisions in order to avoid default, which may suboptimize both service to shippers and the creation of shareholder value. Conversely, companies with little debt—or with few operating leases for that matter—have the flexibility to grow at a moment's notice and can walk away from bad business and/or unattractive pricing.
During the economic downturn many companies have looked to their supply chains to free up "working capital." Do Wall Street investors look favorably on those initiatives, and why?
I believe that Wall Street looks favorably on these sorts of initiatives, as additional capital is now—in theory—available, assuming the initiatives accomplish their objectives: to invest in core assets and profitable growth. Those to whom a company normally outsources typically have lower costs of capital, better systems, more relevant knowledge, and much better buying clout. These 3PLs and 4PLs are willing to share the savings with the shipper, thereby lowering operating cost, and at the same time can often relieve the shipper of its need to own trucks, trailers, material handling equipment, warehouses, and so forth. The freed-up capital can then be redeployed into the shipper's core business.
At the CSCMP Annual Global Conference in Atlanta, you made a couple of intriguing statements. The first was that companies should be prepared for "less Asia, more Mexico" and more "insourcing." Can you explain what you mean by that?
For the past three decades or so, manufacturers have raced to shift manufacturing to China. That was essentially a "no brainer" decision for many years. However, with fuel prices rising, raw materials sometimes difficult to source in Asia, and Asian labor costs rising, some are finding Mexico to be a lower-cost alternative for sourcing manufactured goods that are both labor- and transportation-intensive. Recent studies by AlixPartners and the Boston Consulting Group have confirmed this "nearshoring" thesis. Of course, manufacturing that is not transportation-intensive, such as electronics, will likely remain in Asia for the foreseeable future.
You also said at the conference that new advances in robotics could prove to be game changers in the supply chain. How so?
Products that can be manufactured in a heavily automated or "roboticized" facility may come all the way home to the good old USA. As you might expect, the robot costs the same in Kansas as it does in Vietnam.
There's been a big push to make supply chains "green." Are investors supportive of those efforts?
Most investors like a clean environment as well as the next guy. However, they are often less fanatical about it than are the hard-core environmentalists. What they are most interested in is value creation. If the green strategy doesn't reduce costs, enhance free cash flow, reduce asset intensity, make a product more strongly desired by customers, reduce inventories, and so on, then investors generally are less interested in whether a strategy is green or not. The exceptions to this rule are the managers who are running funds that have a strict mandate in their charters to invest in an environmentally responsible fashion. A good number of these types of funds exist.
Finally, pull out your crystal ball. Where is the U.S. economy headed in 2013?
The economy has been growing at less than half the rate one would expect to see coming out of such a deep macroeconomic trough. The lack of economic leadership in Washington has contributed to this tepid growth, in my view. But so has the uncertainty in Europe, the Middle East, and China. At home, though, we have been dealing with all sorts of headwinds, such as rising energy prices, the housing crisis, a plethora of new federal regulations, and the lack of fiscal policy discipline.
So, my guess is that with the current administration remaining in power, we will be looking at continued tepid growth, say 1- to 2-percent GDP (gross domestic product) growth per annum. Those that pay the bulk of the taxes simply don't like hearing that they aren't doing their fair share and will take fewer risks with their capital.
J.B. Hunt President and CEO Shelley Simpson answers a question from the audience at the Tuesday afternoon keynote session at CSCMP's EDGE Conference. CSCMP President and CEO Mark Baxa listens attentively to her response.
Most of the time when CEOs present at an industry conference, they like to talk about their companies’ success stories. Not J.B. Hunt’s Shelley Simpson. Speaking today at the Council of Supply Chain Management Professionals’ (CSCMP) annual EDGE Conference, the trucking company’s president and CEO led with a story about a time that the company lost a major customer.
According to Simpson, the company had a customer of their dedicated contract business in 2001 that was consistently making late shipments with no lead time. “We were working like crazy to try to satisfy them, and lost their business,” Simpson said.
When the team at J.B. Hunt later met with the customer’s chief supply chain officer, they related all they had been doing for the company. “We told him that we were literally sitting our drivers and our trucks just for you, just to cover your shipments,” Simpson said. “And he said to us, ‘You never shared everything you were doing for us.’”
Out of that experience, came J.B. Hunt’s Customer Value Delivery framework. This framework, according to Simpson, provides a roadmap for creating value and anticipating customer needs.
Framework for Excellence
J.B. Hunt created the above framework to help them formulate better relationships with customers.
The framework consists of five steps:
Understand customer needs: It all starts, according to Simpson, with building a strong relationship with the customer and then using the information gained from those discussions to build a custom plan for the customer.
Deliver expectations: This step involves delivering on the promises made in that custom plan.
Measure results: J.B. Hunt believes that they are not done when freight makes it to the destination. They also need to measure how successful they were versus what the customer expected from them.
Communicate performance: This step involves a two-way exchange, where J.B. Hunt walks the customer through their performance and gets verbal agreement on whether or not they have met the customer’s needs.
Anticipate new value: Here J.B. Hunt looks at what they are hearing from their customer today and then uses that information to derive what the customer may be looking for in the future.
Simpson said the most important part of the process is the fourth step, communicating performance (perhaps reflecting the piece that went wrong in that initial failed customer relationship).
Not only can this framework be used to drive excellence in a company, but it can also be adapted as a model for driving personal excellence, Simpson said. Instead of understanding the customer needs, the process starts with understanding yourself: what your strengths and interests are. This understanding helps drive a personal development plan and personal goals for the year, which can be measured and assessed. For example, each year, Simpson gives herself a letter grade on each of her personal goals and communicates her assessment back to her boss. She has also found it helpful to anticipate where opportunities lie beyond what she is personally doing.
Confronted with the closed ports, most companies can either route their imports to standard East Coast destinations and wait for the strike to clear, or else re-route those containers to West Coast sites, incurring a three week delay for extra sailing time plus another week required to truck those goods back east, Ron said in an interview at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
However, Uber Freight says its latest platform updates offer a series of mitigation options, including alternative routings, pre-booked allocation and volume during peak season, and providing daily visibility reports on shipments impacted by routings via U.S. east and gulf coast ports. And Ron said the company can also leverage its pool of some 2.3 million truck drivers who have downloaded its smartphone app, targeting them with freight hauling opportunities in the affected regions by pricing those loads “appropriately” through its surge-pricing model.
“If this [strike] continues a month, we will see severe disruptions,” Ron said. “So we can offer them alternatives. We say, if one door is closed, we can open another door? But even with that, there are no magic solutions.”
Turning around a failing warehouse operation demands a similar methodology to how emergency room doctors triage troubled patients at the hospital, a speaker said today in a session at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
There are many reasons that a warehouse might start to miss its targets, such as a sudden volume increase or a new IT system implementation gone wrong, said Adri McCaskill, general manager for iPlan’s Warehouse Management business unit. But whatever the cause, the basic rescue strategy is the same: “Just like medicine, you do triage,” she said. “The most life-threatening problem we try to solve first. And only then, once we’ve stopped the bleeding, we can move on.”
In McCaskill’s comparison, just as a doctor might have to break some ribs through energetic CPR to get a patient’s heart beating again, a failing warehouse might need to recover by “breaking some ribs” in a business sense, such as making management changes or stock write-downs.
Once the business has made some stopgap solutions to “stop the bleeding,” it can proceed to a disciplined recovery, she said. And to reach their final goal, managers can use the classic tools of people, process, and technology to improve what she called the three most important key performance indicators (KPIs): on time in full (OTIF), inventory accuracy, and staff turnover.
CSCMP EDGE attendees gathered Tuesday afternoon for an update and outlook on the truckload (TL) market, which is on the upswing following the longest down cycle in recorded history. Kevin Adamik of RXO (formerly Coyote Logistics), offered an overview of truckload market cycles, highlighting major trends from the recent freight recession and providing an update on where the TL cycle is now.
EDGE 2024, sponsored by the Council of Supply Chain Management Professionals (CSCMP), is taking place this week in Nashville.
Citing data from the Coyote Curve index (which measures year-over-year changes in spot market rates) and other sources, Adamik outlined the dynamics of the TL market. He explained that the last cycle—which lasted from about 2019 to 2024—was longer than the typical three to four-year market cycle, marked by volatile conditions spurred by the Covid-19 pandemic. That cycle is behind us now, he said, adding that the market has reached equilibrium and is headed toward an inflationary environment.
Adamik also told attendees that he expects the new TL cycle to be marked by far less volatility, with a return to more typical conditions. And he offered a slate of supply and demand trends to note as the industry moves into the new cycle.
Supply trends include:
Carrier operating authorities are declining;
Employment in the trucking industry is declining;
Private fleets have expanded, but the expansion has stopped;
Truckload orders are falling.
Demand trends include:
Consumer spending is stable, but is still more service-centric and less goods-intensive;
After a steep decline, imports are on the rise;
Freight volumes have been sluggish but are showing signs of life.
CSCMP EDGE runs through Wednesday, October 2, at Nashville’s Gaylord Opryland Hotel & Resort.
The relationship between shippers and third-party logistics services providers (3PLs) is at the core of successful supply chain management—so getting that relationship right is vital. A panel of industry experts from both sides of the aisle weighed in on what it takes to create strong 3PL/shipper partnerships on day two of the CSCMP EDGE conference, being held this week in Nashville.
Trust, empathy, and transparency ranked high on the list of key elements required for success in all aspects of the partnership, but there are some specifics for each step of the journey. The panel recommended a handful of actions that should take place early on, including:
Establish relationships.
For 3PLs, understand and get to the heart of the shipper’s data.
Also for 3PLs: Understand the shipper’s reason for outsourcing to a 3PL, along with the shipper’s ultimate goals.
Understand company cultures and be sure they align.
Nurture long-term relationships with good communication.
For shippers, be transparent so that the 3PL fully understands your business.
And there are also some “non-negotiables” when it comes to managing the relationship:
3PLs must demonstrate their commitment to engaging with the shipper’s personnel.
3PLs must also demonstrate their commitment to process discipline, continuous improvement, and innovation.
Shippers should ensure that they understand the 3PL’s demonstrated implementation capabilities—ask to visit established clients.
Trust—which takes longer to establish than both sides may expect.
EDGE 2024 is sponsored by the Council of Supply Chain Management Professionals (CSCMP) and runs through Wednesday, October 2, at the Gaylord Opryland Resort & Convention Center in Nashville.