Wednesday, July 31, 2013

XPO Logistics Records a Wider Loss Year over Year

I continue to follow this company closely as should anyone in the brokerage and now final mile business (see acquisition of 3PD).  However, I am also fascinated at how much money can be lost in the quest to make money.  I really question whether this is in the best long term interests of the company as they lost $1.00 per share or $18M dollars versus Q2 of last year when they lost $5.9M or .54 cents per share.

Bradley Jacobs, CEO, continues to say they will be EBITDA positive in the 4th quarter of this year but a lot of that (probably all of it) will come from the acquisition of 3PD.  Is it really accretive or has he just bought profits?  Time will tell and this business model is not for the faint of heart.  I guess it works really well in silicon valley where companies that make no money sell for $1bl but I am not sure it works in logistics.

What Supply Chain Needs is Long Term Thinking

We all know there is a conflict - a push / pull relationship if you will - between delivering current results and looking out to the long term.  The story goes that the short term are the "table stakes" meaning you have to deliver those in order to earn the right to think long term.  This makes sense.  After all, you would not want your company to go out of business in the short term just to ensure some long term plan is in place.

However, I do not believe that is our problem.  Actually, the issue is the other way around.  Very rarely do I see real true long term thinking.  How could you identify if your organization is spending too much time on the here and now versus setting up your strategy for the long term?  Here are some indicators to look for:

  1. Do you have any projects which span multiple years?  This is really a key indicator of strategic versus tactical thinking.  Tactical thinkers believe that somehow, magically, the whole world changes at the beginning of every year.  This, of course, is not true and therefore a strategic thinker is one who delivers todays results while working on a multi year strategy.  Very few real strategic plans and projects can be done in one year. 
  2. Does your bonus plan involve a strategic component?  If you are paying bonuses to your employees, especially senior manager and above, only on a yearly basis (they start and stop in a year) than you must likely are too entrenched in tactics and are not thinking strategy.  A way to ensure some strategic thinking is occurring is to provide bonuses based on some kind of 3 year (or maybe even 5 year) result.  Why?  Imagine you want to create an incentive to your team to redesign your supply chain network for the future.  This is at least a 2-3 year project to get it installed then, most likely, another year or two to find out if it actually works.  If you provide bonuses to hit timelines and finish tasks then you are not paying for performance rather you are paying for activity.  Pay for activity and you will definitely get more activity - just not sure that is what you want. 
  3. Every performance appraisal should have multi year projects on it.  Remko van Hoek (Twitter handle @remkovanhoek - Global Procurement Director for PwC and Visiting Professor at Cranfield School of Management) stated in an exchange that he has always had multi year projects on his goals for the last 3 roles he has been in.  This is the sign of a very strategic organization.  He also suggested said in a response to my tweet:  "Begin and end with the customer, think supply chain holistically, not silo, individual or quarterly gain".  Good advice and if you follow that you are pretty well assured that you will be thinking long term. 
Finally, I would like to address the issue of longevity in roles.  One of the big strategic problems is the speed with which people move around.  How can you ask someone to be strategic when they will be measured on just what they do this year and, if they do well, they will get promoted and move on.  For key roles (such as VP of Supply Chain) you have to inform them they will be in the role for 5 years and they will be measured on a 5 year performance cycle.  The first year or two are set up, then the last year 2 -3 years are execution.  Then and only then will you know if they did well and if they thought of and implemented a great strategy.  

If they come into a role, do some quick fix (slash costs) then get promoted I can assure you it will be a disaster.  

In the end, how you set up your culture and your rewards system will determine if you have a great strategy or just a bunch of disparate tactics. 

Warren Buffett once said (paraphrase):  Our business is not based on the orbit of the earth around the sun - meaning they do not set arbitrary targets and deadlines based on when January 1 comes along.  You should avoid doing that as well. 

Continue the conversation on Twitter using hashtag:  #Thinklongterm

Monday, July 15, 2013

XPO Logistics and 3PD - An End Run Around Coyote Logistics?

Back in November of 2012 I reported on XPO Logistics and their "insane" growth pattern.  The company, and its CEO Bradley Jacobs, seem to have no lack of money or desire to expand and acquire. In that post I said you should watch this company and time will tell. 

Today supported my claim I made back in November in a big way.  They have purchased one of the premier home delivery or "final mile" companies in the Country - 3PD.  This puts XPO in an entirely different league than most brokerage houses because it puts them squarely in the middle of a growing trend:  Final Mile Logistics. 

I have reported on FML extensively as well and now it appears there is a marriage made in heaven.  It will be interesting to see if the two can be brought together.  One thing this acquisition does prove is XPO logistics is not just about "dialing for diesels" but rather they want to get into the heavy lifting of logistics.  I think it also shows incredible foresight as the mega trend story for sure is the massive growth of this final mile segment.  Will a broker model win out over an asset based model?  Do they serve the same customer?  Can XPO overcome the inherent high costs of home delivery?  

All of this is yet to be seen and I can say however it appears that if anyone can do this right it will be XPO Logistics. 

Now the question is where does this leave the fast growing upstart, Coyote Logistics and the old guard of brokerage C.H. Robinson?  Coyote has grown rapidly and shown a great skill set in putting new and innovative technologies to use.  However, this move by XPO Logistics appears to be an "end around" around, over, and through Coyote's model.  Does this leave Coyote to be just "another broker" while XPO logistics is now branching out into more innovative services?  The initial reaction would be yes however I do think time will tell.

As far as C.H.Robinson is concerned, I think they will continue to be the "broker to the stars" - meaning a big brokerage house for huge industrial shippers.  I am not sure they will compete in this space with XPO Logistics or even want to.  

Finally, I must say the reaction of the market is ludicrous.  If I were a gambling man I would short the hell out of this stock.  Right now we are talking about a company (XPO) that is losing money and losing a lot of it.  Even with this purchase and even if 3PD is wildly profitable it does not change the fact that the base business is losing money.  Further, there is a real question if there are any core synergies between a truck brokerage company and 3PD beyond the fact that they do not own assets.  I just cannot in my wildest dreams comprehend how this purchase could or should add 15% to the value of the company.  

But, again, as I am fond of saying... we shall see. 

Read into The Earnings Statements - Freight is Soft - Beyond the Hype

I found something very intriguing for shippers in the JB Hunt earnings release and it had to do with the ICS (Integrated Capacity Solutions) earnings.  Essentially, the group is a broker so they act a lot like an actual shipper.  They have loads and they go to the open market to procure those loads.  Here is what the results say:
  • Revenue - $132M up 20%
  • Operating Income - $4.2M up 113%
That is telling as the OI is increasing at a dramatic pace over the revenue.  Why is this?  In their words:
"Operating income increased 113% over the same period 2012 primarily due to increased revenue and improvement in gross profit margin. Gross profit margin increased to 11.8% in the current quarter vs. 10.6% last year. A softer carrier environment contributed to the increase. " [Bold is mine]
So, those who are closest to the market are telling you there is a soft carrier environment out there.  A good line to have when a carrier comes in to tell you how tight the market is and why they need a rate increase.  With Revenue in a quarter of about $130M that makes this entity a $520M shipper - many shippers have a lot more freight than that and should be able to get the same results.

I am not picking on JB Hunt here, they are an incredible company, I merely use these results and statements to show what is really going on  - beyond the hype. 

Monday, July 1, 2013

Carbon Offsets Should Be Part of a Sustainability Program

When I talk sustainability, either individually or in groups, the same consistent theme comes from middle management:  We will do it if it also makes economic sense (i.e., immediate payback) but we will not do it if it "costs" us.  Very few companies and people today will execute sustainability projects purely because it is the "right" thing to do.

The problem with this however is that it is tough, if not impossible, for the free economic market to put a true cost on environmental issues.  The "cost" is down the road and the "benefit" of destroying the environment is now and that leads to distorted ideas and distorted business decisions.  I heard a person say a the Alternative Clean Transportation (ACT) conference this week that our minds would adjust if we thought:
"Rather than thinking we inherited the earth from our parents, we should think like we are borrowing it from our children."
When you think about borrowing the earth you think about what state it will be when you leave it regardless of whether there is a cost now.  And that leads you to build out a very detailed sustainability practice regardless of the immediate payback.  And this leads us to this great post about carbon offsets.

Yes, as Marc Gunther mentions, carbon offsets are so 2007.  Essentially the idea was you would either voluntarily or involuntarily (through mandatory carbon offset markets) buy into offset projects to help mitigate the long term damage any action you take may have on the long term of the environment.  This led to the EU carbon markets and now the California Carbon Exchange.  The problem right now is the price of a ton of carbon is far too low.

Some point to the fraud which naturally was part of these markets as proof they did not work - kind of like saying because people get murdered in Chicago it is proof the laws against murder are not good for society.  This is a ridiculous argument.  The fact there is fraud says more about the general business community than it does about the markets.

In the end, to build a true sustainability program you have to invest beyond the hear and now from an immediate business case, you have to acknowledge the markets do not properly price issues like carbon emissions, global warming, rise of sea levels etc. etc., and you have to be willing to do something about it.  I am not saying you have to bankrupt your company in the defense of the environment but I am saying you have to realize that the market does not price 400ppm of carbon in the atmosphere properly. The carbon which brought us to 400ppm was catastrophic (see where some say 350ppm was the tipping point) and the marginal cost should have been astronomical. But, alas, it was not; it was essentially free.  That is a market which is not working properly.