Taxonomy: Shipping

3PLs face challenges in the year ahead

But the industry is much stronger financially than container liner companies, according to the consulting firm AlixPartners

3PLs face challenges in the year ahead

But the industry is much stronger financially than container liner companies, according to the consulting firm AlixPartners

3PLs face challenges in the year ahead

But the industry is much stronger financially than container liner companies, according to the consulting firm AlixPartners

 
The logistics industry is much more financially stable than the companies in the liner shipping industry, says the consulting firm AlixPartners, but that “does not necessarily mean that 2019 is going to be as stable as we would like to think,” says Gabe Koch, a director at AlixPartners.
      Economic indicators such as growing world GDP, rising U.S. industrial production index, continuing growth in world merchandise trade and a decline in the inventory-to-sales ratio over the past two years augur well for the industry, says Brian Nemeth, a director at the firm.
    Looking at the financial health of 26 public logistics companies, AlixPartners concluded “by and large, the industry remains fairly stable,” for example, with average leverage ratio — debt to EBITDA (earnings before interest, tax, depreciation and amortization) — below three.
    By a different measure — the Altman Z score, a measure of credit strength that gauges the likelihood of a bankruptcy — the 26 firms had an average of 4.41 in the last 12 months, with only one of the 26 below 1.81, putting it in the “distress zone.” That’s down from four companies with scores below 1.81 in 2015.
    In contrast, AlixPartners study of the public liner companies has found them to have an average between 1.1 and 1.91 in recent years.
   “So relatively speaking, the logistics space is performing well, said Nemeth.
    Speaking during a webinar last week presented by the Journal of Commerce, Koch said labor issues, including the driver shortage in the U.S., is “one of the more recurring and obviously challenges” logistics companies face and that finding drivers is a challenge in Europe as well.
    “But the driver shortage is only one part of the larger logistics problem of having good quality labor,” he said. “There’s a hunt for talent that goes on when we’re in an environment where we have more job openings than we actually have unemployed people to fill them. While the U.S. driver shortage may garner the most attention, we are also seeing shortage of warehouse labor, other blue collar jobs and white collar jobs.”
    He noted that “logistics companies are not just competing against other logistics companies, but they’re competing against other industries” and that retaining workers, not just recruiting them, is a challenge.
    The issue is getting a lot of attention, he said, with some companies making it “truly a CEO-level priority.”
   He said while part of the issue is compensation, part of it is “creating real career paths” for workers in the logistics industry. “That has yet to be the norm,” he said.
    The result, he said, is that “we expect to see a bit of a pickup in labor costs and that in turn is going to drive demand to have companies do more with less,” with companies focusing on how to improve productivity.
    Another challenge in the coming year is the cost of fuel, which is expected to rise across the industry as a result of the ocean shipping companies switching to low-sulfur bunkers in order to meet a requirement by the International Maritime Organization to reduce sulfur in engine emissions, beginning on Jan. 1, 2020.
    “This is an area where logistics companies who are on top of fuel trends and who are thinking about this and have developed very strong customer relationships have a chance to really shine,” said Koch, as they advise companies on ways to balance the pros and cons of various transport modes in terms of transit time and costs.
    The continuing growth in e-commerce is driving demand for logistics providers with expertise in a particular industry such as pharmaceuticals, chemicals or automobiles as well as those with last-mile and even last-yard solutions for both business-to-consumer and business-to-business deliveries.
    According to the Council of Supply Chain Management Professionals "last-yard" logistics refers to the status of a shipment once it is delivered to a customer or consumer, and how the shipment, once in the end user's possession, is routed to the specific location where it may be needed or used.
    Koch noted a large retailer he worked with recently regretted its switch to a low-cost logistics provider. “They said it was one of the most expensive decisions they made, and it was because the provider really didn’t understand their industry.”
    Logistics companies can do well, he suggested, by understanding what they are good at as opposed to just following a trend and by understanding which of their customers are profitable.
    AlixPartners said that its research has found that companies that have invested a higher percentage of their revenue in capital expenditures have seen improved productivity and better EBITDA margins within two years.
    Automation and robotics are an area of growing interest in the logistics business, but AlixPartners says 50 percent to 70 percent of “robotic process automation” pilot projects fail.
   It says “most failures are due to governance/leadership reasons, not due to technology.”
    Robots can be cost-effective, said Koch. “Bots don’t have the same labor issues of working with humans, but at the same time a lot of these programs struggle on implementation.”
    He said standardization is “key to the success of any kind of bot program. Conversely, where there is a high degree of customization, it’s much harder to implement.”
    While 3PLs may be pressed by customers and industry gurus to take advantage of potentially “disruptive technologies” such as artificial intelligence and the internet of things, Koch said “some of these really will be meaningful and some of them are just going to be nice to have.
    “Understanding what is important to your customer base and focusing investment on those areas as opposed to just jumping on a bandwagon — that becomes really key,” he said.
   “If there is one kind of takeaway, it’s don’t worry about the trend, it’s what fits into your business model and your core competencies that is meaningful.
    “At the end of the day,” he said customers will ask themselves if a 3PL can “do it better, can they do it faster, can they do it with a greater value than a shipper might be able to do it in house themselves.”
AAPA commends the decision to temporarily suspend another tariffs increase and supports and encourages steps focused on expanding exports rather than creating new import restrictions.
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