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The Last Mile - The Holy Grail of Logistics

Stock Market

By Jack O'Connell 2015-05-26 18:00:40

(Article originally published in Mar/Apr 2015 edition.)

It’s the Holy Grail of logistics. Why so important?

I love logistics. Not that I know very much about it, but the subject fascinates me. I mean, how do you keep track of 7,000 40-foot containers on a 14,000-TEU container ship? How do you know where each one goes when it is offloaded? If the ship stops at multiple ports, how does it know which ones to unload at a given port? How, for that matter, do terminal managers keep track of the thousands of “boxes” they have lying around the yard, stacked four or five high, on any given day? Some are empty, others are full. Where do they all go?

These and other questions ran through my head as I attended the 30 Annual BB&T Capital Markets’ Transportation Services Conference in Miami last month, where I quickly discovered that it’s all about the last mile. Well, not all about, as the West Coast port strike got plenty of attention too, but mostly.

What is the last mile, you ask? Good question. It’s the final leg of a journey that may begin in China and end at your local Target store with stops along the way in LA/Long Beach and the nearest Target distribution center. Or it may end at your doorstep when the FedEx or UPS or Amazon package arrives. Technically, it’s where the product and the customer meet. It’s not really a mile, of course. That’s just a figure of speech. It’s usually more than a mile. It usually involves a truck or a van, and it’s often the most expensive part of the journey.

3PLs

And that’s why it gets so much attention. Last-mile business is lucrative. And congested, in more ways than one. The West Coast port strike is a good example. It’s held up deliveries for most of the nation’s top retailers and set schedules back anywhere from three to six months.

It’s been so disruptive that major retailers like Walmart and Home Depot and Target are rethinking their carriers and routes and shifting container traffic from China away from West Coast ports in favor of those on the East and Gulf Coasts. Alternative routes include the Panama Canal or going west through the Suez Canal (a much longer journey, but not that much more expensive). And at least you’ll know the products won’t sit on the dock.

And that’s where the so-called 3PLs come in – third-party logistics providers. They take the hassle out of logistics. They tell you the best route to use and which carriers to use and how to save money in the process. Coca-Cola has 77 of them, and all big shippers have their own 3PL network to supplement their in-house capabilities.

Some 3PLs are carriers themselves (think J.B. Hunt and Ryder, or FedEx and UPS, or any of the big rails). These are called “asset-owning” carriers. Others are “non-asset-owning” carriers like C.H. Robinson, XPO and Coyote Logistics. There are thousands of these “asset-light” companies – lesser known names who are like “pure plays”: They don’t own any ships or planes or trucks but contract on your behalf with those who do. They pride themselves on their expertise and knowledge of the business of logistics. They are like investment bankers, providing advice and making the investments and collecting a fee in the process.

3PLs stand to make a bundle in the aftermath of the West Coast port strike as shippers look for the fastest way to get their long-overdue products to market. So let’s take a closer look at one of the fastest-growing – XPO Logistics.

Established less than four years ago when a group of investors led by serial entrepreneur Brad Jacobs invested $150 million in what was then known as Express-1, XPO (XPressOne – get it?) has grown through a series of “roll-up” acquisitions and cold starts to become the #3 provider of freight brokerage and intermodal services, the #1 provider of last-mile logistics for heavy goods, the #1 manager of expedited shipments, and a leader in the growing cross-border intermodal trade with Mexico. Its revenue run rate now exceeds $3 billion a year, and the company boasts of exceeding $5 billion by the end of this year and $9 billion in 2017.

Jacobs’ vision is to become a “one-stop” provider of intermodal services, and he is well on his way to his goal. The acquisition last year of Pacer International, a major provider of rail and trucking services, was his signature coup to date and gave XPO access to 60,000 miles of network rail routes and added $1 billion in revenue. More recently, the addition of UX Specialized Logistics – which is now called XPO Last Mile – bolstered the company’s position in last-mile logistics and brought with it 1,600 independent carriers and installers plus important long-term contracts with blue chip retailers and e-tailers.

The company IPO’d three years ago at $15.75 a share and is today trading in the mid-40s, so Jacobs is clearly on to something. Yet XPO continues to lose money – roughly $10 million in last year’s fourth quarter and $63.4 million for all of 2014. I guess that’s to be expected when you’re growing so fast, and it doesn’t seem to bother knowledgeable investors like Singapore’s GIC and the Ontario Teachers’ Pension Plan, which together with another big Canadian pension plan (PSP Investments) plunked down $700 million for an equity stake in XPO last September. Combine that with $400 million in Senior Notes from a February issue and XPO has a cool $1.1 billion to play with as it pursues its aggressive growth strategy.

Too high-flying for your taste? Then try something more staid like Ryder Systems, an established leader in the 3PL space with a proven track record. You remember Ryder. It used to be called Ryder Rent-a-Truck and sported bright yellow trucks that people like you and me would rent for a day or a week. Well, the yellow trucks are long gone and, while Ryder still rents trucks, it does so a bigger scale – a much bigger scale.

Among its many blue-chip customers are Coca-Cola, Toyota, GM, P&G and Dunkin’ Donuts. So the next time you see a Coca-Cola truck coming down the road, there’s a good chance it’s owned and operated by Ryder. Ryder posted net earnings from continuing operations of $220 million last year on sales of $6.6 billion. It has 216,500 vehicles in its fleet and a growing reputation for supply chain efficiency. Its stock has more than doubled over the last three years and currently trades in the low 90s.

All About Amazon

One of the more interesting panels at the BB&T conference concerned e-commerce and the impact of online shopping on last-mile services. Panelists included representatives from Walmart and a number of small-package delivery and consulting firms as well as XPO’s Jacobs. The big concern was capacity: As big-box retailers like Target and Walmart grow their online sales from two percent or so of revenue to 10-12 percent, how will all those packages be delivered? Especially when more and more shoppers are demanding same-day or next-day delivery. It’s big business, about $15 billion a year, and growing fast.

Amazon, the 500-pound gorilla in the e-commerce space, reportedly lost $500 million last year on its free delivery service for preferred customers. One of the reasons is the high percentage of returns, which can be very expensive to process. In-store returns are much cheaper, so a growing alternative to same-day or next-day delivery is in-store pickup of online orders. Another reason is cost: Last-mile service in the form of overnight delivery via FedEx or UPS or DHL is expensive for the shipper and very lucrative for the carrier, which is why everybody wants a piece of the action.

One wit pointed out that same-day delivery in places like West Texas could be difficult. Another noted that the use of drones was still a science fiction fantasy, although Google Express reportedly has plans to do just that. A third pointed out that the use of peak season surcharges, such as during the Christmas shopping season, will become more and more common to avoid what happened to UPS, which increased its seasonal workforce by 17 percent last year to handle the expected Thanksgiving-to-Christmas rush (it had been caught shorthanded the year before) only to see volumes rise by just nine percent.

Facts & Factoids

You can’t attend a conference like this without picking up some neat trivia and new buzzwords to go with the usual “takeaways.” For example, did you know that there’s a “modal shift” underway from truck to rail? Yup, and it’s causing lots of congestion on the rails as they struggle to keep up with demand. Did you know that many companies plan to “upsize” their “revolver” to take advantage of new investment opportunities? Or that sometimes it’s just better to “keep your powder dry” and wait for the right opportunity to come along?

My favorite was “That’s a conversation we don’t want to have,” which is a polite way of saying “No way!” It arose in connection with a hypothetical request from a carrier for a four-to-six percent rate increase, which is what some shippers expect. Four to six percent is a “non-starter.” Two or three percent is more like it.

It’s a fascinating subject, all right, and it’s amazing to think that you can live in New York or Toronto or Copenhagen and eat blueberries from Chile or asparagus from Peru in the middle of February. Or get fresh-cut flowers any time of year no matter where you live. Or pens for a dollar a dozen and socks for two dollars a dozen or a good computer for under $500 and enough furniture to fill a small apartment for less than $1,000.

It’s all made possible by logistics, intermodal and supply chain management – the science of moving a container from point A to point B in the fastest and cheapest way possible. Transportation today represents barely five percent of the total cost of goods – the greatest bargain ever and down from 20 percent a generation ago – and it’s the result of big ships and big planes moving lots of containers to computerized terminals where they are offloaded onto trains and trucks and vans for last-mile delivery to stores and customers. – MarEx

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.