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.
Benefits for Amazon's customers--who include marketplace retailers and logistics services customers, as well as companies who use its Amazon Web Services (AWS) platform and the e-commerce shoppers who buy goods on the website--will include generative AI (Gen AI) solutions that offer real-world value, the company said.
The launch is based on “Amazon Nova,” the company’s new generation of foundation models, the company said in a blog post. Data scientists use foundation models (FMs) to develop machine learning (ML) platforms more quickly than starting from scratch, allowing them to create artificial intelligence applications capable of performing a wide variety of general tasks, since they were trained on a broad spectrum of generalized data, Amazon says.
The new models are integrated with Amazon Bedrock, a managed service that makes FMs from AI companies and Amazon available for use through a single API. Using Amazon Bedrock, customers can experiment with and evaluate Amazon Nova models, as well as other FMs, to determine the best model for an application.
Calling the launch “the next step in our AI journey,” the company says Amazon Nova has the ability to process text, image, and video as prompts, so customers can use Amazon Nova-powered generative AI applications to understand videos, charts, and documents, or to generate videos and other multimedia content.
“Inside Amazon, we have about 1,000 Gen AI applications in motion, and we’ve had a bird’s-eye view of what application builders are still grappling with,” Rohit Prasad, SVP of Amazon Artificial General Intelligence, said in a release. “Our new Amazon Nova models are intended to help with these challenges for internal and external builders, and provide compelling intelligence and content generation while also delivering meaningful progress on latency, cost-effectiveness, customization, information grounding, and agentic capabilities.”
The new Amazon Nova models available in Amazon Bedrock include:
Amazon Nova Micro, a text-only model that delivers the lowest latency responses at very low cost.
Amazon Nova Lite, a very low-cost multimodal model that is lightning fast for processing image, video, and text inputs.
Amazon Nova Pro, a highly capable multimodal model with the best combination of accuracy, speed, and cost for a wide range of tasks.
Amazon Nova Premier, the most capable of Amazon’s multimodal models for complex reasoning tasks and for use as the best teacher for distilling custom models
Amazon Nova Canvas, a state-of-the-art image generation model.
Amazon Nova Reel, a state-of-the-art video generation model that can transform a single image input into a brief video with the prompt: dolly forward.
Economic activity in the logistics industry expanded in November, continuing a steady growth pattern that began earlier this year and signaling a return to seasonality after several years of fluctuating conditions, according to the latest Logistics Managers’ Index report (LMI), released today.
The November LMI registered 58.4, down slightly from October’s reading of 58.9, which was the highest level in two years. The LMI is a monthly gauge of business conditions across warehousing and logistics markets; a reading above 50 indicates growth and a reading below 50 indicates contraction.
“The overall index has been very consistent in the past three months, with readings of 58.6, 58.9, and 58.4,” LMI analyst Zac Rogers, associate professor of supply chain management at Colorado State University, wrote in the November LMI report. “This plateau is slightly higher than a similar plateau of consistency earlier in the year when May to August saw four readings between 55.3 and 56.4. Seasonally speaking, it is consistent that this later year run of readings would be the highest all year.”
Separately, Rogers said the end-of-year growth reflects the return to a healthy holiday peak, which started when inventory levels expanded in late summer and early fall as retailers began stocking up to meet consumer demand. Pandemic-driven shifts in consumer buying behavior, inflation, and economic uncertainty contributed to volatile peak season conditions over the past four years, with the LMI swinging from record-high growth in late 2020 and 2021 to slower growth in 2022 and contraction in 2023.
“The LMI contracted at this time a year ago, so basically [there was] no peak season,” Rogers said, citing inflation as a drag on demand. “To have a normal November … [really] for the first time in five years, justifies what we’ve seen all these companies doing—building up inventory in a sustainable, seasonal way.
“Based on what we’re seeing, a lot of supply chains called it right and were ready for healthy holiday season, so far.”
The LMI has remained in the mid to high 50s range since January—with the exception of April, when the index dipped to 52.9—signaling strong and consistent demand for warehousing and transportation services.
The LMI is a monthly survey of logistics managers from across the country. It tracks industry growth overall and across eight areas: inventory levels and costs; warehousing capacity, utilization, and prices; and transportation capacity, utilization, and prices. The report is released monthly by researchers from Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University, and the University of Nevada, Reno, in conjunction with the Council of Supply Chain Management Professionals (CSCMP).
Specifically, 48% of respondents identified rising tariffs and trade barriers as their top concern, followed by supply chain disruptions at 45% and geopolitical instability at 41%. Moreover, tariffs and trade barriers ranked as the priority issue regardless of company size, as respondents at companies with less than 250 employees, 251-500, 501-1,000, 1,001-50,000 and 50,000+ employees all cited it as the most significant issue they are currently facing.
“Evolving tariffs and trade policies are one of a number of complex issues requiring organizations to build more resilience into their supply chains through compliance, technology and strategic planning,” Jackson Wood, Director, Industry Strategy at Descartes, said in a release. “With the potential for the incoming U.S. administration to impose new and additional tariffs on a wide variety of goods and countries of origin, U.S. importers may need to significantly re-engineer their sourcing strategies to mitigate potentially higher costs.”
Freight transportation providers and maritime port operators are bracing for rough business impacts if the incoming Trump Administration follows through on its pledge to impose a 25% tariff on Mexico and Canada and an additional 10% tariff on China, analysts say.
Industry contacts say they fear that such heavy fees could prompt importers to “pull forward” a massive surge of goods before the new administration is seated on January 20, and then quickly cut back again once the hefty new fees are instituted, according to a report from TD Cowen.
As a measure of the potential economic impact of that uncertain scenario, transport company stocks were mostly trading down yesterday following Donald Trump’s social media post on Monday night announcing the proposed new policy, TD Cowen said in a note to investors.
But an alternative impact of the tariff jump could be that it doesn’t happen at all, but is merely a threat intended to force other nations to the table to strike new deals on trade, immigration, or drug smuggling. “Trump is perfectly comfortable being a policy paradox and pushing competing policies (and people); this ‘chaos premium’ only increases his leverage in negotiations,” the firm said.
However, if that truly is the new administration’s strategy, it could backfire by sparking a tit-for-tat trade war that includes retaliatory tariffs by other countries on U.S. exports, other analysts said. “The additional tariffs on China that the incoming US administration plans to impose will add to restrictions on China-made products, driving up their prices and fueling an already-under-way surge in efforts to beat the tariffs by importing products before the inauguration,” Andrei Quinn-Barabanov, Senior Director – Supplier Risk Management solutions at Moody’s, said in a statement. “The Mexico and Canada tariffs may be an invitation to negotiations with the U.S. on immigration and other issues. If implemented, they would also be challenging to maintain, because the two nations can threaten the U.S. with significant retaliation and because of a likely pressure from the American business community that would be greatly affected by the costs and supply chain obstacles resulting from the tariffs.”
New tariffs could also damage sensitive supply chains by triggering unintended consequences, according to a report by Matt Lekstutis, Director at Efficio, a global procurement and supply chain procurement consultancy. “While ultimate tariff policy will likely be implemented to achieve specific US re-industrialization and other political objectives, the responses of various nations, companies and trading partners is not easily predicted and companies that even have little or no exposure to Mexico, China or Canada could be impacted. New tariffs may disrupt supply chains dependent on just in time deliveries as they adjust to new trade flows. This could affect all industries dependent on distribution and logistics providers and result in supply shortages,” Lekstutis said.
Grocers and retailers are struggling to get their systems back online just before the winter holiday peak, following a software hack that hit the supply chain software provider Blue Yonder this week.
The ransomware attack is snarling inventory distribution patterns because of its impact on systems such as the employee scheduling system for coffee stalwart Starbucks, according to a published report. Scottsdale, Arizona-based Blue Yonder provides a wide range of supply chain software, including warehouse management system (WMS), transportation management system (TMS), order management and commerce, network and control tower, returns management, and others.
Blue Yonder today acknowledged the disruptions, saying they were the result of a ransomware incident affecting its managed services hosted environment. The company has established a dedicated cybersecurity incident update webpage to communicate its recovery progress, but it had not been updated for nearly two days as of Tuesday afternoon. “Since learning of the incident, the Blue Yonder team has been working diligently together with external cybersecurity firms to make progress in their recovery process. We have implemented several defensive and forensic protocols,” a Blue Yonder spokesperson said in an email.
The timing of the attack suggests that hackers may have targeted Blue Yonder in a calculated attack based on the upcoming Thanksgiving break, since many U.S. organizations downsize their security staffing on holidays and weekends, according to a statement from Dan Lattimer, VP of Semperis, a New Jersey-based computer and network security firm.
“While details on the specifics of the Blue Yonder attack are scant, it is yet another reminder how damaging supply chain disruptions become when suppliers are taken offline. Kudos to Blue Yonder for dealing with this cyberattack head on but we still don’t know how far reaching the business disruptions will be in the UK, U.S. and other countries,” Lattimer said. “Now is time for organizations to fight back against threat actors. Deciding whether or not to pay a ransom is a personal decision that each company has to make, but paying emboldens threat actors and throws more fuel onto an already burning inferno. Simply, it doesn’t pay-to-pay,” he said.
The incident closely followed an unrelated cybersecurity issue at the grocery giant Ahold Delhaize, which has been recovering from impacts to the Stop & Shop chain that it across the U.S. Northeast region. In a statement apologizing to customers for the inconvenience of the cybersecurity issue, Netherlands-based Ahold Delhaize said its top priority is the security of its customers, associates and partners, and that the company’s internal IT security staff was working with external cybersecurity experts and law enforcement to speed recovery. “Our teams are taking steps to assess and mitigate the issue. This includes taking some systems offline to help protect them. This issue and subsequent mitigating actions have affected certain Ahold Delhaize USA brands and services including a number of pharmacies and certain e-commerce operations,” the company said.
Editor's note:This article was revised on November 27 to indicate that the cybersecurity issue at Ahold Delhaize was unrelated to the Blue Yonder hack.