With shipment volume weak, it’s no surprise even the best-managed providers of logistics and transportation services are suffering lower revenues. For example, first-half revenue at Expeditors International of Washington was off 35 percent and 16.1 percent at C.H. Robinson.
When it comes to profits, however, there’s a vast difference between the losses being racked up by asset-based providers and the relatively strong, if diminished, profits reported by non-asset-based companies. Over the first half of 2009, Expeditors reported net earnings of $113.3 million, down only 18 percent from first half of 2008. C.H. Robinson announced net income of $177.6 million, actually 0.5 percent higher than last year.
“There aren’t many companies in today’s environment that can say they have record cash balances ($916 million), have recorded a 136 percent increase in cash flow provided by operations (compared to the second quarter of 2008), have had no layoffs, and remain debt- free,” Peter Rose, chairman and CEO of Expeditors, said recently in written responses to shareholder questions.
Switzerland’s Kuehne + Nagel may have seen its profit in the first half of 2009 decline 16 percent from last year, but the logistics operator still earned $237 million in the period, and saw its cash flow from operating activities grow from last year’s first half and its margins improve. “We see this as a confirmation of the resiliency of our business model,” Kuehne + Nagel CEO Reinhard Lange said.
C.H. Robinson, which gets most of its revenue in the domestic U.S. truck broker market, improved its net revenue 3.1 percent in the second quarter, while gross revenue, which includes direct transportation costs, fell 17 percent. The Minnesota-based company said its model is built to follow demand.
“We keep our business model as variable as possible to allow us to be flexible and adapt to changing economic and industry conditions,” the company said in a securities filing last week. “We buy most of our transportation capacity and produce on a spot-market basis. We also keep our personnel and other operating expenses as variable as possible.”
Brook Bentz, partner, supply chain transportation at New York-based consulting firm Accenture, said the disparity in the downturn highlights the challenge for asset-based companies in making payments on their ships, trucks and other equipment while not getting a return on their capital from those assets.
When plagued by overcapacity, asset-based companies are eager to get rid of unprofitable assets, but it costs them money and takes time to manage that process properly. In contrast, when a non-asset-based service provider loses a customer, it doesn’t have to sell assets to realize cost savings; it can quickly reduce its head count to compensate. “They can clean up their balance sheet much faster than an asset-based provider,” Bentz said, especially the sort that borrowed heavily in the past to acquire those assets.
Only a few years ago, capacity was in short supply, and some transportation providers eagerly acquired equipment so they could provide their customers with hauling capacity — and avoid losing them to the competition. That strategy paid off when markets were tight, and those assets could be used enough to generate a return on investment, despite the added debt burden. That’s no longer the case.
“Clearing up debt is the No. 1 thing today,” Bentz said. “It doesn’t matter how low interest rates are if you can’t pay your debt expenses because your revenue stream is so weak.”
But Bentz said the same basic rules of the game apply for every company, asset-based or not. “We are largely a market economy, and you invest at your own risk,” he said.
Success doesn’t necessarily mean shunning all assets at all cost, he said, but developing a strategic approach to managing the entire lifecycle of each asset you own — from the purchasing process through operations, through the process of selling off those assets once they are no longer cost-effective.
“You have to be very cautious about what assets you own, what you pay for those assets. And are you getting the asset at the right price and on the right terms? There are three aspects to getting it right: buying it smart, running it smart and selling it smart,” Bentz said.
Some companies fail to manage the entire lifecycle, leaving the critical process of selling off depreciating assets to whim or improvisation. “Too often, the people who do the buying in the company are not connected with the people who do the selling,” Bentz said.
Companies need to chart a cost curve for each asset, so they can sell when the curve hits bottom, rather than wait too late. The lifecycle of each kind of asset has its own predictable curve. For example, a dump truck may be worth owning for eight to 10 years, but a fleet sedan may be worth holding for only four years before its resale value drops too far. Fortunately, massive amounts of useful asset lifecycle data can now be crunched with powerful software tools over ordinary PCs.
Not long ago, that process required more training, and the use of costly mainframes. Now, of course, it doesn’t require as much of an investment in such assets.
Contact Alan M. Field at email@example.com.