Aftershock: Harris Williams and Kearney on Global Supply Chain Recovery

Despite COVID-19 wreaking havoc on global supply chains, 2021 was a record-setting year for M&A in transportation and logistics. Looking forward, fundamentals remain healthy. While the supply chain continues to generate challenges for shippers and consumers, the best companies in the sector are helping to solve them and positioning themselves for long-term growth. For instance, four Harris Williams clients–Magnate, Inspirage, Transflo, and AIT Worldwide Logistics–exemplify the ways that companies have innovated amid supply chain challenges.   

Senior bankers from the Harris Williams Transportation & Logistics Group recently talked with leaders from global management consulting firm Kearney to gain deeper insight on the global supply chain impact of COVID-19 and how it may influence the sector’s M&A. The group covered several topics, from the causes of disruption to potential solutions, and whether a new normal is underway. 

Jeff Ward, Partner, Kearney Chicago Transports & Infrastructure
Michael Zimmerman, Partner, Kearney New York Operations

 

Q&A with Kearney


Mountcastle: Let’s start at the beginning. Why has COVID-19 been so disruptive for global supply chains?

Zimmerman: For years, supply chains have been finely tuned to deliver goods just in time, and as efficiently as possible. When COVID-19 hit, consumer sentiment and expenditures dropped dramatically, and these finely tuned supply chains shut down. Workers were furloughed, and orders for trucks and cargo ships were canceled. Then, after the first COVID wave and government stimulus, consumer sentiment skyrocketed. Through e-commerce in particular, people began spending money on hard goods. The stoppage and subsequent boom created tremendous disruption in previously efficient networks.

Ward: When everything shut down, the inventory-to-sales ratio increased due to lack of consumption and sales. However, the shutdown of manufacturing and supply chain operations around the world meant that, as consumption came back, goods were not available and the inventory-to-sales ratio declined.


Bass: What are the implications of a low inventory-to-sales ratio?

Ward: The biggest implication for carriers of a low inventory-to-sales ratio is a demand spike and increased pricing power. As capacity among carriers became scarce, prices increased, and that pressure has not yet abated. The freight transportation industry has been running at peak for 18 months. A large number of ships are still backlogged in ports, and the trucking companies and railroads are at full throttle. While this is a negative for shippers’ freight costs, the market dynamic and the associated pricing increases have been very favorable for freight companies’ top-lines and margins. 

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Source: DAT, St. Louis Fed, Kearney


Mountcastle: What impact did COVID have on supply chain trends already underway?

Zimmerman: Several pre-COVID-19 trends were dramatically accelerated, especially in relation to data-driven decision-making and technological capabilities. Reconfiguring supply chains to handle more business-to-consumer delivery has been a priority for some time, but COVID added tremendous pressure on home delivery capability, which changed how these supply chains work. Also, ESG pressure on carriers continues to intensify. Focus areas include sustainability, social issues and workforce fairness, particularly around wages and demographics.


Bass: What happens next? Do supply chains go back to how they were, pre-pandemic, or is there a new normal?

Ward: We believe there's a new normal. There will be fundamental changes in the way supply chains operate. Near-shoring and reshoring trends will accelerate. There will be increased levels of inventory in the supply chain and more stock-keeping locations closer to consumers. Lack of labor availability is a significant issue right now, and it’s not likely to abate soon. As a result, wages have been rising, and will not likely retreat to pre-pandemic levels. At some point, the market will regain equilibrium, but there's going to be continued pressure on capacity and pricing power. While this continues, carriers, third-party logistics companies, and others in the supply chain will enjoy peak earnings.

Zimmerman: For shippers, logistics costs as a percent of expenses has dramatically risen. Will we ever see 2019 COGS percentages return? Don't count on it; at least, not in 2022, and probably not in 2023. The most likely scenario is that rates will gradually drop in the second half of 2022 at potentially 5% to 10% per quarter over the following quarters. If we get recessionary conditions, rates may come down a bit more dramatically. There’s also a small chance that the chaos continues if there’s a new COVID-19 variant that's much more virulent and infectious.


Bass: What is your perspective on how the inventory-to-sales ratio will play out going forward?

Ward: It will take time for ratios and supply chains to stabilize. There is a steep hill to climb, and it will take 2022 and more to get it done. But once the supply has stabilized, I think we will be looking at higher inventory-to-sales ratios going forward. Retailers and manufacturers may keep somewhat higher inventory than in the past—a more just-in-case level rather than the lean, just-in-time inventory levels companies have historically followed. This will elongate inventory replenishment timelines and supply chain pressure and strain. In addition, as high last-mile delivery demands become part of the new normal, there will be more inventory stock-keeping locations and more safety stock at those locations. That naturally lifts the inventory-to-sales ratio.

Zimmerman: The bias to buy capacity is very powerful. Logisticians get penalized much more for missing deliveries than they do for paying a premium. As consumers continue to look for faster home deliveries, that means more forward-deployed inventory.

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Source: Kearney


Mountcastle: Outside of COVID-19, what else could accelerate or decelerate our return to normal? What should we keep our eyes on?

Zimmerman: Supply chains must be prepared to be more resilient to disruption. We're encouraging clients to look across multiple dimensions of resilience, understand what kind of supply chain they have, how they go to market, and where they can reconfigure themselves to be more successful in what is promising to be a more disrupted world than we've seen in the past.

Ward:  We must get more labor in the transportation industry. The labor shortage could prolong the resupply cycle. Longer-term, we need to watch the impact of carbon costs. Since many supply chain operations can have large carbon footprints, a carbon tax could impact the sector. The industry’s strategy and implementation pace around electric is still evolving. It’s unclear how quickly these technologies will be available and adopted.


Mountcastle: Related to the prior question, what about driverless vehicles?

Ward: There needs to be both technical ability and public acceptance, which could take time. However, driver-assist could have a very beneficial impact on highway safety, rail operations, and safe use of mechanical equipment in fulfillment centers. The safety dividend from operator-assist is going to come before the substitution of the driver.

 

Making Lemonade: Innovative Companies Adding Value in the Global Supply Chain


As the global supply chain recovers from pandemic disruption, volatility and complexity will characterize a new normal. Investors interested in the transportation and logistics sector should look for assets that are innovating to help their customers solve known and unforeseen challenges. These four Harris Williams clients exemplify organizations positioning themselves well for long-term growth.

Inspirage: A leader on the cloud adoption curve

The speed of business today requires constant innovation, visibility, resiliency, and risk mitigation–all needs that were amplified by pandemic-driven supply chain volatility. Inspirage helps its clients integrate and optimize their enterprises to meet these needs, with consulting and implementation solutions across the Oracle Fusion Cloud Applications Suite. With advanced, industry-specific supply chain knowledge, Inspirage professionals are uniquely qualified to help companies improve the agility and performance of their integrated supply chains. 

Since its founding, Inspirage has stayed on the forefront of innovation in the Oracle product suite. It invested early and heavily in accelerators, programs, training, and certifications to help clients pivot to the cloud and successfully adopt Oracle Cloud solutions. With strong market demand for cloud solutions to help optimize operations, Inspirage is well-positioned to continue to thrive as it helps its clients create end-to-end supply chain solutions that improve visibility, coordination, and efficiency. 

Anthony Basmajian, Managing Director, Business Services Group
Derek Lewis, Managing Director, Business Services Group
Thierry Monjauze, Managing Director, Technology Group
Priyanka Naithani, Managing Director, Technology Group

Magnate Worldwide: Premium service for must-move shipments

Magnate Worldwide is a leading asset-light, third-party logistics (3PL) provider delivering a highly specialized set of transportation solutions. The company and its brands provide premium customer service to a diversified client base, and they are committed to executing sensitive, time-definite, high-value, white-glove shipments. 

Magnate is an excellent example of a 3PL business model that proved its resilience amidst supply chain disruption. The company’s tailored services help clients meet complex shipping needs where the cost of failing to deliver on time is high, such as in the healthcare and medical supplies end markets throughout the global pandemic. Magnate’s flexibility allowed it to tailor its services to meet the needs of customers most disrupted by low supply chain capacity. With strong carrier relationships and premium service levels, Magnate delivered high service levels in difficult market conditions, and is positioned for solid growth and profitability well into the future.   

Jason Bass, Managing Director, Transportation & Logistics
Jeff Kidd, Managing Director, Transportation & Logistics 
Frank Mountcastle, Managing Director, Transportation & Logistics

Transflo: Innovative software connecting the freight transportation ecosystem

Transflo offers a suite of mobile, telematics, data, scanning, and document management, all in one integrated experience. Its software platform provides real-time communications to thousands of fleets, brokers, and commercial vehicle drivers that represent more than $100 billion in freight bills each year. The company evolved from providing decades of freight industry document management into being the largest connected digital ecosystem in the supply chain.

In a volatile supply chain climate with highly constrained trucking capacity, the collaboration and visibility that Transflo offers is vital. The platform connects all parties involved in freight movement. Brokers can make smarter decisions about filling capacity. Carriers can effectively match loads because they have the digital footprints of truck driver locations, and can instantaneously contract freight through the system. And, drivers have an all-in-one tool to manage their workflow from navigation to document and compliance management. In sum, this connected ecosystem maximizes available transport capacity and provides fast liquidity and high levels of efficiency across the freight industry.

Andy Leed, Managing Director, Technology Group
Erik Szyndlar, Managing Director, Technology Group
Brian Titterington, Director, Technology Group
Jeff Kidd, Managing Director, Transportation and Logistics
Frank Mountcastle, Managing Director, Transportation and Logistics

AIT Worldwide Logistics: Outsourcing complex freight management

The pandemic has revealed how complex the global supply chain can be: Shippers have been pushed to make their supply chains more nimble in the face of route and lane closures and restricted capacity. What used to go air may now go ocean. What used to go ocean may now go air. Global sourcing is complex, and the need for flexibility in routing is more critical than ever. Such complexity motivates shippers to outsource to freight forwarders.

AIT Worldwide Logistics is a leading non-asset-based global freight forwarder within the third-party logistics sector. Unlike many competitors, AIT is highly diversified. The company can handle customers’ needs across air, ocean, and ground, including home delivery of heavy goods. AIT also serves nearly every industry. That market diversity and range of services give AIT great resilience. Its business model is built around its customers’ needs, and its highly service- and solution-oriented approach keeps it tightly embedded with customers. All of these factors make AIT an invaluable partner as shippers navigate supply chain complexity and disruption.

Jason Bass, Managing Director, Transportation & Logistics
Frank Mountcastle, Managing Director, Transportation & Logistics
Jon Meredith, Director, Transportation & Logistics

Conclusion

Most likely, the world’s complex supply chain disruptions will never be fully resolved. As such, tomorrow’s winning logistics companies will roll with the disruptions better than others.

That’s because global manufacturers, retailers, and consumers will continue to reward logistics companies that bring the most value and innovation to the supply chains that connect us—and get us the things we need when we need them. From assembly line to the last mile, there’s never been a better time for forward-looking players to win share and pull ahead from the pack.

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