XPO – too big too fast? Or Amazon strategy?

XPO Logistics has made close to 20 acquisitions since 2009 driving the business’ inorganic growth from no-ones radar to a major player in the industry with over $8bn in revenue.

The case for why they are doing this has been hotly debated from competitors and press alike. 

What’s at stake? 

 

From our vantage-point, we have two theories on the outcome of XPO’s M+A strategy.

 

XPO has grown from a multi-million dollar revenue business to a multi-billion dollar one in the span of around 5 years. This has been driven by a combination of visionary leadership, an industry in need of consolidation, the availability of private equity and cheap/free money.  With such a huge component of what XPO is looking to achieve in the logistics space based on company culture and technology, can XPO truly consolidate 20 different businesses into one unified structure in less than 5 years? 

 

XPO’s number of employees jumped from 10 000+ to 52 000+ and doubled their customer base on the back of the ND acquisition alone. It’s likely to take a matter of years not months for XPO to realize its goal of one ‘cohesive, single-minded focus’ organization with IT and company culture probably playing the biggest challenges to tackle. 

 

The first theoretical outcome for XPO is what happens when interest rates rise?  

 

Inorganic growth will likely slow down once this happens, as money will be more difficult to access. Will XPO have positioned itself at this point as a logistics leader, capable of surviving on squeezed margins? Will it have developed a clear enough differentiation from its competitors to continue its stellar growth?

 

The other theoretical outcome we see is XPO creating an end-to-end solution, from ‘clicks to bricks’ - providing shippers with a one stop solution for all their logistics needs, from intermodal and freight forwarding to the last mile and even a foray into eCommerce portal hosting perhaps. As the industry asks whether Amazon is a 3PL – maybe they should be asking whether XPO is an Amazon competitor. 

 

This Amazon strategy is clearly in motion, but still requires a number of critical pieces of the puzzle to truly stand up to Bezos’ behemoth. Looking at XPO’s recent moves – last mile, trucking etc. – it would seem that technology driven logistics solutions and dedicated eCommerce solutions are the predominant missing pieces of the puzzle. 

 

XPO has a lot going for it – it’s acquisition strategy has already made it a major force in the $1tn + logistics industry; its leadership is visionary, and clearly set on redefining the culture of big-business logistics; it has significant finances on hand for further acquisitions. However, time is ticking, interest rates will rise, will XPO have enough time to go head to head with Amazon?

Supply Chain of Things: Challenges & Solutions

By Susan Fourtané on Aug 28, 2015

The Internet of Things, (IoT) can bring more complexity to the supply chain, but it can also bring greater visibility affecting the supply chain's operations in a positive way. The IoT will bring supply chains a $1.9 trillion boost.

Pascal Fernandez, vice president at Avnet, one of the world's largest global distributors of electronic components, computer products, and embedded technology, spoke at the High-Technology and Electronics Supply Chain Summit in Amsterdam in May about challenges and solutions in the Supply Chain of Things (SCoT). He analyzed some challenges that the industry will be facing and offered some solutions to help supply chain leaders mitigate those challenges.

"Data and analytics are more important that the object itself," said Fernandez. "It goes from sensors to servers." All the connected things that will be around us in the next 10 years are going to be located in a cloud-based solution. "Big data is going to be the fuel of the IT industry," Fernandez said. "Big data is what people are going to be building, small data is going to be money. People are going to merchandize and monetize the analytics created by all the things connected."

"By the end of the decade there will be 50 billion connected objects. Samsung says there will be 130 billion objects. Whatever the number, it's going to be enormous," said Fernandez. According to Fernandez, there is going to be many contenders, but there are not going to be many winners.

The objective of the case was to provide the owner of intellectual property the control and visibility of who was able to order products containing their IP. The challenge was the startup didn't have a supply chain, or fulfillment capabilities. However, it possessed working prototypes, and funding.

The objective was achieved by providing the required encrypted programming services, and developing a licensee Onboarding Process between the IP owner and Avnet. There was also an authorization channel developed between the IP owner and Avnet. This was used to confirm who was authorized the purchase of components, nd under which conditions. An online ordering portal where the licensees could place orders for the components they were licensed for was also provided. 

• Fernandez observed how the electronics supply chain is undergoing some changes that affect digital trust:
• Emerging business models are changing the value chain: All the data collected is stored in the cloud and software is becoming the biggest investment.
• Connectivity: The IoT is taking a front seat. However, the connectivity that the IoT is bringing to all devices is making devices less secure.
• Hardware standardization is seen as a business enabler.
• Logistics: In terms of logistics, secured devices can't be stored in unsecured places.
• Traceability: With multi-location production and accessories partner with licensing, product pairing will become key for growth, but complex to control. In the sales channel, Web stores licensing, and all pervasive business models might bring complexity for the return of investment (ROI).
• Added value services will need higher level identification.
• Export control is becoming complex, and subject to governmental claim.

Complexity, volatility, and the need for velocity is the new norm in the high-tech industry, noted Fernandez. The SCoT will bring some additional challenges. Securing the supply chain is the way to be prepared: 

• Explosive growth, high density of startup companies, or newcomers to the hi-tech industry
• Analytics are more important than "things": Assess risk and secure data, and pay attention to Signal Chain (Trusted/Non trusted sites)
• Design ecosystem from sensors to servers: Control access, and manage IP and licensees network
• Many contenders, few winners: Assess risk, and be prepared to fail quickly

As Amazon Fresh looms, Ocado emphasizes tech over food

BY BLOOMBERG NEWS

Online grocery competition is heating up, and UK-based Ocado may deliver more computer and warehouse technology with partners, including international ones.

(Bloomberg)—At Ocado Group Plc’s warehouse in Hatfield, a half-hour north of central London by train, hundreds of red shopping crates wind their way through a labyrinth of conveyor belts.

The plastic crates make a series of pit stops where workers fill them with any of 45,000 different products in the warehouse: corn flakes here, oysters there, bananas farther along. The crated groceries are then loaded into vans in time to make it to homes across Britain within a one-hour window.

The sophistication of the operation has many investors betting that the most important product for Ocado—the world’s biggest online grocery specialist—might not be food, but technology. With the stock trading at about 140 times estimated earnings, the stakes are high.

“If you believe Ocado is simply a U.K. grocer, the valuation is ridiculous,” saidCharles Allen, an analyst at Bloomberg Intelligence. “But if you believe they have some technology to sell, then its outlook is much brighter.”

Ocado, No. 19 in the Internet Retailer 2015 Europe 500 Guide, has plowed hundreds of millions of pounds into its U.K. distribution centers, and this coupled with the thin margins in the grocery business means the company has reported just one annual profit in its 15-year history.

Amazon Fresh

Chief Executive Officer Tim Steiner plans to boost returns by licensing Ocado’s technology to an international grocer—a prospect he has been talking up for two years. With speculation that Amazon.com is preparing a delivery station near London to offer its rival ‘Fresh’ service, the pressure is mounting.

Steiner, a former Goldman Sachs banker, says he wants to provide grocers with all of the computer technology and warehouse equipment they need to run an online service of any size. Ocado’s system offers “better operational efficiency than anything that’s been launched globally,” Steiner said on a conference call with analysts in June. He said the company is in advanced talks with multiple potential partners and aims to sign an international deal by December. Steiner declined to be interviewed for this article.

Andrew Gwynn, an analyst at UBS AG, cautioned that by targeting a deal this year, Ocado may have “backed itself into a corner.” The credibility of any partner is paramount, and Steiner shouldn’t rush into an agreement with a “lower or mid-league” grocer that wouldn’t provide the revenue boost needed to justify Ocado’s investment in technology, he said.

Ocado has ruled out partnering with any retailers that generate less than 10 billion pounds ($15.4 billion) in revenue, according to a person familiar with the matter. The decision was made due to concerns that an agreement with a smaller retailer could signal that the company was unable to attract a large grocer, said the person, who asked not to be identified because the negotiations are private.

Many of the largest potential partners already have online services, often supplied with goods directly from their own stores. Of the 24 grocers globally that generated at least 20 billion pounds ($31.6 billion) in sales last year, all but one sell food online, according to brokerage Redburn Ltd.

In the U.S., Ocado faces competition from both established players and new entrants. Royal Ahold NV’s Peapod, an online grocer with 25 years’ experience, has said it may consider licensing its technology.

Uber-esque alternative

And a startup called Instacart has a low-tech, Uber-esque alternative: Instead of building warehouses and shipping operations, the company simply hires personal shoppers. Customers place an order from their favorite grocer via an app; One of Instacart’s 10,000 shoppers goes to a store, picks up the goods, and delivers them. Instacart is valued at $2 billion—roughly two thirds of Ocado’s market capitalization—and already counts Costco, Safeway and Whole Foods among its partners.

With an international deal elusive, skepticism still surrounds Ocado. Almost half the analysts covering the company recommend selling the stock. According to data compiled by Markit, a London research firm, traders have borrowed and sold 9% of the company’s shares in so-called short sales, a bet that they’ll be able to buy the stock back at a lower price. That compares with an average of 1.7% across the FTSE 250 Index.

“There’s a lot of negative talk about Ocado’s prospects, and management are sensitive to that,” said Richard Hyman, an independent retail consultant in London who follows the industry closely. “Building revenue internationally is critical for their future, and they need to get their skates on.”

Capturing Sweet Success in S&OP

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Hailey Lynne McKeefry, Editor in Chief
8/28/2015   Post a comment

Sales and Operations Planning (S&OP) is not a new idea, but many organizations report that their efforts have been less than effective. As the saying goes, though, when you get lemons, it's a good time to make lemonade. That is, rather than a point of failure, S&OP improvement offers an opportunity for great improvement.
In a study titled Race for Supply Chain Insights 2020, which outlines research by Supply Chain Insights, 71% of organizations surveyed reported having an S&OP process in place. When asked to rate the effectiveness of that process, though, 43% felt that it was effective, while 20% said that it was not and 24% were neutral.
"Why, after more than 20 years, does S&OP still top so many executives' lists as an area of great opportunity for supply chain improvement?" wrote Sean Rollings, vice president of product marketing at E2Open in a blog. "The truth is that most companies have plateaued with the return on their efforts, yet they expect more from such a promising collaborative process."
Supply Chain Insights reported that competing priorities and lack of understanding and support from the executive team topped the list of stumbling blocks around improving the S&OP process.
The infographic below, created by E2Open, outlines some basics around creating a process that works. Take a look, and then let us know about your experiences with S&OP improvement. What worked well? Where were the stumbling blocks?

Yuan devaluation good for US retailers, bad for exporters

Alan M. Field | Aug 29, 2015 10:11AM EDT

China’s devaluation of the yuan may not kick off a currency war around the world, but it’s already triggered similar moves in Asia, and that’s potentially great news for U.S. retailers, the dominant importers of U.S. containerized products such as apparel, footwear and furniture.

A week after the Asian giant acted on its currency, Vietnam reacted by doing the same to the dong, and other Asian countries could follow suit. “This could definitely be a very positive development for retailers who are importing from China or Southeast Asian countries whose currencies are being devalued,” said Jack Kleinhenz, chief economist for the National Retail Federation, which represents some 14,000 U.S. retail companies, restaurants, grocers, e-tailers and others. Prior to the yuan’s devaluation, China’s currency was very expensive relative to other countries in region, such as Indonesia, Cambodia and Thailand, he said.

On the downside, U.S. exports to Europe and China “carried us through the first part of our recovery a few years ago,” Kleinhenz added. “Retailers exported the luxury brands, and found some really good years. Now they are seeing speed bumps, especially with foreign purchasers and particularly in China, including brands that really have had an attraction for buyers” such as Coach and Tiffany. 

China also buys about $25 billion in beef, nuts, pork, wine and other agricultural and food products from the U.S. each year, products that now will become less affordable to some Chinese consumers. The cheaper yuan also could reduce U.S. exports of machinery and equipment to that country.

In theory, a cheaper yuan “should improve the profitability of U.S. retailers,” because they will need fewer dollars to buy the same quantities of Chinese goods, Kleinhenz said, before noting the headwinds on this side of the Pacific. “The challenge is that there is deflationary pricing going on in retail. U.S. consumers are
very discount-oriented, and promotion-oriented,” making it harder for retailers to pass on the higher margins to consumers. “Consumers are struggling, in some cases, with lower wages, so to try and pass on the benefit of these lower input costs is very much a challenge.”

Even before China devalued the yuan, the NRF lowered its retail sales growth forecast for 2015 to 3.5 percent from its earlier estimate of 4.1 percent, because of weak demand and the slow pace of wage growth in the U.S. 

Retailers, Kleinhenz said, have become more expert and agile in adjusting their supply chains to changes precipitated by currency evaluations and other surprises. “The mom-and-pop firms may be a lot more exposed, but by and large, we have learned from the past.”

Whereas retailers used to need five or six months of lead time when ordering from China, “that has been winnowed down considerably.” Retailers still need enough lead time to get a better deal on the products they order, “but in some cases, we’ve seen a turnaround that can be less than six weeks,” although such cases may involve using air freight.

“Our retailers have become more astute at gauging their inventory needs,” Kleinhenz said. “With the aid of online inventory management tools, they can adjust more quickly to abrupt changes in consumer tastes, so “they are tracking this much more closely than they were 10 years ago.”

Accounting for a Lean Supply Chain

Aug 29, 2015

^by Paul Myerson

Professor of Practice in Supply Chain Management, Lehigh University

Lean accounting and a lean supply chain together can ensure that everyone is aligned to reach the maximum, long-range goals and benefits of lean thinking.

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“Benefits of Lean Accounting in a Lean Manufacturing Company,” author Dan Anthony discusses the  major differences between traditional and lean accounting, starting with a quote from Taiichi Ohno stating  that “costs do not exist to be calculated; costs exist to be reduced.” This really gets to the core of the difference between traditional and lean accounting: traditional accounting focuses primarily on the cost of goods sold, whereas lean accounting focuses on the value stream from customers to suppliers.

Lean accounting looks at cost reports on a daily basis, as opposed to after the fact in weekly or month-end reports as is common in traditional accounting; it views capacity as an asset instead of just idle time, and sees inventory as a liability and not an asset.

The lean accounting process itself frees up the time of the financial people by eliminating a great number of transactions, reports, reconciliations and meetings so that they can be less like “bean counters” and more like consultants, providing timely, detailed, focused reports as to costs at any step in customer fulfillment.

When using traditional accounting methods, companies try to break down expenses by determining the cost of each unit produced, then create their financials based on that through standard costing. In lean accounting, it is more “real time,” so you look at what you have sold and what it cost you to estimate your profitability continually.

This can have a huge impact on the manufacturing and supply chain processes in a company. If you think about it, one of the main goals of lean is to identify and eliminate waste and non-value added processes, but traditional accounting systems really have no ability to measure waste and inefficiency (and don’t think in terms of value streams). As consultants, lean accountants can readily see the impact on profits of expediting shipments and quarter-end “push” to meet quotas and targets. Yet for the most part, today’s executives are primarily driven by financial reports, which don’t really do a good job of modeling the supply chain.   

So simple and timely information focused on value streams helps empower people at all levels of the organization and can foster a lean culture focused on customer value. Together, lean accounting and a lean supply chain can make sure that everyone is “rowing in the same direction” to reach the maximum, long-range goals and benefits of lean thinking.

Creating a Supply Chain Strategy

By editor on Aug 26, 2015

Supply chain is happening at your company. I mean, if your company sells a thing to a customer, supply chain is all around you. Even if you’re a farmer and you think you don’t have a supply chain, you’re wrong. You do. You might procure seed or fertilizer or packing supplies that end up being crucial to your customer supply

ut is it optimized?

What does that mean? 

An optimized supply chain means that you’re getting your customer what it wants, when it wants it – and doing that by spending as little money as possible.

 So, how do you optimize your supply chain? 

Let’s start with this: What does your supply chain look like right now?  To really see your supply chain, you’ll need a whiteboard.  Okay, you can use a big sheet of paper or Visio or PowerPoint – but I’ve found whiteboards to be very useful for this exercise. 

When you’re drawing your supply chain, you’ll do it three times.  I’ll explain in a minute – but my definition of optimized supply chain should give you a hint as to why.

Drawing number one.  On the far left of your whiteboard, list your Tier II suppliers.  These are the suppliers who supply your suppliers.  Focus on just suppliers of key raw materials and components.  If you buy a machined metal component from a contract manufacturer, then one of the key Tier II suppliers that you need to track would be your contract manufacturer’s raw metal supplier.  Once you’ve listed all of the critical Tier II suppliers, move to the right on your whiteboard and list your suppliers. 

Now draw arrows to represent the flow of goods from your Tier II suppliers to your suppliers.

 In some cases, the same Tier II suppliers might provide materials to more than one of your suppliers.  To the right of your suppliers, put yourself.  Or your company.  Or the many divisions of your company. 

Don’t forget to put in warehouses.  If there’s a freight forwarder or 3PL between any of the Tier II suppliers, suppliers or your company, be sure to include them and to draw the arrows to represent the flow of goods.

Include any manufacturing steps along the way under each production facility (whether it’s your company or one of your suppliers). 

Finally, to the far right of your whiteboard – put your customers.  If there are warehouse, freight forwarders or distribution centers within the flow of goods, be sure to include them. 

Don’t forget to include all of your arrows to represent the flow of goods.  If you’re a small company, this diagram might take you 30 minutes to complete.  If you’re Pfizer, it could take 6 months.  And you might have to have a different diagram for different products or family of products. 

That’s drawing number one.

Drawing number two.  It’s the same drawing, really.  Except now look at all the steps in your supply chain and start filling in how much time each step takes.  If you’re shipping products across the Pacific Ocean (and who isn’t these days), put in the amount of time it takes for ocean transit and air shipments.  If there’s processing time at the ports, freight forwarders, in quality control or on receiving docks – include that time.  And production lead times at your suppliers and your own manufacturing facilities – include it all.  By doing this, you’ll be able to see how long (on a calendar) your supply chain takes. 

That’s drawing number two.

Drawing number three.  It’s the same drawing as number one.  And – at some companies – it can be laid on top of drawing number three.  (It depends on how much activity and how busy you want these diagrams to be.)  In drawing number three, instead of time, label each step of the way with dollars (or your local currency).  Each link in your supply chain costs something.  If a raw material costs $1 from your Tier II supplier and costs $.10 to ship it to your supplier, and then your supplier adds value and charges you $2.50 for it and then it costs you another $.25 to deliver to your door (freight, customs, duty, insurance – etc.).  And then your own processing adds $.75 to its cost – by the time you’re ready to ship it to your customer, it’s cost you $3.50.  Hopefully, you’re selling it for more than that.  (This is all direct cost, by the way.  You’ll probably want to start adding indirect costs, too.) 

That’s drawing number three.

And what did I say optimized supply chain is?  Getting your customer what it wants (drawing number one), when it wants it (drawing number two) – and do that by spending as little money as possible (drawing number three). 

You have it all in front of you now.  Does your product flow make sense?  Where can your supply chain stand some lean trimming?  If a customer ordered a product today and you had to make it from scratch – how long would it take you to deliver it?  And where can you improve on those steps?  And if you’re selling that part in our example for $3.25 – and you discover it really costs you $3.50 – can you: 1) approach your customer about a price increase, or 2) look into your supply chain to see where you can work some Six Sigma or Lean or COGS magic to get your costs down. 

Supply chain is happening at your company.  It’s happening right now and it’s costing you time and money.  The sooner you create a strategy around optimizing your supply chain, the sooner it can help deliver increased revenue and increased earnings.