The quick economic recovery once touted by public officials may no longer be feasible for the US as the country reported its largest GDP contraction since the mid-20th century last quarter.
Despite some signs that things were hastily rebounding, the country’s employment situation has turned from temporary to permanent in many sectors.
And even those organizations that have seen demand surges over the past few months are now exposed to new risks within their operations, supply chains, and distribution channels. It may take significantly longer than once thought to shrug off the effects of COVID-19.
As business conditions toughen, it is critical to assess the financial strength of your key vendors.
Doing so will allow for reduced exposure to potential vendors at risk for closures.
Why You Should Care About a Logistics Provider’s Financial Risk
When a 3PL financially collapses, it is not just their employees that suffer. The business’ customers and other vendors face undue financial burden with their closure.
Carriers and drivers take on unpaid invoices and accessorial charges and lose future revenue.
But the newly closed 3PL’s customers face even worse ramifications. Shippers can suddenly find themselves receiving collections calls from carriers who were never paid by the shuttered logistics provider. These calls can still come if the customer has paid their invoice.
Even in typical markets, this type of financial hit can prove to be a devastating blow to your organization’s health.
In a challenging business environment, like the one we are in today, any added burden should be viewed as a potentially existential threat.
That applies to any organization but is especially true for those in the consumer goods sector.
It is critical to determine whether you are at risk for these threats by evaluating the solvency of your supply chain partners.
To assess the financial health of your vendors, we recommend asking three key questions of your logistics provider.
How Financially Strong Were They Before COVID-19?
Last year was particularly difficult for logistics companies throughout the sector with the capacity oversupply brought on by the demand spikes of 2017-2018, as well as automated direct-freight-matching entrants disguising loss-leading rates.
These factors created intense pressure on rates and profitability. Even some of the largest 3PLs in North America struggled to produce solid financial fundamentals. One of the largest publicly-traded firms was a couple of bad quarters from the danger zone before the COVID-19 crisis even started.
This difficulty is now even more widespread and likely the case at hundreds of logistics companies, as we already have seen significant layoffs in the industry.
And unfortunately, the economic impact of this crisis is just beginning. The fallout will continue to unfold for months after the worst of the virus is passed.
The Altman Z-Score is a reliable measure of a company’s bankruptcy risk. It is a reliable indicator of how well a publicly-traded company is performing and helps to determine their likelihood of bankruptcy.
We recommend performing the calculation for your key logistics provider based on the earnings report for the last quarter of 2019. This figure will give you a realistic view of their solvency before the crisis started, which can be a useful marker for how long the company can endure difficult conditions.
How Tied Are They to the Industrial Economy?
Currently, the entire industrial economy is on pause and, many of the largest shippers in the space are pushing out their days to pay as they stave off bankruptcy.
As a result of the stoppage, there will be a significant pullback for many in the automotive, heavy machinery, construction, and other “non-essential” sectors.
For many logistics providers, including large publicly-traded organizations, freight from these distressed sectors make up a significant portion of their order volume.
The challenges faced by these industries will spread to many 3PLs, logistics solutions providers, and freight brokers whose businesses commoditize primarily across industrial sectors.
How Diversified Is Their Customer Base?
Many logistics companies, especially those outside the top 50, manage heavily concentrated customer portfolios. These firms often rely on one or two large customers to generate over 60% of their revenue.
In times like these, a diversified customer base with no individual customer generating more than 15% of gross revenue is critical.
No matter the business sector, labor constraints, economic distress, and raw materials shortages can collapse an over-levered organization, which can spell disaster for the logistics provdier that serves them.
Have Other Questions About the Current State of the Industry?
Feel free to reach out to our team of CPG logistics specialists. Zipline values continuous industry education and works to provide the latest logistics information to our customers. If you are interested in learning more about the current state of logistics providers, contact us.