Transport Authorities
When Unisys Corp. wanted to streamline its massive transportation and warehousing system, which stores and delivers billions of dollars’ worth of computers all over the world, it turned to BAX Global.
The Irvine-based air transportation and logistics firm designed a door-to-door, factory-to-customer global delivery system that bypassed Unisys’ warehouses altogether.
The new system slashed about $250,000 a day from the computer maker’s inventory costs and dramatically sped deliveries. Not only does the system cost less, it does more, telling Unisys where everything is at any given moment.
“In the past, it was more a situation of moving it from Point A to Point B, end of discussion,” said Kevin Clark, Unisys’ vice president of logistics services. “Now we’re making business decisions and planning production schedules based on the flow of information they provide.”
Heralded as the spark igniting a new industrial revolution, logistics is the intricately planned movement of goods--from raw materials to finished products--to accommodate just-in-time manufacturing and delivery.
By precisely timing and tracking shipments, businesses can keep inventories lean, wring waste out of their supply chains and give customers more of what they want when they want it.
So why aren’t many of the companies that supply these services seeing their own profits soar?
BAX is a prime example. Formerly known as Burlington Air Express, the company is a major player in hauling heavy cargo. It has engineered a transition into the new world of logistics and supply chain management, a business now estimated at more than $40 billion annually. Its clients include such heavyweights as General Motors Corp., Boeing Co., AlliedSignal Inc. and Federated Department Stores Inc.
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Yet BAX, like many of its rivals, is beset with pressures that have kept profit slim. The competition is fierce. Just about every air freight, trucking and warehousing firm is offering logistics services. The costs can be exorbitant, particularly for the sophisticated information systems needed to manage the complex supply chains of major industrial concerns.
“This is a terribly competitive business. Everyone is hanging out their shingle and none of these guys is very big yet,” said James E. Morehouse, a vice president at management consulting firm A.T. Kearney Inc. in Chicago. “There’s a free-for-all and margins aren’t terribly high.”
Morehouse sees a consolidation coming, after which “there will be a handful of large players left, and they will be global.”
Whether BAX will survive this high-tech Darwinian contest remains to be seen. With a $100-million technology upgrade underway, a new chief executive at the helm and a push to expand its more promising international operations, BAX may finally show some of the positive results long hoped for by analysts and investors.
“They have been a good company in the niche of market they’re in,” said Doug Coates, a principal at San Francisco-based transportation consulting firm Manalytics. “Does that make them a good company in changing services? The jury is still out.”
Certainly, C. Robert Campbell, a former Ryder System Inc. executive who joined BAX as chief executive earlier this month, has his work cut out for him. Campbell said his goal is to “continue to raise the level of service” by building BAX’s logistics and technological capabilities.
In many ways, BAX’s story is a window on the transportation business.
The company began life a quarter of a century ago as an air-freight transporter, in the uncomplicated though sometimes perilous business of moving goods from one spot to another. In those days, air transport was used mainly as a faster but more costly backup to truck, train and ocean haulers.
In the 1980s, the transportation industry began a metamorphosis as U.S. companies began adopting just-in-time manufacturing techniques and expanding globally. Suddenly, the firms that shipped goods were viewed as more than just freight handlers. They became responsible not only for pickup and delivery, but for managing the movement of raw materials, parts and finished products throughout the entire manufacturing and delivery process.
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The term “logistics” was borrowed from military supply lines, and the concept was quickly embraced by auto makers, major retail chains and other large industrial concerns.
Many of these corporations, figuring they’d do well to stick to managing their core businesses, have increasingly contracted out their logistics to companies such as BAX.
In the 1990s, logistics has evolved to another level known as supply chain management. The firms that provide these services are becoming so intertwined with their customers that in some cases they’ve taken over wholesale parts of those companies’ operations.
Logistics firms are in constant electronic communication with their customers, providing instantaneous information on the whereabouts of every gadget wending its way through the system. In many cases, the transportation network replaces the warehouse and eliminates the expense of storing inventories as goods are timed to arrive at the moment they’re needed on assembly lines or for shipment to customers.
“It’s come a long way from moving a piece of cargo from one factory to another,” said BAX Senior Vice President Malcolm Heath. “It’s become much more information-based.”
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Mostly because of advances in information technology, analysts expect the logistics business to grow at about a 20% annual rate, reaching $50 billion by 2000, making it the fastest-growing part of the freight transportation industry.
The business has attracted players that include well-heeled Los Angeles investor William Simon Jr., whose investment firm has acquired transportation providers and consolidated them in a company called International Logistics.
BAX’s biggest rival in its segment of the market--air freight--is Palo Alto-based CNF Transportation Inc., which owns Emery Worldwide and Menlo Logistics. Scores of other firms have been trying to capture pieces of the logistics market.
Dennis Mishler, executive director of logistics at General Motors, said that as the auto maker extends its global reach, outside logistics providers like BAX help keep factories lean and provide access to suppliers anywhere in the world. That allows GM to focus more on strategy, new business ventures and improving cars, and less on the tactical, nitty-gritty work of moving parts around its huge network, he said.
Mishler foresees vast efficiencies being realized as logistics moves down the pecking order through GM’s suppliers, cutting their transportation and warehousing time.
“I don’t think we’ve even begun to harvest the potential here,” he said.
Ultimately, these users of logistics services say, the consumer is the winner. By operating more efficiently, the companies can hold down the prices they charge, while devoting more resources to improving their products and responding quickly to customer needs.
At NEC Technologies Inc., BAX helped simplify and speed returns of damaged or defective merchandise--a prickly area of business that can cost manufacturers dearly. Figuring a customer with a machine that doesn’t work grows unhappier by the minute, the computer maker hired BAX to set up a secure Internet linkup. That allows BAX to get information immediately and rush replacement products to NEC’s customers.
“It’s given us a great deal more control” over the returns process, said Steve McBride, NEC’s director of distribution. “It has also given us a great amount in customer service and public relations.”
BAX’s role has evolved to such a degree that some of its customers rarely--sometimes never--touch some of their own products.
For Boeing, BAX actually runs its warehouses in Singapore and London from which replacement parts can be quickly dispatched to the aircraft maker’s local customers.
Also in Singapore, BAX runs a plant for IBM Corp., where it ships in components, assembles them and delivers the finished computers to local customers. “That’s how far this logistics thing has gone,” said Heath.
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But for all its promise, BAX’s parent, Pittston Burlington Group, has seen its profit languish. Its 1997 net income was $32.3 million--about even with the previous two years--on $1.66 billion in revenue. In this year’s first quarter it lost $3 million on an 8% increase in revenue to $402 million. The company blamed everything from Asia’s financial crisis to a flat domestic market to the cost of acquiring an airline.
Although many other transportation and logistics companies also have found profit growth elusive, analysts are particularly critical of BAX.
Emery “may not be firing on all cylinders,” said analyst Stephen Klein at S&P; Equity Group. “But BAX is not firing on any.”
One problem is that the market for heavy air cargo--as opposed to letters and small packages that carriers such as Federal Express specialize in--is highly cyclical. It’s the first to fall off in economic downturns as companies turn to cheaper modes of transportation.
BAX is also burdened with the huge expenditures needed to build its information systems and to maintain its 38 planes. Those costs have dragged down profit in its domestic operations, analysts say. Internationally, they say, BAX is far more profitable because rather than operating its own planes, it rents space on other air carriers and on ships and other forms of transport.
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Asset-heavy companies like BAX argue that they can provide a higher level of service. But analyst Gregory Burns at Gerard Klauer Mattison said that strategy isn’t paying off. He notes that some of the most profitable logistics providers, like Expediters International of Washington and Eagle USA Airfreight, don’t own any planes.
“Logistics isn’t about owning assets,” he said. “It’s about information.”
BAX’s confusing corporate structure and a low profile on Wall Street haven’t helped matters. Pittston Burlington, BAX’s parent, is one of three operating subsidiaries of Pittston Co.--the others are mining company Pittston Minerals Group and Pittston Brink’s Group, the armored-car services firm--but all three units trade separately on the New York Stock Exchange.
Pittston Burlington’s stock has drifted down from about $30 a share last fall to its close of $15.25 on Friday.
Analysts also complain of absentee management at BAX, which until recently was run by Pittston Co.’s top executives based in Richmond, Va. They say they’re hopeful that the appointment of Campbell signals the start of some needed changes.
Campbell was appointed by Pittston’s new chief executive, Michael T. Dan, who earlier this year replaced the holding company’s longtime CEO, Joseph C. Farrell. Dan was traveling and unavailable for comment.
Some analysts see an even bigger problem haunting the industry: the possibility that corporations will cut back on outside services and handle more of the logistics themselves.
But most, like Burns, see just the opposite occurring. “We’re in the very early stages of outsourcing by corporations to lower their supply chain costs,” he said.
With the pressures mounting, logistics firms might place their bets either on shedding assets or on buying up as many assets as possible and going for critical mass. For BAX, that could mean eat or be eaten.
“What BAX has going for it is it’s on the right trend,” said Burns. “The demand for its underlying services is going to grow, and grow dramatically.”
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Shipping News
In order to reduce inventory and warehousing costs, some companies are turning the job of shipping goods over to businesses such as BAX Global Inc., which provides just-in-time delivery of products worldwide. An example of how logistic transportation planning works:
1. Computer manufacturer ships product to logistics center.
2. Vendors and suppliers ship additional parts to logistics center, where product assembly is completed.
3. Logistics center ships product to three basic outlets:
* Consumers
* Distributors, who provide product to retailers
* International pool distributors, with customers in Asia, Europe, South America and North America. Product may then be sold directly to consumers or retail distributors
Slowing Profit
Over the last five years, BAX Global’s operating revenue has continued to grow, but profit has stagnated since 1994.
Operating Revenue
1997: $1.7 billion
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Net Income
1997: $32.4 million
Source: BAX Global Inc.
