XPO’s reach for LTL optimization earns spot in FreightTech 25

XPO Logistics Inc. (NYSE:XPO) Chairman and CEO Brad Jacobs has said the protracted decline in U.S. industrial production, which has shrunk the revenue streams of every less-than-truckload (LTL) carrier, will leave three types of LTL firms in its wake: the laggards that aren’t able to counteract the revenue hits; middle-pack companies that will muddle through with difficulty; and the leaders with technological advancements that will make their operations more efficient and more valuable to their partners.

Jacobs, who is also XPO’s founder, has put his money where his opinions are. XPO’s rising IT budget is today pegged at about $600 million a year, a sizable sum for a company not named FedEx or UPS. Automation is being applied across XPO’s entire $17 billion enterprise, but perhaps most importantly in the LTL category, historically a backwater for IT advancements.

Jacobs and his longtime CIO, Mario Harik, contend that the investments will provide shippers with more cost-effective services, strengthen the company’s operating network and push out benefits to truckers and drivers who’ve never had an abundance of them. When industrial demand rebounds, XPO will be well positioned on multiple fronts to capture outsized market share of the LTL ecosystem, Jacobs and Harik reckon.

As XPO’s third-quarter results showed, technology, when deployed properly, can offset top-line weakness by delivering a more efficient and productive operation. The company reported adjusted $1.18 in diluted earnings per share, up strongly from the 89 cents per share posted a year earlier. The 2019 results were 16 cents a share ahead of analysts’ estimates. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), a key financial metric for XPO, rose $23 million year-over-year. LTL yields rose 2.9%, indicating XPO squeezed more profits out of less tonnage. Operating ratio, the ratio of operating expenses to revenues, improved to 80.8%, the company’s best third-quarter performance in years. XPO sourced its transportation services at a 3% better rate than what could be found on the DAT spot market load boards.

The results came amid persistently weak demand for U.S. industrial goods, LTL’s bread and butter. XPO’s third-quarter LTL tonnage declined 3.1% year-on-year, while brokerage loads fell 4%. Jacobs has said that U.S. industrial production has been in recession for more than a year and that demand will remain muted for LTL and brokerage services, at least over the near term.

XPO is working on 10 tech-driven initiatives it said will generate $700 million to $1 billion in profit improvement by 2022, regardless of how the economy performs. Near the top of Harik’s list is streamlining XPO’s $5 billion annual investment in “variable labor.” Put another way, XPO will use technology in an effort to wring more productivity out of its labor force.

“Our business model is resilient to the macro,” Harik said in a recent interview. He added that low-hanging fruit remains on the LTL tree. “We are a few innings in, but we still see a huge runway ahead of us.” 

LTL, which operates under a hub-and-spoke model that has many touches and handoffs, is notoriously difficult to automate. XPO, with 8,000 scheduled LTL runs covering about 2.6 million miles per night, is probably taking the strongest crack at it yet. The company has refined its route-optimization tools in the hope of identifying more direct, point-to-point runs that can be profitably implemented, Harik said. This would mean that fewer routes would need to navigate traditional break-bulk networks, which are key to building density but can be slower and have more hand-off issues. 

XPO is applying machine learning to perform more accurate forecasting of pickup and delivery flows. “You know what and where your deliveries are in the morning, but you don’t necessarily know where the pickups will be in the afternoon,” Harik said.

The company in 2019 made the real-time visibility tools of its digital marketplace, known as XPO Connect, available to its “Managed Transportation” unit, which manages transportation activity across all modes. The result was a 22% gain in managed transportation revenue amid a flat demand environment, Harik said, pointing out that there are now more than 37,000 carriers that collaborate with XPO Connect.

XPO, which operates 787 distribution centers worldwide, looks to tie shippers, carriers and consignees into end-to-end networks with its many DCs as jump-off points. Here, there will be more of a balance between manual labor and automation, according to Harik, who said at this time, warehouse technology is beneficial as it frees up workers to focus on more value-added, productive tasks. Besides, it is easier for people to load and unload pallets than it is for a robot or some other form of automated capability, he added.

XPO has invested $77 million in a 638,000-square-foot U.K. distribution center that it has built with Swiss food and beverage giant Nestle, S.A. (ADR:NSRGY). Starting later this year, XPO will use the site to manage Nestle’s U.K. consumer packaged goods distribution. The facility, which will be the size of seven football fields, will be staffed by a remarkably few number of workers, the company has said. But those workers will use XPO’s IT prowess to be significantly more productive than most warehouse labor has been in the past, Harik said.

XPO’s big-ticket commitment to IT earned it the 23rd spot on the annual FreightTech 25, announced in mid-November at FreightWaves LIVE! in Chicago.