(00:00) Kerry Gibson-Morris: Check the checker. That was something I learned very early on in my career. You can have the best QA audit infrastructure globally in your markets, but if you’re not checking the checker, you’re going to expose yourself to unexpected risks and costs to the business. So you need to be able to have that human gut that is assessing the data and making sure that the information that is coming out is actually accurate. And so it’s a patience game. Jump in fast, you’ve got to be patient and you’ve got to challenge the information that’s coming back to you and really delve in and make sure that it’s correct.
(00:41) Voiceover: Welcome to Supply Chain Now, the number one voice of supply chain. Join us as we share critical news, key insights, and real supply chain leadership from across the globe. One conversation at a time.
(00:54) Scott W Luton: Hey, good morning, good afternoon, good evening all, wherever you may be. Scott Luton with you here on Supply Chain Now. Welcome to today’s show. Folks, we have a special conversation teed up here today. Many of you are familiar with my good friend, Kim Reuter, whom I’ve been co-hosting shows with for quite some time. She’s been doing big things in supply chain for years at companies such as Amazon, Nordstrom, and many others. And I always enjoy learning from her been there, done that, no nonsense perspective. Not long ago, Kim approached me with an idea. She said, “Hey, Scott, I’ve recently reconnected with a few of my former colleagues that all did big things in the industry. These are bonafide experts and last mile financing, sourcing, and a whole lot more. I like to call this team of savvy pros, the collective. What do you say we get them on a show?” Kim said.
(01:49) Scott W Luton: “Wait, it sounded good, but you know all ideas aren’t acted on, especially in the world of digital content. However, when I met this team of leaders who amongst other things are true veterans of disruption, innovation, and scaling big initiatives at the most demanding, game-changing companies under more pressure than some of us will ever experience. I got to tell you, I was intrigued with the notion of bringing these voices together on a show or two because I’ve come to find that they’ve got the stories, the perspective, and the points of view that I think our SEN global fan will enjoy watching, listening, and learning from. So I invite you to take a listen to today’s unique podcast here on Supply Chain Now, powered by Kim and The Collective. And let us know what you think.
(02:44) Kim Reuter: Scott, thank you for that introduction. As Scott mentioned, we have been working together for over a half a decade. That’s five years for all y’all. And Scott is the first person to introduce me to podcasting, and I have been hooked ever since. I am very grateful to the Supply Chain Now Network for even giving us this opportunity to host my own show. I hope that I do you proud. Now, welcome to The Collective where we discuss everything supply chain, leadership and life. And as our name implies, our podcast brings together four battle-proven commerce titans. Collectively, this team architected and built the Amazon that you see today. And they didn’t stop there. These leaders went on to lead in trucking, air cargo, luxury retail, and of course, coffee. You cannot have a career in Seattle without at least touching coffee once. Now, let’s do a quick introduction of our co-host.
(03:40) Kim Reuter: First up, Kerry Morris, global sourcing expert. She has sourced everything from teak furniture to insulated coffee mugs. Kerry built Amazon Private Label from scratch, introducing the early brands Strathwood and Pinzon and led the first celebrity kitchen collab with world famous chef Tom Douglas. Welcome, Kerry. Second, we have Jack Mowreader, finance guru and Army Logistics veteran. Jack has built financial models and business plans for just about every industry, from truckload carriers to solar panel construction. Jack laid the foundation or the financial foundation for Amazon’s early import strategies and the Kiva Robotics integration. Welcome, Jack. And next up, we have Derreck Travers. Everything Last Mile starts with Derreck. Derreck has built networks and programs for outbound and inbound and everything in between. Derreck led the charge developing Amazon’s last mile delivery and returns program and dabbled a little bit in product fraud. Welcome, Derreck. And last but not least, your host, Kimberly Reuter.
(04:49) Kim Reuter: I’ll keep it short and sweet. If it’s shipped across the border, I have probably handled it. From servers stuck in Singapore to radioactive monkey brains, to six karat diamond stud earrings, I have cleared it and moved it. And along the way, I’ve had a hand in building some pretty amazing technology. So welcome my co-host. We are excited to bring a bevy of knowledge and expertise to the supply chain network. Now let’s get started. Kerry, let’s start with you. What do you think is the most disrupt development in supply chain happening right now?
(05:22) Kerry Gibson-Morris: Well, thank you, Kim, for bringing such a great topic forward. I have to tell you, I am a veteran of disruption. It is something I thrive in. And I couldn’t help but think on this topic about my early days at Amazon and the disruption of retail and the power of technology. So my topic is a disruption in the smart sourcing space with AI and how AI can play a role, but also create risk along the way. AI in the supply chain space is really not a novel new concept. We have been looking to technology to streamline task level roles from as long as I can say in this career, in this space. But what I do think is really uniquely different about AI in the sourcing space today is it’s on steroids. It’s moving at a very fast pace. And for me, it’s an area where we need to jump and we need to be a part of it and we need to be building and curious to be able to harness the power of this tool.
(06:28) Kim Reuter: It’s a really interesting perspective. And you’re right, we have been replacing labor since we’ve invented technology, right? Since the beginning of the wheel. Before that we carried it and then we had the wheel. So we’ve been going through this. This is not the first time. People are acting like this is probably the first time. But it’s a really interesting perspective that you bring up because it plays a specific role in sourcing. Because sourcing, which is you’re going to educate all of us on sourcing, is not just about picking pretty stuff out of a catalog. It goes way deeper than that. And so what are some of the things that are going on with AI and sourcing? Why is this so important?
(07:04) Kerry Gibson-Morris: One of the things, and you touched on this, is I don’t see it as replacing our members of the team in the space. I do think it’s about allowing my team to level up and be much more strategic. We’re all faced with bandwidth pressure and headcount pressure through our OpEx. But when I think about the power of AI and why I want to jump into it strategically and with a high level awareness that there’s risk, it’s because it’s going to allow my team to level up. It’s going to give them the capacity to deal with complex problems to solve, to really nurture their supplier relationships and build out that supplier network and to be able to think about innovation in the future, lifting their head up and looking forward.
(07:51) Kim Reuter: Excellent point. Because a lot of times we get stuck in that Excel spreadsheet. And that’s where we’re making all of our decisions. It’s where everything is launching from. And we’re not really don’t have the time to. The bandwidth for that creative thinking, which are the things that you’re talking about, the innovation, the making time to talk to your suppliers and work on those relationships. We recently did a podcast, Scott and I did with Archestra who works in the AI procurement space. And we talked a lot about relationships are still really important. AI is never going to replace that human relationship piece. So we’re not talking about getting rid of people. What you’re talking about is giving people an opportunity to be more effective.
(08:34) Jack Mowreader: Yeah, absolutely. And you think about the payoffs of really delving into this and using the tool in the right way. It’s going to allow us to be much more strategic with our supplier network to understand what that last mile could look like and how we really drive cost value into our model. Being able to think about the competitive landscape and the pressure on cost and where we start to play into tariffs and how do we drive down the cost. Again, this tool can really help us achieve that in the right ways.
(09:13) Kim Reuter: And so speed to market is something that came up or comes up pretty frequently when we talk about AI and procurement. Can you expand on that just a little bit and why that is so important?
(09:23) Kerry Gibson-Morris: Well, speed to market is a competitive advantage since the stone ages. Not a new idea, but certainly one that is a buzzword in the industry. And speed to market and cost are probably the two most important levers. And you think about the ability to be able to be first in with innovation or first in with the right inventory at the right place for your customer. It translates into the right financial model that all of us want to build in our e-commerce spaces or in retail in general. And so this tool allows us to take the task oriented roles that my team is spending time on and allow them to model out the right life cycle for the product and move it through the pipeline quicker.
(10:12) Kim Reuter: Beautiful. That’s amazing. Are there any risks that people need to worry about when we talk about this?
(10:17) Kerry Gibson-Morris: Oh, absolutely. There are lots of risks, right? Any new technology brings risks along the way. And I think about the word jump, like I’m saying, get in there. I’m an early adopter. I want to build. I love to be curious, but there’s going to need to be a discipline around this as there has been in any technology that you bring into this space. And so the risks for me right now are most important is the data integrity and the hygiene of the data. Again, this was a problem we had to solve at Amazon, early day catalog. Junk in, junk out, not having the right naming conventions and having the right integrity around the categories can really foster inaccurate data that the AI tool might be pulling back up. And so you’ve got to make sure that your data hygiene is there and you’re going to have to work on architecting the right infrastructure and discipline early on to actually make this data worth anything to the end user.
(11:22) Kerry Gibson-Morris: I think the other piece very important is check the checker. That was something I learned very early on in my career. You can have the best QA audit infrastructure globally in your markets, but if you’re not checking the checker, you’re going to expose yourself to unexpected risks and costs to the business. So you need to be able to have that human gut that is assessing the data and making sure that the information that is coming out is actually accurate. And so it’s a patience game. Jump in fast, you’ve got to be patient and you’ve got to challenge the information that’s coming back to you and really delve in and make sure that it’s correct.
(12:05) Kim Reuter: Yes. I think that’s super important. And I will tell you, AI will give you the wrong information with 100% confidence. And it will back it up, but it’ll
(12:18) Kerry Gibson-Morris: Still
(12:18) Kim Reuter: Go
(12:18) Kerry Gibson-Morris: Back. And it will sound so convincing, right?
(12:21) Kim Reuter: It’ll be like all the confidence in the world. And this is exactly how I came up with it. You can trust me. And it’s dead wrong. And it’s dead wrong. So you have to keep the human element in there. You’re absolutely right.
(12:33) Kerry Gibson-Morris: I would tell you, Kim, here’s just a fun exercise for anybody out there. Search the word T-shirt because I will tell you the algorithm behind that, you do have to bed keyword searches to make it the right result. But if you search t-shirt, there’s so many ways that we spell that word that you’ll just get completely different results every time. And that’s the data integrity I’m talking about.
(13:00) Kim Reuter: Yeah, exactly. Exactly. Anything else we need to worry about?
(13:03) Kerry Gibson-Morris: Well, I do think that when you’re moving at the pace that this is, and the media is certainly making sure we don’t forget about AI, I feel that how do we engage our executive leadership in a way that sets us up for long-term success? This isn’t a novelty moment. This isn’t something shiny that we kind of all jump around, but making sure that we’ve got a foundation of governmental instructions around how we’re going to embed this and how we’re going to manage it. And then I think on the other side of this, it’s a training requirement that the teams need to understand. And you can’t just all of a sudden roll out an AI tool and expect everybody to be able to consume the information appropriately and understand how to leverage it appropriately. So executive oversight, building that foundation, and then really thinking about engagement and training for the team so that they’re leveraging it and freeing up their time to be more strategic.
(14:08) Kim Reuter: Yeah. And using it consistently. That would be the other thing I would call out is that governance is key. That’s one of the big things we started out at Amazon and we learned very early on was governance of data. And if you don’t have that, not only is the data and data out, but it’s also how you use it and how you access it. Yes. And who has access? Also very important because you will come up with competing numbers and no time flat. So important to put that around it.
(14:36) Kerry Gibson-Morris: Such a great call out. Thank you for calling that.
(14:38) Kim Reuter: All right. So Jack, do you have anything you want to add here to Kerry’s brief conversation about AI and procurement?
(14:48) Jack Mowreader: Yeah. Well, I mean, it’s such an interesting discussion, not only in supply chain, but just in the world that we live in. And I think that you illustrated a lot of challenges. We’re in spreadsheets. We have people that maybe don’t really know how to use the data. If I’m going to be practically jumping in, I mean, what does that look like, Kerry? I mean, where do I start? Do I start with the executive sponsorship? Do I start with data hygiene? What does jumping in look like from your perspective?
(15:15) Kerry Gibson-Morris: I will say just because of the speed, speed to market and speed of AI introducing itself into all of our workspaces, it’s going to have to be dual path. I think that the importance here is if we try to get everything perfect, we’re going to miss the opportunity to be in this space competitively. So I see a parallel pathing of setting up clear guardrails with the end user that’s going to be implementing or leveraging this capability while simultaneously bringing the executive leadership along and getting their buy-in and allowing them a forum to ask questions, difficult questions. Because the tool can remove task level work, but it also can have a large financial impact if not leveraged appropriately. But really great point.
(16:09) Jack Mowreader: Yeah. And so what I’m hearing you say is don’t jump in blindly, but have a plan and just get started. I mean, that’s the premise, right? You should have started yesterday, so let’s start today, right?
(16:18) Kerry Gibson-Morris: Yes. Love it.
(16:19) Jack Mowreader: Yeah.
(16:20) Kim Reuter: Jack, are there any financial aspects to this that you would want to talk about?
(16:25) Jack Mowreader: Yeah, I mean, I think an interesting concept is you hear about the Microsofts and the Googles of the world. They’re just laying off and they’re saying, “We’re going to figure this out.” But is that really the best path for your company? Is it better to, like Kerry said, let’s get an ROI, let’s get something together, let’s get a plan, let’s invest in that infrastructure and do it methodically and not put your business at risk. So when I look from a financial perspective, it’s what do I need to put in? When are we going to start seeing returns? And what’s the risk of doing it wrong?
(17:03) Kim Reuter: Right. Yeah. There’s a big risk to doing it wrong. Derreck, what about you? Do you have any thoughts on this?
(17:08) Derreck Travers: Yeah, a couple thoughts come to mind. I love how, Kerry, you were talking about the concept of trash in or trash out or garbage in, garbage out. I’m not convinced that AI is as impactful as the media hypes it up to be. To me, this feels like the continuation of the digitalization of the marketplace. I can remember early on in my career when I was a customers broker, and Kim will probably relate to this, but we’d have the sheet that we’d fill out that we had to figure out what’s the tariff number, what’s the unit of measure, what’s the value? What could you deduct from the value so you didn’t pay duty on it? But basically it was a handwritten sheet that we had. And just as I was leaving that business, they were introducing, putting computers at everyone’s desk to where everybody individually would key it in.
(17:56) Derreck Travers: And actually what they were doing behind the scenes is tying in with this new technology called EDI with the customer to be able to get all this electronically and not need someone to key it in. Well, really to make all these systems work, you have to have the architecture in place. And there’s been a lot of public discussion, which if it’s public now, you can imagine behind the doors it’s a very large and loud discussion. But people are realizing that their architecture isn’t as solid as it needs to be. And AI is actually making it even more profound of what that problem is. And so a lot of people are going back and they’re reinvesting into architecture. They put it off for a while and now they’re reinvesting in that. The second thought that comes to mind, kind of like what Jack was talking about from a cost implication, Ford just recently announced that they are bringing back a couple hundred, what they called gray beards, meaning engineers, to come back and focus on quality control that they had actually let these guys all go because AI was going to solve their problems.
(19:03) Derreck Travers: And I think the last couple of years, everyone’s been in a real mad rush to appear to be doing something with AI without stopping, taking a breath and really putting together a solid strategy and actually evaluating if they really had everything in place to actually make it more effective. So I think just one other though too here is I know there’s a lot of people, a lot of fear out there about how is AI going to replace everyone’s jobs and such, and there’s different opinions. I think something that’s been promoted lately is that the expectation actually is that this will create more jobs. And the case in point that I would use in the logistics or supply chain industry, I’ve been at this for a little while and I can promise you there were maybe two or three people in the company that would be doing something related to supply chain.
(19:55) Derreck Travers: Well, you look at any company today, there’s at least a dozen. And depending on the size and scale of your operations, I mean, there’s organizations that have a couple hundred, if not a couple thousand different people in the supply chain space. So I’m not convinced that it’s going to actually eliminate jobs. Jobs will change. This is going to be no different than switching from a typewriter to a PC, but it is a change and change is probably one of the most uncomfortable things we do as humans. We’re not wired for change, we’re wired for safety. And I’m telling all my kids right now, just use the tools, learn how to do it. Don’t worry about how stupid it is that you’re trying to use the tool for. Just get used to using it because it will help you five, 10 years down the road.
(20:43) Kim Reuter: Okay. Thanks, Derreck. Excellent points. Kerry, thanks for sharing that. AI and procurement, definitely here to stay. Lots going on in this space. We’re going to jump into Jack, who’s going to talk about something very similar to what you deal with on a very regular basis. Jack, what do you got for us? What’s going on out there that you think is the most disruptive thing happening in supply chain?
(21:07) Jack Mowreader: Well, I think in my view, tariffs are having a huge impact. It’s just the speed at which government is implementing changes. We were kind of talking about previous changes. I mean, I was in the trucking business and when the FMCSA decided they want to do hours of service overhauls and they wanted to start doing electronic logs and things like that, there was a study period and there was two years that went into that initial implementation. They extended it. And so you had this at least four-year period where you could react as a business to the change in conditions and you knew what the outcome was going to be, or you could at least predict it. In this tariff world we’re living in, it’s just very disruptive and it impacts all sorts of things. I mean right now, I mean the first thing is the de minimis tax tariffs, I’m sorry, that’s going on right now.
(22:10) Jack Mowreader: And now all the small parcels under $800 are now coming in and they have new requirements for reporting. The customs needs to really understand how to treat them, what kind of information they’re going to use. They’re not getting huge budgets to solve for this. So they’re trying to be efficient. And what’s that going to do to the rest of the import world? Is there going to be some spillover or is everything just going to get clogged up? So I think that in itself, that starts to play out, that’s going to be a really big disruptor.
(22:48) Kim Reuter: Yeah. So talk to us about the financial aspects of this, Jack, because obviously for a long time, tariffs pretty much were the same. There may be a change, but as you said, we knew about them way in advance. They had to be published. It wasn’t something that was happening on an overnight basis. So for a long time when buying was planning their purchasing, selling was planning, selling, supply chain was planning, everything was pretty steady. But now we have this sort of curveball that we have to deal with almost on a daily basis. What kind of financial impact is this having?
(23:27) Jack Mowreader: Well, it has tremendous impacts and it really just depends on where you’re at in that supply chain. Are you going to be the one holding the bag because maybe on a fixed price contract or you’ve negotiated something previously and there’s no provision for pass through? So it really depends. You have to take a look at your own individual perspective. I just came from solar construction and we’d have a half a million dollar battery system that gets produced in China because that’s where that happens. And it’s literally getting built and I’m in negotiation with my end customer to try to pass through some of these tariffs and you have a fixed price contract. A lot of times you’re the one that’s bearing the brunt of that. And so really just understanding where you are, what your contracts allow for. Is this something that you can use as a force majeure?
(24:23) Jack Mowreader: Is this an event that you feel like you can go back and pass this through? Or do you need to get smarter about how you’re pricing, having variability in there? So there’s so many different variables, Kim. It’s really understanding where you sit in the supply chain.
(24:40) Kim Reuter: You bring up a really interesting point because working in e-commerce and retail and CPG, what I’ve been doing a lot of when all this stuff happened is helping people figure out how to better source or how to better classify or deal with the problem on a kind of a PO made by PO basis, which is what most retail and e-commerce is. We place a PO, we get it. And when all of this happened, most of the retailers and merchants and sellers that I deal with were able to go back to their sellers and say, “Hey, they’re manufacturers. Oh, this thing happened. We need to renegotiate.” But you bring up a really interesting point about big builds that take longer than a month or two to build. And in the middle of this build, you have a whole other thing. You got a 30% increase in the cost of your product.
(25:35) Kim Reuter: How do you deal with that? Do you have any recommendations for companies that are dealing with this?
(25:41) Jack Mowreader: Well, it’s pretty unprecedented. And I think there’s a bunch of legacy agreements that we’ve all had about parts. So I mean, part of this is getting with your contracts team, your legal department and saying, “Hey, let’s take a look at what our arrangements are, what our risks are,” and taking a look at it and just being proactive with your customer. Because even if you can pass it through, you want to still be having those conversations with your customers. Because at the end of the day, they need to be successful and you don’t want to just blindly just pass those things through. So it’s about understanding where you’re at, looking at your risk, coming up with some creative ways to problem solve, and then engaging your customer and saying, “Hey, this is what’s happening to me.” And that’s one of the things that we did on that battery build is I basically said, “Hey, I can’t absorb this.
(26:27) Jack Mowreader: Can the general contractor absorb a little bit out of their contingency? Can my supplier take a little bit of the cut?” And we negotiated a way that I didn’t have to hold all of it, but there was limitations to what my customer could provide. So it is a risky proposition, especially, I mean, we’ve got a lot of changes still coming through in July around the section 201, the 122 tariff, sorry, and then the 301 provisions that are being implemented here in the next couple of weeks. And so there’s going to be tremendous change even with countries like Japan, Brazil. I mean, big tariff impacts where we think, all right, it’s not a China impact. It’s happening all across the industry. And I mean, really to tie it in where Kerry’s at, can we use AI to help understand which products are being exempted? Which countries are going to be most effective?
(27:27) Jack Mowreader: How do I communicate that throughout my organization and to my customers? So there’s a lot of information processing that we’re going to have to deal with here pretty soon.
(27:36) Kerry Gibson-Morris: Well, I would love to just piggyback on what Jack said, because trust me, I’m feeling the pain on this topic. Thinking about the power of AI and how it can leverage our supplier network, I think one of the questions I have for you, Jack, is there is somewhat of a domino effect because the supplier community, particularly in China, moved very, very quickly to find alternative markets that they could set up and be able to ship out of. But the domino effect is when you start to move production out of China into Cambodia or into Vietnam, you’re faced with two new costs. One of them is training capability of that market in the short term and inventory because a lot of the raw materials are not available in these alternative markets. And I’m finding as the supplier shifts markets, they have a new burden of cost.
(28:36) Kerry Gibson-Morris: And then simultaneously that market could eventually get a tariff added onto it when it wasn’t there before. So I know it’s complex, but I’d love to just hear your thoughts on that.
(28:48) Jack Mowreader: Yeah. Well, I mean, when you look at the supply chain, I mean, we worked for years to do this optimization just in time, stay lean, do all these things. But in a disruptive environment, we’re really setting ourselves up for failure. So now do you start having days of supply contacts and challenges with. It’s like, do I need to warehouse locally? Do I need to secure stuff within the country of manufacturer? What does this mean? And so I think that we may even see this trend where I’m adding buffers in there so that I can absorb the risk. And really having those conversations, it’s like, “Well, what’s my true risk? Is my true risk running out of supply or is it being as optimal as possible and being cost competitive?” So I think that you’re introducing more opportunities for us to just have that dialogue and say, “Maybe we leaned out the supply chain a little bit too much.”
(29:59) Kim Reuter: Yeah. That’s an excellent point, Jack, because you’re right. Every single one of us on this call has lived through lean and just-in-time inventory. And for a long time, that’s all we live by, was how lean could we get inventory? 30 days or less was the goal at all times. And now in the last 18 months, we’re hoarding. We’re buying as much as we can, as soon as we can at the price we think we can get it. We’re trying to get it and to keep it somewhere safe so that we can access it later, which is like what we used to do back in the 40s and the 50s before all of our containerization and inventory management modernized. So it’s an interesting point that all of this has kind of almost made supply chain go a little bit backwards. Would you guys agree with that?
(30:53) Kim Reuter: Yeah, that’s a good point.
(30:55) Jack Mowreader: For sure. And I mean, you talk about consolidation going back to the de minimis tariffs, right? I mean that’s a power play for aggregators here in the States to warehouse and go back to instead of these individual shipments, all right, do I do a fulfillment by Amazon? Do I do something like that where I can just bring it in, store it and displace it out of a centralized warehouse? So yeah.
(31:21) Kim Reuter: Yeah. Bringing at a wholesale cost. The advantages for bringing stuff in at retail under de minimis are gone. There’s no more advantage for that at all.
(31:30) Derreck Travers: Kind of echoing what Jack was saying, this whole idea of having stock on hand. Maybe if I was a little bit smarter when this thing was all going down, maybe, and if I had the money, I’d go buy a bunch of land and build a bunch of warehouses because there’s a lot of inventory now sitting in warehouses waiting for it to move to wherever it needs to be moved to as far as putting on the store shelf or go to a production line or something. The other thing I’d call out here too is that in a strange way, this has sort of leveled the playing field to where offshore e-commerce products aren’t just controlled by one particular region of the world. I think if people spend a little bit of time, people would be really surprised to start seeing the interest in actually shippers from other parts of the world that traditionally have higher expenses are actually now getting to become competitive in being able to ship stuff from say Europe or from the Middle East or from Africa or South America to the US.
(32:32) Derreck Travers: Whereas before it was pretty much controlled by Eastern Asia there. So I think that’s kind of an interesting change or disruption that’s happened, and it’s going to be interesting to see how this continues to play out.
(32:46) Jack Mowreader: Well, yeah. And I mean, just to riff off that a little bit, Derreck too, I mean you’re talking about warehousing. I mean, there’s two things that you can do around tariffs and one is it’s working with foreign trade zones. What that does is brings it in and holds it. And then also using bonded warehouses. There’s going to be a window here that if you’re ready in the next couple of weeks to really, there’s going to be one tariff ending and another one hasn’t quite implemented. Can you bring it in and ship out of a bonded warehouse and see tariff-free? Are there options for you to work with foreign trade zones in this interim time to load up your inventory in the states and take advantage of these gaps? So I think those that are most flexible and are thinking ahead can really take advantage and get some really good competitive advantages.
(33:43) Kim Reuter: They’re out there. You just got to find
(33:45) Derreck Travers: Them. To echo Gary’s topic earlier too, we won’t hear about this probably for another year or so, but it’ll be interesting to start to see the stories of companies that leveraged AI to play out what are scenarios and to hear about the successes or maybe some of the failures of how people leveraged AI to play out these situations such as you said about with Japan and Brazil and the tariff rates changing.
(34:09) Kim Reuter: That’s good stuff. All right, excellent. Derreck, you’re up. What do you got for us? What’s going on out there?
(34:16) Derreck Travers: Well, it’s an interesting time. I think going along with increased fuel costs, we talked about tariffs, we talked a little bit about AI here and stuff. In the logistics industry, there seems to be a strong appetite for consolidation. So I think one that a lot of us probably have heard about most recently is CMA, which is a large ocean shipping consortium. They went and they announced that they bought FedEx’s supply chain unit. So FedEx has actually been in the process over the last couple of years of splitting up their company and doing some smart consolidating and such. So this was a good opportunity for FedEx to be able to help with their strategy. But the way the deal’s announced is that CMA is spending $1.4 billion. They’re going to inherit with that purchase 10,000 people in North America and roughly about 150 warehouses. If I remember correctly, I think that increases their North American warehousing capacity to a little bit north of 250,000 warehouses.
(35:18) Derreck Travers: So to put that into scale, that’s actually kind of similar to where Amazon is at right now. A bit more than what Walmart is doing. It’s more than what some of the other larger box retailers that we’re all very well known of. But just to give people a sense of the scale, the deal’s expected to close later this year, and the FedEx supply chain group itself brings in roughly about one and a half to $1.8 billion in revenue every year. What’s interesting is that this actually isn’t new for CMA. Over the last five years, they’ve actually closed other deals similar to this all around the world. This is the first time that’s pretty much mostly focused in North America. When they first started doing this, it was with CEVA. CEVA was a Swiss-owned company and they had presence all around the world. And many of us in the business have heard of CEVA here in North America.
(36:17) Derreck Travers: But with this is kind of interesting with CMA. They’re focusing on top line growth. They’ve made no bones about it. In fact, they’re betting that by leveraging scale, they’ll be able to make it difficult for customers to be able to switch to alternative or competitors. Having said that, history shows with CMA that they’ve shared that roughly they’ve lost 15 to 20% of customers after each time they make an acquisition like this. And typically rates for customers will go up between 15 to 30%. So for a 3PL service, if your total costs are roughly about four bucks a unit, which is pretty typical, you can now expect to pay something maybe north of $4.60 a unit. The challenge though is that with each of these acquisitions that they’ve made over the last five years, none of them have been completed. They’re still working on these integrations, even though they commit to having this closed out in a year and a half or two years.
(37:24) Derreck Travers: And especially if I think of this deal with FedEx, FedEx has a really, really strong culture that started out with Fred Smith years and years ago, and it’s really difficult to change the culture of an organization. It’s really difficult. In fact, Harvard Business Review put an article not too long ago specifically about the logistics industry, but roughly between 70 and 90% of all M&A deals actually don’t live up to the expectations.
(37:59) Derreck Travers: And the other disturbing part of it too is that it actually typically destroys shareholder value by 10 to 50% within two years. So this is kind of interesting times. We’ll probably see more consolidation is my guess.
(38:14) Kim Reuter: Well, so what I wanted to ask you, Derreck, is how do you think this will impact the e-commerce market?
(38:19) Derreck Travers: Well, two things. Number one, consolidation never favors a shipper. It will always put inflationary pressure on costs. May not be immediate. It’ll come over time. I think number two, there will be organizations that can benefit from this. If they can go to a single supplier or service provider that’s fully vertically integrated, there are benefits you can have. If it’s the same company that’s doing your customs clearance, it’s doing your ocean transportation, it’s doing your trucking and your warehousing and all those different pieces. There can be benefits for that, but you have to have pretty significant scale to leverage price concessions. But if the reality is that most commerce or e-commerce that’s out there is done by moms and pops operations, it’s actually quite surprising how large it is. And I think for a lot of these companies that don’t want to spend the time on the supply chain or the logistics side of the business and want to focus more on the marketing, the say side of the business or the design and research of the product that they’re making or improving on, it’s easy for them to fall victim to just letting someone else take care of it.
(39:31) Derreck Travers: And if the industry consolidates and your prices come up, it will catch you blindsided quickly.
(39:37) Kim Reuter: Yeah. So this announcement came on to me, the way that I saw it, came kind of on the heels of the Amazon supply chain services announcement and Amazon opening up all of their logistics to anyone who wants to use it. Do you think that too, that’s a coincidence? Do you think that CMA and FedEx are trying to compete with this Amazon supply chain services?
(40:03) Derreck Travers: I think it’s just dumb luck. These deals, especially with this size or scale, that’s a disruptive comment. Deals this size usually take a long time to work out. So I think I wouldn’t be surprised if these discussions have been going on for some time. So that’s number one. Number two, CMA has been doing this for the last five years. This isn’t the first deal that they had. So I think there’s more of a bigger play with those logistics companies that have strong capital resources to integrate more of the physical movement of goods and services. And these things all go in cycles. We’ve all been at this for a while. They seem to run in 20, 25-year cycles. I think a lot of us can remember back in the day when UPS was promoting about how they were going to be able to make it easy for customers because they’ll take care of everything.
(40:59) Derreck Travers: And those things are kind of being spun off. Same thing with FedEx. So I think it’s just playing the same cycle. But to look at this objectively, I think customers are going to.
(41:12) Derreck Travers: I’m never convinced that consolidation is a benefit to the customers with one exception, and that’s with the airlines. If you look at a price of a ticket, at least to me, it feels like the prices really haven’t changed a whole lot over the last 10, 15 years, but service has improved. And it’s not just one or two or one airline. If I think of Delta and what American have done, it’s actually pretty impressive. I would even say United as well. But consolidation usually never benefits the customer. We’ve all seen this happen over and over again, that usually something’s going to cost us more. Gas costs us a lot more money when there’s fewer gas producing companies and such. And then the biggest concern that I would have though is that as they go through this integration and they’re also still trying to manage five or six other companies that they’re trying to put into and get aligned, there’s a lot of chaos and a lot of problems.
(42:09) Derreck Travers: And it’s always at the end of the day, the customer pays the price. Now having said that, I think with Amazon’s deal, I think it was just kind of like dumb luck.
(42:19) Derreck Travers: Amazon tends to go in and out of trying to offer the service. They’ll have success, but at the same time, I think it’s a big ocean. There’s lots of different types of shippers out there. There’s lots of room for service providers to be successful.
(42:34) Kim Reuter: Kerry, you seem like you had someone on the tip of your tongue there. What do you have to say?
(42:39) Kerry Gibson-Morris: I’m hearing the two talk tracks. One of them’s the customer impact, and there’s no question. We always get the short straw on these deals. But I’m curious if we were to look through the lens of CMA, was this a reckless move or was this a disruptive big bet for them and worth the impact that we’re seeing?
(43:00) Derreck Travers: I don’t know that this is a strategy. And when I say it’s not a strategy, meaning the implementation of it. There’s probably been other organizations that have had more success in the integration than what CMA has demonstrated. Strategy as far as top line growth, control the whole supply chain movement of goods and services, that’s definitely a strategy. I don’t know the CMA group very well to have a strong opinion. I look more of what is the experience of the customer? I think there’s definitely a strategy out there where as the opportunities present themselves, those that have the cash on hand or the capital resources are definitely going to be consolidating more. And it’ll be around for 10, 15 years and then we’ll see them spin them off. It’s what always happens.
(43:48) Kim Reuter: Well, we saw this with Maersk too a couple years ago. So Maersk kind of shifted and did some consolidation where they were moving more towards the small mom and pops. Maersk was trying to offer more boutique services that were easier to plug into. I see CMA trying to follow in that path. And I do think that there’s a direct correlation between CMA’s FedEx Buy and Amazon opening up Amazon supply chain services. I think that they’re directly trying to compete with them.
(44:19) Derreck Travers: Yeah. And what’s interesting about Maersk though is if you look, talk about strategy, their strategy is very, very focused on margin. So for every dollar you invest in Maersk, you get a much higher, I think it’s like a 25 or 28% return on your dollar. Whereas with CMA, I think it’s like seven or 9%. So I think if I’m a shipper and I’m seeing all this, what appears to be some kind of a strategy of everyone trying to consolidate and such, number one, I would try to leverage myself by having diversification in service providers that will always benefit you. Don’t fall into the trap of giving all your business to one person to think you’re going to save some money because you’ll never save money. But number two, really instead of just looking at the price or the cost, which is the trap that we all fall into, really look and understand what is the culture?
(45:15) Derreck Travers: What is the true strategy of the company that you’re about to do business with? Amerisk is focusing on margin and they make no bones about it, and that’s why they’re very selective of what they purchase and who they acquire. And the companies they have acquired, they’ve all been integrated seamlessly on time and they’ve had less attrition rates from customers and such. Is one better than the other? There’s probably as many opinions on that as there are people on this podcast.
(45:48) Kim Reuter: Jack, what are your thoughts on the CMA FedEx situation?
(45:54) Jack Mowreader: Well, I think it’s kind of interesting really to the points that Derreck brought up about the integration, because having integrated companies before, it’s a heavy lift. And I look at the list of all of these recent acquisitions that they had. And I mean, you’ve got systems integrations, you’ve got financials, you’ve got tracking, all of these things, and you can only do so many at one time. And so I think it’s going to be really difficult for them to really make any progress. Now, if they’re just getting FedEx to just, “Hey, I’m shoring up a partner and I’m going to integrate it slowly over time and I just want to get my foot in the door here,” that could be a strategy. But really to Derreck’s point is I’d be really concerned about the service levels of all of their companies because the impact is bound to pop up.
(46:49) Kim Reuter: Yeah. And you make a good point. I kind of jumped to the conclusion that they’re going to take this and now offer end-to-end logistics. And I still think that’s what they’re going to do. I think they’re going to sell this as we can take it. They’ll probably get into some sourcing at some point, but we can help you with everything. We can help you get the product from the manufacturer and we will take it all the way to your customer store and we will do the returns. I mean, they’re starting to offer this end-to-end services that we’re seeing that traditionally we’ve been seeing the marketplace is really trying to play into. So Walmart, Amazon trying to offer these logistics services to entice more merchants to sell on their marketplaces. So now we see Kerryrs actually trying to jump into this space. And I think they’re really trying to reclaim their business.
(47:37) Kim Reuter: I mean, Amazon has been eating away at all of their businesses for the last 20 years, and it’s finally caught up to them. Kerry, you have a great perspective on that. What’s your perspective?
(47:51) Kerry Gibson-Morris: I think you’re absolutely spot on. And the opportunity for them to command the space like this puts them at a very strong advantage. But the question is, can they integrate? To Derreck’s point, can they streamline it? How many customers are they going to lose along the way as they try to play out this strategy? But if I were sitting there, I would jump on that opportunity as well. I also was thinking about the fact that when this type of disruption happens in the market, it allows room for new companies to innovate and squeeze into a very tightly populated landscape. So I would be curious to see what spins out from the Seattle market from an innovation perspective with this gapping.
(48:40) Derreck Travers: So that’s an interesting point. I think the challenge though is that barrier to entry is really expensive. So to put up some warehouses isn’t as expensive as buying a ship and managing a ship. So if your focus is to be vertically integrated and offer a complete door-to-door solution, think it’s going to be. I’m not even sure that anyone can actually enter the market unless they’re sponsored by some government or whatever. Now, as far as if I think back the days when we were at Amazon, Bezos had said more than once, “Your margin is my opportunity.” So if there is this effort to consolidate vertically, it will be interesting. To me, the bigger interest here is whether or not they’ll actually be able to do that or will this, to your point, Kerry, will more independent entrepreneurs enter the marketplace?
(49:35) Kim Reuter: Yeah. And snatch it up. Yep.
(49:38) Derreck Travers: And between the four of us and however many people are listening.
(49:41) Kim Reuter: And our million listeners.
(49:43) Derreck Travers: I’m opting for the second option. More competition
(49:46) Kim Reuter: Always
(49:47) Derreck Travers: Always improves the experience for the customer.
(49:49) Kim Reuter: Yep. Agreed. Very good. So I don’t know about y’all, but that was a lot of supply chain firepower in an hour. And I want to thank all of our co-hosts for being here and sharing in their great perspectives on what’s going on in supply chain today and what is the most disruptive. There’s a lot going on there. We hear about AI all the time, and I’m glad we were kind of able to shed some truth on that. Excellent topics and insights. I want to thank our co-host, our audience. I want to thank supply chain now for hosting us and allowing us to produce this on their network. Please tune back into our next episode where we are going to talk about agentic commerce and what does that mean for supply chain? So what’s going to happen when all Father’s Day gifts are decided by a computer?
(50:40) Kim Reuter: And what does that mean for sourcing? What does that mean for supply chain? What does that mean for selection? What does that mean? Do we lose our personality? What happens? We’re already starting to see this a little bit in the fashion industry, right? Because algorithms are driving what people see in their search results. So we’re seeing what people are calling a flattening of fashion. So are we going to see that additionally? Is this going to continue? So be sure to tune back in. We will have Kerry, Jack, and Derreck back with us to talk about this subject. Thank you for being here. Go out in the world, do something good. And at the very least, if you can’t do anything else, leave it better than you found it. Thank you. That’s The Collective.
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