Memphis Business Journal Table of Experts: Distribution & Logistics
Cliff Lynch: What’s happening in the logistics and distribution industry as a result of recent tax changes?
Mark Baricos: The Tax Cuts and Job Act that passed on December 22, 2017, made some big headlines. Generally speaking, the Tax Act is positive for most businesses in terms of lowering income taxes.
However, capital-intensive companies in the logistics and distribution industry will face some challenges under the new Tax Act because interest expense may no longer be fully deductible for all businesses.
Under prior law, if a company had a large debt load, annual interest payments associated with that debt was fully tax deductible. Moving forward, that interest expense may no longer be fully tax deductible because it’s limited to 30 percent of adjusted taxable income.
This interest limitation is a new phenomenon. Businesses are taking a closer look at their debt load and thinking through how this interest limitation will impact their cash flow. It’s probably the single biggest challenge of the Tax Act for capital-intensive companies.
Steve Fallon: This makes me think about the decisions I see in our 77-year-old company, Barrett Distribution Centers. We have historically financed our growth from cash flow and we’re debt-free, which provides a lot of flexibility to support expansion and re-investment of capital into the business.
Richard McDuffie: What I see is that companies are using the tax break to invest more in their people; taking opportunities to pass that along in different ways to personnel.
Lynch: What are some other opportunities logistics companies might have regarding taxes?
Baricos: While the biggest challenge is the new interest limitation, there is also a major opportunity for capital-intensive businesses in the form of the new depreciation rules, which allows for 100 percent of fixed assets to be deductible immediately. Most importantly, it’s now no longer limited to new assets; it is applicable to used property as well.
For the first time, a company can purchase used equipment and immediately write off 100 percent of the purchase. If a company acquires a new business, the company can expense a significant amount of its capital outlay in the first year of the acquisition.
So, we’re seeing new approaches to business planning related to this rule. It doesn’t apply to a new building or a new distribution center, and the entire building can’t be written off, but new trucks, for example, for a logistics company result in an opportunity to write off significant dollars.
Lynch: What other laws exist that logistics and distribution companies might be missing or not taking advantage of?
Baricos: One conversation we continue to have relates to taxation by states and municipalities. States’ coffers are not as full as legislators would like them to be. So, it’s natural for states to seek more tax revenue from businesses, and any time a state can start taxing a business—especially a business that’s out of state—that sets the stage for an ongoing battle with those states.
One major change was the Supreme Court decision earlier this summer on the e-commerce side—South Dakota v. Wayfair, Inc. South Dakota said that even though Wayfair doesn’t have property within the state, the company is selling within the state and, therefore, sales taxes should be paid to South Dakota. The Supreme Court decided in favor of South Dakota, so now even if a company doesn’t have property in that state, but is doing business there, South Dakota can tax the company.
That’s one example, as e-commerce continues to grow, states will be re-energized and incentivized to claim their piece of the available sales tax revenue.
Fallon: With our warehouse networks, we operate in eight states supporting B2C and B2B fulfillment. Our customers are very aware of NEXUS tax issues related to direct-to-consumer orders. They understand the balance of operating in a state that may have a more favorable tax structure versus another state that may be more advantageous for time in transit to customers and saving money on small parcel freight to support three-day ground delivery.
Lynch: Amazon might not last forever; it might go the way of Sears. What do you think about Amazon from a business perspective? Is it a threat or just part of doing business?
McDuffie: It’s just part of doing business. If you look at the Amazon model and what they’ve accomplished in over 10 years and financially in the past three years, it’s impressive—they continue to spend money in research and development and infrastructure in so many areas. If you analyze their financials—the fully loaded costs of home delivery—you will see they are not making as much money there as they are making in cloud services.
Our company, Dunavant Logistics, competes on a bulk basis—we’re not a last-mile type of company. We’re delivering to distribution centers, like Amazon and other shippers, but we’re not the last-mile deliverer.
From a logistics and 3PL perspective, there’s still opportunity with companies that are distribution center and hub center focused—they have to deliver product into other plants or distribution centers, whether it’s raw material or finished product.
Those competing with Amazon, and Amazon itself, from a business to consumer perspective still have lots of issues to be weighed in on from a government perspective (state and federal), like state tax issues and the financial viability and support of the U.S. Post Office. I’m interested to see how Amazon’s model transpires over the next several years.
Fallon: Amazon is here to stay. Most of us in the logistics industry have been directly or indirectly impacted by the Amazon effect. At Barrett, we support our customers with drop-ship fulfillment that have their products on the Amazon Marketplace. We send bulk replenishment orders to Amazon fulfillment centers and recently have been adding Seller Fulfilled Prime services in our warehouses.
Traditional brick and mortar retailers have been slow to respond to e-commerce retail, and many are finally developing their own multichannel infrastructure to compete and survive in the marketplace that Amazon has defined for them.
Over the past five years, it’s been interesting to see how Amazon has evolved into a major sales channel for our customers and, at the same time, is a competitor to 3PLs globally.
Lynch: More firms are establishing inventories in an expanded number of cities. Do you expect that to continue? Do you expect to see a corresponding growth in reverse logistics facilities?
McDuffie: Every company has a little different philosophy or strategy around their product type and speed to market. We hear a lot of about speed, choice, transparency, consumers wanting visibility—and that all depends at a high level on whether it is a B2B or B2C model or even C2C in some cases.
There’s a lot of pressure dealing with the consumer model, especially with Amazon—companies are trying to make choice, speed and availability paramount. I think that’s very hard to make that work financially. I see it a lot more that stores are becoming more consumer mini distribution centers.
I believe you’ll continue to see more and more retail distribution centers that may be smaller but are closer to the consumers to meet speed to market demand—lots of opportunity to take advantage of inventory optimization and placement.
Returns is a completely different supply chain model to optimize, as returns continue to increase as customers want choice and spend but also the freedom to touch and see it as you would in a retail store. You see it now, when ordering online, there’s a whole reverse logistics process and it’s getting larger as consumers now think, ‘I can I order 10 things and send five back, for free.’
The dollars spent associated with the reverse logistics process is significant and growing and will continue to grow as more and more products are ordered online.
Baricos: What it comes down to, ultimately, is that the consumer is changing in terms of e-commerce purchasing habits and this is spurring suppliers to react by meeting the customers’ needs in new ways—through increased efficiency, transparency, and cheaper goods. Warehouse strategies are changing to meet the growing demand of e-commerce and new consumer expectations.
From an e-commerce perspective, this is still a relatively new phenomenon—with single items being purchased, delivered, and returned. Distribution processes will continue to shift.
Lynch: How do you see the local Amazon facility impacting Memphis as an e-commerce center?
Fallon: Their strategy is to establish forward fulfillment centers in every major metro area in the country to support same-day and next-day delivery. There’s already a large warehouse open off State Line Road. And they’re opening another one in southeast Shelby County.
McDuffie: I don’t study consumer demand, but I do think there will always be consumers who want to hold it, touch it, feel it—before they buy.
Lynch: There’s a lot of discussion about infrastructure and the changes necessary in Memphis for your industries. What do we need here to help your businesses?
McDuffie: I’m happy about the Lamar expansion—that’s a huge win for the city if Memphis. Our city leaders, the Memphis Chamber of Commerce, etc. have been working on that for many years, and it’s well-needed. The distribution space on Shelby Drive, that corridor by the railroad—there’s been significant congestion and driving delays there for years.
When you think about a trucking network and drivers—time is so valuable—any delays they have in any way is time the driver loses on making money, and the company that employs the driver loses as well.
I-40 is a mess—it needs to be three lanes at some point across the State of Tennessee, at a minimum more than 50 miles outside of West Memphis and Eads just to get out of the city faster. It’s a bottleneck now and those infrastructure changes long term are extremely necessary.
As railroads go, Memphis is only one of two locations East of the Mississippi with all five Class A railroads here with significant infrastructure invested in railyards/depot and equipment infrastructure. Bridge work has to be done; some bridges haven’t been touched since the early 1950s.
We can reach 80 percent of the population in a day in a truck—but if you can’t get out of the city in a timely and safe manner, that’s a problem.
Baricos: The bigger takeaway is that if Memphis wants to maintain long-term success in the logistics industry, the city will need to continue making significant infrastructure investments. Companies make expansion and growth decisions based on infrastructure quality and infrastructure efficiency.
Lynch: Blockchain is a hot topic. Do you see it as a benefit that we’ll see quickly in logistics?
McDuffie: We’re trying to learn and study it every day. One of our largest industries we ship for is cotton—Mark Pryor with The Seam has been instrumental in working with cotton shippers across the country on using blockchain technology.
It’s a way for everyone to look at information across the common identity of that item or shipment. Instead of sending info back and forth, it’s a single secured ledger for that item or shipment.
We are trying to understand the security aspect. We have our IT team and our risk management and compliance team starting to look at the advantages and how customers can use it. In theory it makes a lot of sense.
One good example in our business are container yards at ports, railroads, or truckers—how can we scan the complete container, verify its contents and there is some medium on the container that has all the information about the contents of the container, in addition the scan looks for mechanical defects of the container, it goes on one system ledger instead of the all these different drivers carrying paperwork.
IBM is spending money and time on this. It’ll be interesting to see how it goes all the way through the supply chain; learning capability; how shoppers can use it; or how it fits into 3PL.
Lynch: If bigger companies adopt blockchain, will smaller companies have to adopt it faster?
Fallon: Blockchain is getting a lot of hype right now and it will take years before the technology matures and becomes integrated into supply chains. However, you could see potential benefits to a global consumer packaged goods company or food manufacturer importing goods into the US, where years ago they certified their supply chain to be C-TPAT compliant.
Now with Blockchain, you could layer that code into the electronic transactions for materials sourcing or product purchase orders that pass within the C-TPAT supplier network and have a secure record of every step in the process and every transaction that would speed decision-making and potentially cut weeks out of manual processes out of the supply chain.
For smaller companies to adopt blockchain, you will likely see ERP software vendors like Oracle or SAP integrate blockchain technology into their suite of services and this is how small and large companies will be able to take advantage of blockchain.
McDuffie: It has to be big blocks of data. It used to be touched by hand, now we achieve efficiency by getting out of that. Depending on how quickly it’s adopted and what efficiencies there are, if small- to mid-size companies will respond.
We’re keeping our eye on it. We’re seeing how the technology benefits our companies. Back when Walmart was pushing barcodes, costs didn’t come down to where it was effective for a while.
It’s very important to remember, however, the less human intervention we have in the data, the less opportunity the data will be compromised.
Lynch: Let’s talk about real estate in Memphis. How do you see the market now? Are we running out of space and is space getting more expensive?
Fallon: Memphis was at 94 percent in 2017—a long way from 10 years ago, when it was running about 88 percent. Developers have gotten smarter about not overextending, which has caused excess supply to shrink, driving lease rates up.
As we look across our warehouse network from California to New Jersey, Memphis does have a significant real estate cost advantage, which has influenced decisions by our customers on where to set up a new fulfillment center, and many of those have chosen Memphis.
McDuffie: The cost per square foot in Memphis is very competitive compared to cities like Dallas and Atlanta.
Baricos: Several of my distribution clients are getting into e-commerce for the first time or have decided to expand the e-commerce side of their business.
We’re having discussions to help evaluate opportunities strategically from a tax advisory standpoint—whether it’s taking on a new location to meet the e-commerce demand or capital investments to rework an existing warehouse to meet customer needs—company’s must evaluate how that will impact their bottom line, and tax is a major consideration.
Lynch: Do you still see Memphis as North America’s logistics center?
McDuffie: Absolutely, I firmly believe that. It’s all about speed to market and good infrastructure. We have the world’s largest cargo airport. Memphis and Hong Kong fight it out. We have two to three major highways, a river—ocean containers are being shipped empty on a barge, to relocate empty containers down river so ships can pick them up.
We have such an advantage from a multimodal standpoint: highway, river, air, rail—Memphis is here to stay for a long period of time from a distribution mecca standpoint.
Our biggest opportunity is labor—finding a good labor force, with training programs that allow our labor to meet the needs of businesses that want to open a distribution center or logistics hub, or packing and consolidation center.
Fallon: Due to the increasing demands of direct-to-consumer fulfillment, Memphis is well positioned to support the needs of two- to three-days ground service to consumers. The intermodal network is also beneficial and cost effective to get goods from West Coast ports into Memphis as compared to other cities in the Midwest.
Lynch: Is labor more expensive and is there trouble finding good employees?
Fallon: Yes, with very low unemployment, wages are rising as you have more companies competing for qualified labor. Barrett has tended to pay above-market wages and, as a result, we are able to attract strong candidates. But wage inflation is something we’re seeing nationwide.
To attract, retain, and incentivize our employees, we really focus on our hiring process, employee engagement, and profit sharing with employees at all levels of the company. We have demonstrated that employees who are engaged in their jobs deliver better service to our customers.
Baricos: It’s hard to have a conversation with a business owner in which labor isn’t discussed. Finding the right people, retaining talent, and getting the salary and overall compensation packages competitive, all the while maintaining a margin, are significant challenges for this industry.
McDuffie: Today across the country we have the most diverse workforce in the history of America. There’s such a divergence, we’re becoming a much more diverse nation—and there are different ways you manage some of those diverse cultures.
Think about the population base and how it’s growing—we’re a nation of immigrants, we have different languages, different ethnicities—and our diverse workforce isn’t just based on our ethnicity, we also have generational differences like with millennials.
Leading and managing all those expectations from different types of cultures and backgrounds is something we have to think about.
Lynch: With technology today, do you have to hire different kinds of people with different qualifications than in the past?
McDuffie: For some of our software programs to some of our heavy lifts to some of our forklifts, we have to train people coming in the door—they need to understand the Dunavant way. So, we ask: Is this person capable of learning it?
Training is a key part, whether it’s technology or what the processes are, those skills have to be evaluated and scrutinized before you make a choice on personnel.
Additionally, from a driver’s perspective, the average age for the professional truck driver is over 50. And times are changing considerably from years ago, drivers now have a tablet or an electronic drive—their jobs become much more technical than ever. It’s not just driving a truck. They have to log hours electronically and be so conscious of safety today—not only is the company at risk from a safety perspective, there’s also extreme pressure on drivers today more than there ever has been.
Fallon: Yes, working in a modern warehouse today requires our staff to interact with technology on a daily basis using computers, hand-held RF devices, tablets, and technology-enabled material handling equipment.
We have to recruit people who either already have that experience or can be trained to work with these systems. This is why we tend to pay a bit above market wages as we are looking for people who have these skills and want to come and work for a growing company that can provide opportunities for career advancement.
Lynch: About six to seven percent is lost in productivity because of electronic logging devices (ELD); it’s an execrable problem. How do you attract drivers today?
McDuffie: Lots of people think it’s only about pay. Obviously providing drivers good compensation packages is a big element. The other big element is consistency and respect. Consistency of freight that the driver is used to is a big win. And we want the general workforce to have respect of our professional drivers—they have lots of pressure—no one likes to drive down the highway and be next to a big 18-wheeler truck.
We wouldn’t be able to eat, be clothed, have roofs over heads if it wasn’t for truck drivers. They deserve more respect, pay, and consistency—respect goes a long way for drivers.
Baricos: The number of current drivers not expected to be on the road 10 years from now is alarming. It’s an overwhelming and significant issue for this industry. I don’t know that there’s a single solution.
There’s a continued push in terms of recruiting talent that is younger and more diverse than the truck driver demographics of today. Technological and innovative changes will also hopefully help overcome the shortage as well.
In the coming years, it’s possible that we’ll see advancements such as the adoption of automatic transmissions and the implementation of additional safety measures, which may help with the shortage. We’ll also likely see some level of autonomy for trucks in the future that may help alleviate the lack of available drivers. There’s no easy solution—this is a significant problem.
Lynch: There’s a St. Louis company that does all kinds of things to make drivers more comfortable. Many drivers travel with their dogs, so the company put in a dog run at a distribution center and free feeding stations. And for women drivers, we know there’s a shortage of restrooms. I think all of that goes back to the respect of these drivers.
McDuffie: It’s interesting, we put pilots and railroad engineers on a certain level, but if you think about the challenges drivers have, they’re no different than a railroad engineer conducting a train. It’s a different vehicle, but the challenges with freight in NYC are just as important compared to a pilot landing a plane at FedEx at night.
Lynch: What do you think about the idea of increasing truck lengths?
Fallon: It’s an option, as you could theoretically need fewer drivers if you extend the length of a trailer fleet. However, modern distribution centers typically have truck courts that are 130’-180’ in depth, so certain warehouses may not be able to support a dramatic change to the length of trailers.
McDuffie: I think it all depends on the infrastructure and where you’re carrying those containers and can the infrastructure handle it. I don’t have an issue as long as the infrastructure can support it.
Lynch: Final thoughts?
McDuffie: We’re discussing tariffs and possible trade war to ascertain how we might be impacted. We just don’t know what that means for the general supply chain. It’s impacting agriculture. That’s the biggest issue—besides finding good drivers—that we’re talking about now.
We need tort reform in this country so bad it’s incredible. The punitive lawsuits now are getting a lot of publicity and the settlements keep going up. Every shipper now wants $5 million of additional umbrella insurance.
Baricos: Our logistics and distribution clients are seeing a great deal of opportunity and growth potential in the market. At the same time, there is an intense focus on margins to ensure rising warehouse costs, new customer demands, or labor do not squeeze the bottom line.
With the rising costs in the market, recent tax reform has allowed companies to be more tactical in terms of incorporating the new tax laws into the overall growth strategy of businesses, which is key.
Fallon: The availability of labor and rising wages are key components for both warehousing and freight costs this year. Tariffs could also be a major issue that could adversely impact the Memphis market over the next few years.
Clifford F. Lynch, Moderator
C. F. Lynch & Associates
Cliff has been in the logistics industry for more than five decades, including with The Quaker Oats Co. and Trammell Crow Distribution Corp., and he has provided management advisory services in for more than 20 years.
Cliff is an adjunct professor at the University of Memphis, a frequent lecturer and an author of hundreds of articles on logistics, two books on logistics outsourcing and one on transportation in the supply chain. He also authored a cookbook, “The Gourmet Logistician (An Oxymoron).” He has consulted for clients in the U.S., Canada, China, the Philippines, Mexico and Europe.
Mark Baricos, Panelist
CPE, Tax Practice Leader, CBIZ & MHM
Mark is the Tax Practice Leader and Lead Managing Director in the Memphis office of CBIZ & MHM.
Mark has more than 15 years of experience in public accounting with a specialized focus on tax compliance, planning and consulting. He leads and develops the tax strategy for the Logistics and Manufacturing & Distribution segments of the Memphis office.
He works with both publicly traded and privately held companies to provide strategic business solutions for the unique challenges that entities face in today’s complex tax environment.
Steve Fallon, Panelist
General Manager, Barrett Distribution, Memphis
Steve has been the General Manager of Barrett’s 650,000-square-foot Hickory Hill facility in Memphis for almost two years. This facility provides storage and shipping services for 40+ accounts.
He has 35+ years of manufacturing and distribution experience with both Fortune 500 and smaller companies in the capacities of Plant Manager, General Manager, Director of Operations and VP of Operations. He has negotiated nationwide LTL, parcel and TL freight, along with IB containers from SE Asia. He has been in the Memphis market for 25+ years and has an MBA from Southern Arkansas University.
Richard McDuffie, Panelist
Chief Operating Officer, Dunavant Global Logistics Group
Richard has more than 20 years of experience in all aspects of a global supply chain within industries ranging from automotive, retail, food, consumer products and commodities. He provided the leadership and vision to develop Dunavant into a global logistics service provider.
Richard leads his management team in delivering clients lower-landed cost solutions with improved customer service. Formerly, he was vice president of supply chain for the Fortune 300 retailer, AutoZone, and vice president of global logistics for Williams-Sonoma.