Supply Chain Business Cycles, Freight Downturns, and Future Opportunity with John Larkin of Clarendon Capital
The Future of Supply Chain Episode #37
|Dec 21, 2019|
In our latest episode of the Future of Supply Chain podcast, we interviewed John Larkin, CFA, transportation and logistics operating partner of Clarendon Capital Management, about the cyclical nature of business, how those cycles impact the freight industry, and finding opportunity in inevitable economic dips.
John’s combined formal education and multiple decades of experience working in the trucking railroad industry led him to cultivate expertise in the freight industry. He has a keen understanding of supply chains and a knack for predicting trends and changes in the market.
While pursuing his Bachelor of Science in Civil Engineering, he became interested in highway design and decided to pursue a Master of Science in Engineering (MSE) in Transportation Engineering from the University of Texas at Austin.
John worked as a civil engineer for several years before earning his MBA in business strategy from Harvard Business School in 1984. After he completed his MBA, John took a job with CSX and the rest, as they say, is history.
“CSX launched me on my way to a career in trucking, railroads, and logistics,” John says.
Supply Chain Business Cycles
Over the last 40 years, John has witnessed five economic cycles. He says that there appears to be a tightly-linked relationship between the freight industry and the rest of the economy.
“Freight recessions have predicted five of the last 10 economic recessions,” John says, “so we have roughly twice as many freight recessions as we have economic recessions.”
“If anything, that trend is even truer today, because the economy is so diversified and so broad in the consumer sector and in the services sector. The freight economy can be in a recession, but that doesn't necessarily drag the whole rest of the economy down with it.
“I think we’re in one of those periods now.”
However, the silver lining is that modern technology allows the health of the industry to be monitored much more closely in real-time.
“We see more real-time data, and that that gives us more of a clue as to what’s happening analytically,” John says.
In John’s opinion, these freight recessions might actually become more common as the economy continues to diversify.
Although downturns in the industry may become more common, John believes that they’re perfectly manageable with proper planning and management. John cautions against being too optimistic in business plans and projections- if downturns are inevitable, then planning for the possibility of those downturns allows us manage our projections.
Because of these trends, John cautions that it’s important to plan for tough times.
“Be very mindful of how much debt and expense you take on, and how many capital commitments you take on,” he says. “There may come a time when your revenue is cut by 20-30% and your margins are cut to zero or worse.”
Although it’s natural to want our businesses to grow and to be optimistic with business plans and projects, it’s critical to be open-minded from one year to the next.
“The key thing to remember as an operating company in the transportation sector is you don't necessarily have to grow 10-15% a year. There may be years where it makes sense to move sideways from a capacity point of view, or even trim your fleet down a little bit given the economic conditions,” he says.
The possibility of more frequent downturns and the advice to be conservative in business plans and projections may sound off-putting. However, John sees these downturns as an opportunity for innovation by individuals and businesses that have an eye for problem-solving.
“If you've got a solution to a problem that is unique and has yet to be solved, I think people are all ears during a downturn,” he says.
“They're willing to take a chance on a system that will reduce their headcount, improve their efficiencies, and reduce their overall unit cost.”
This means innovations that make business more efficient and profitable might seem risky during seasons of plenty, but that downturns are a prime opportunity to pilot new programs that make a business more financially solvent.
According to John, technology provides a solid platform for such innovations, leading to big opportunities.
“On the technology side, I think there's a real opportunity to make hay during freight downturns like we’re seeing now. Everybody is really focused on eliminating phone calls, eliminating manual procedures, and automating as much as possible for the future.”
To listen to the full Future of Supply Chain episode featuring John, click here.