Why Are Logistics Companies Prone to Bankruptcy?

According to Supply Chain Brain, total transportation costs in the US grew by 7.4% year-on-year from $1.2960 billion in 2021 to $1.3914 in 2022. These costs are among the most expensive that logistics companies must consider and are wide-ranging. They can include:

• Direct transportation costs: This refers to the price of physically transporting goods from one location to another and covers fuel, vehicle maintenance, driver wages and tolls. (For specifics on how much these costs can set you back, read our analysis here.) 

• Freight charges: This is the amount that carriers or logistic providers charge for transporting goods. It covers volume, distance, weight and type of transportation (i.e. truck or rail). 

• Inventory carrying costs: These costs are related to transportation because they’re directly impacted by transportation lead times. They cover holding inventory, product depreciation, insurance and financing.

• Packaging costs: These expenses involve packaging materials like crates, boxes and palettes. It’s not advisable to cut corners with packaging as products must be protected while in transit (be it by road, sea or air), even if that means paying more for extra peace of mind for yourself and clients. 

Storage costs are another factor you should understand thoroughly about risk management in logistics. This could be any one or all of the following:

• Location: Where a warehouse is located affects price. For example, a warehouse that’s located hundreds of miles from customers and suppliers is more expensive than a warehouse located only a few miles away.

• Size: Big warehouses require more employees and equipment, making them more expensive to lease, operate and maintain. 

• Technology and equipment: The technology used to handle and store goods affects pricing. For example, climate control-based technology may be necessary for making sure certain goods are protected and will inevitably be more expensive than a rudimentary system.

• Labor: The amount of labor you need is proportional to the size of the warehouse, times of the year and supplier relationships. 

• Security: High-level security is a must for any warehouse and includes CCTV and alarms. 

• Insurance: The cost of insurance varies depending on the type of products. But it’s an absolute necessity for protecting your goods from damage and theft. 

• Types of products based on customer demand:  Trends are always shifting and it’s imperative that you’re clear on the kind of goods that will net you the highest profit. Otherwise, it’ll cost you in terms of revenue, time and storage. This factor is even more important in the face of package shippers potentially using fewer delivery providers, according to Supply Chain Drive.

Along with being familiar with the financial risks and cost management in transport, you should be aware of the industry challenges. 

Cash flow management is at the top of the list of challenges for logistics companies – it’s driven by every other issue that we’ll be discussing. Remember the story of Yellow Corporation’s rise and fall? The company suffered from cash flow problems and was drowning in $1.2 billion of debt.

Meanwhile, Minnesota-based Twin Express defaulted on a $19 million loan and was liquidated by courts in November 2023. FreightWorks also shut down after losing its biggest customer, putting many employees out of work.  

Bankruptcy often happens due to several internal factors like poor cash flow forecasting and profit management. But it’s not just what’s happening inside a company – we know external factors like soaring overheads and wage and freight cost rises can also play a major role. 

The geopolitical landscape has been rough terrain for the transport industry. The conflicts in Russia and the Middle East have damaged supply chains, leading to shipping delays and an inability to find replacement suppliers. Adding to that, the growing tension between the US and China could further complicate matters. 

Another symptom of this disruption is a labor shortage, with the American Trucking Associations predicting a shortage of 82,000 drivers in 2024.  You also must consider the slew of bankruptcies like some of the companies we’ve already mentioned. With those brands shutting down, thousands of skilled drivers have been left in the lurch, making it an even more competitive environment for jobs that businesses can’t hire for because of recession turmoil.

Talk of a recession happens every year. But there is evidence to support that many of the recent big logistics bankruptcies have been caused by rising interest rates, with one of the most prominent examples being Convoy Inc. 

The co-founder Dan Lewis said in a company-wide phone call that the main reason why the company went bust was being caught in “the middle of a massive freight recession and a contraction in the capital markets. This combination ultimately crushed our progress at the same time that it was crushing our logical strategic acquirer — it was the perfect storm. There has been a drop in merger and acquisition activity in the logistics sector and most of the logical strategic acquirers of Convoy are also suffering from the freight market collapse, making the deal doing that much harder.”

Now that we’ve looked at the major factors driving logistics companies to fail, one of the first actions to take is to reassess all your due diligence processes. How do you choose suppliers and partners? How do you vet them? How do you manage Accounts Receivables and keep cash flowing?

Let’s start with supplier due diligence. Poor practices will only saddle you with late product deliveries and expose you to the risks of working with unethical suppliers who can cost you financially, legally and reputationally. 

Once your due diligence is air-tight, apply the same thoroughness to your Accounts Receivables processes.

Here are some tips to help you improve your Accounts Receivables and keep cash flowing:

• Reconcile all your accounts as part of a better financial planning and analysis strategy. This can involve reconciling bank accounts, customer balances and vendor balances.

• Create a contextual finance report that anyone in the company can understand. Include your balance sheet, income and profit statement and AR aging statement so you can make an informed decision about where you need to improve processes and with which clients. 

• Invest in automation technology that can help you improve your credit decision process, while minimizing errors, delays and inefficiencies. By doing so, you’ll be better equipped to prioritize collection of payments and can make better sense of large volumes of financial data.

• Identify gaps in your cash flow process and think about how you can improve your relationship with suppliers and customers. Consider how you’ve made their lives easier and negotiate payment terms so you can get paid faster and can protect your business from financial risks.

• Reconcile your inventory management systems so you know what your most lucrative products are and can free up storage to save on costs.

As the saying goes, in times of peace, prepare for war. Even if everything seems great like it did at Yellow Corporation on the surface, don’t run the risk of going down the same path. Have multiple backup plans so you can fend of all logistics challenges and be at the front of transport risk and cost management. 

Here are some things to consider for your contingency plan:

• Be clear on all the objectives and outcomes: What are you focused on most? Cash flow? Customer satisfaction? Transportation safety? It all needs to be thought out and recorded. 

• Deep dive into your assets and liabilities and develop a better working capital management strategy: Are there any vehicles you could lease or sell off for some added cash? Do you have some extra warehouse space that you could put to good use by storing your partner’s products and taking a fee to keep the cash flowing?

• Pick several, reliable suppliers in countries that have good offshoring possibilities: Places like Vietnam are ideal because the country has a high labor force, cost-effective standards and one of the most stable economies in the world. 

• Have backup fleets available: Secure a fleet of backup transporters in case of damage to your main vehicles.

• Makes sure you have enough cash to pay back debt: Reviewing your own business credit report is useful. It will give you full visibility into your own company’s financial health. You need to know your own financial history before you apply for a business loan or financing because lenders will 100% check your business credit report and make sure you’re not a high risk.