Q&A: Drew McElroy, Transfix Co-Founder and Chairman

Logistics Management Group News Editor Jeff Berman recently spoke with Drew McElroy, Co-Founder and Chairman of New York-based Transfix, a logistics technology services provider that streamlines shipment data to better help shippers make informed decisions to optimize time and revenues. McElroy offered up insight on various topics, including the impact of COVID-19 on the e-commerce supply chain, market conditions, inventory, management, capacity, and the spot market, among others.  

LM: With so many consumers ordering goods online, due to COVID-19, there is a lot of talk about increased e-commerce-related supply chain activity, as it relates to the last mile, in advance of Peak Season and the holidays. How do you see things shaping up?

Drew McElroy: That question belies some things I have been thinking about. Before the pandemic, there has been natural tension in our business that exists between inventory and costs and final mile, from a service velocity standpoint vis a vis large regional DCs that allow more flexibility. And there is inherent tension between the flexibility and the service and the cost. To me, the huge thing that COVID-19 has done is create unprecedented volatility. E-commerce is obviously growing like gangbusters. I don’t think we really know what anything is going to look like, specifically in a granular way, over the fourth quarter and into the first quarter of next year. All of the smart shippers we have talked to are thinking about how to balance inventory and deal with all of this volatility and still fulfill customers as quickly as you have to, in order to compete with Amazon and the rest of the e-commerce vendors. We see what is happening on the industrial real estate side, with everyone wanting to forward-stage inventory as close to the customer as they possibly can to fulfill their orders as quickly as possible.

LM: What are the main benefits of that?

McElroy: In order to have that many more nodes and that much relatively smaller amount of inventory—because it is being divided across that many more nodes, while you have the opportunity to effectively fulfill in 24 hours—you run the risk of getting completely out of whack. In the past, if you had an East Coast DC and the West Coast DC, inventory was in one of two places, and you could kind of make it work. But now, with the inventory in 30, 40, or 50 places, the complexity of things leading up to that final mile increases exponentially, and if you don’t manage that complexity properly….you are not going to be able to fulfill anything. The inventory trade-offs and everything else are adding so much complexity, so you better have partners that are able to help you with that.

LM: The inventory piece, in many ways, is fascinating, especially when you see record West Coast import levels. Where does that fit in, is it due to demand or retailers “making bets” on the holidays?

McElroy: It is so hard to determine why, to be honest. On one hand, you have e-commerce growing as a percentage of [retail sales] spend. And you also have some lag that has to be cleared out from manufacturers being shut down, and other businesses, too. That can speak to the growth. But on the other side, you have restaurants, bars, and travel shut down, so it is hard to gauge if there is true growth, or a mixed shift, with people unable to go on vacation and instead buying a camera or other things. We are looking at this from all directions. It is hard to ascertain the root cause of this.

LM: In what ways?

McElroy: There is so much volatility relative to ever before. If you are on the shipper side, and your job is to make sure you don’t mess that up and make sure your widgets are where they need to be and you don’t have too many widgets….this volatility would scare the hell out of me. Having partners that can see all of the data and help model things are key. Like with West Coast imports, if a shipper lacks visibility needed to get their boxes out of the Port of Los Angeles, for example, and does not get in front of it, it could be a question of “how do we deal with this?” There are so many moving parts, and it can be difficult for shippers to manage it on their own.

LM: With growing imports and a need for rebuilding inventories, retailers, in some ways, are making bets on the holidays, coupled with the expected need for inventory rebuilds in early 2021. Also, with August freight shipments leveling off, things are mixed, to a degree. How do you view that?

McElroy: It seems like every year we have this cyclicality that we all go through. The economy grows, trucks make a lot of money, so carriers buy more trucks, supply goes up and rates go down. But usually in those situations you can tell very clearly which way the wind is blowing. In one case, you can see which way capacity is going, so let’s get out the playbook for tight capacity. Or 12 months later the pendulum is swinging back and you get out the playbook for loose capacity and on a daily basis you optimize lane levels. But, for the most part, things are directionally consistent. I will tell you that none of that is happening right now. There are some naturally directionally consistent things, as we gear up for peak, but there are so many different countervailing winds that each individual business is dealing with, whether that be geographically-related, due to certain [COVID-19] hot spots, so we are chasing the biology of this, which leads to individual businesses doing certain things. Different businesses are taking different inventory strategies. And, in like any type of business, this is sort of stratifying the haves and the have not’s, or the strong and the weak.

LM: How does that work?

McElroy: There are two basic strategies. There is the “OK, things are crazy, and our job is to invest into our business in such a way that we are there for our customers in their time of need…and we can gain share and really take a step forward.” And then, unfortunately, there are others that are not in a position to do that and are effectively looking to cut costs, which you can understand. But it is not going to help them make their way out of a problem. That is what I think is unique about this. There are sort of these crosswinds that make it very difficult to determine what is going to happen, in terms of demand. You have record unemployment and would think that would suppress spending, and, on the other hand, you have all of these other categories of non—physical spending, like travel, that are totally depressed. Anybody not unemployed is sitting home scared of the four walls and playing board games they have not seen in 20 years. I don’t know if anyone knows what the net effect of that is. Will it be more or less shipping or shipping out of different locations? Everyone is thinking about more inventory and should be thinking about flexible partners, because the more you don’t know what is going to happen, the more you should probably invest into flexibility so you can deal with whatever does happen.  

LM: Doesn’t it seem odd that not all that long ago the biggest supply chain concern, for many stakeholders, was tariffs?   

McElroy: Indeed and also remember the good old days of the Polar Vortex, when rates were through the roof and trucks were frozen, but we all knew what was going on but you could figure it out. You could sort of white board how to get out of that situation. Things would get delayed a little bit, and then you would catch up and you would know what is going to happen. The unknown now is what I think is freaking people out the most. There is no playbook for this or maybe there is, but it is the messiest one. I get it. Companies don’t like it when their supply chain folks say they should carry more inventory, but they like it even less when a customer wants to buy a widget and the store does not have it.    

LM: Looking ahead, how do you think things look in a year or so, assuming there is a vaccine and we are back to normal? As a follow-up, what may be some of the lessons learned, when we eventually come out on the other side?

McElroy: I think that the truth has not changed; COVID-19 has just made it more apparent for everyone. In my personal view, the supply chain is incredibly critical to most of the companies with whom we do business. At its core, we do business with people that sell widgets. If you cannot get the widgets to where they need to be, you are in big trouble. Historically, there is this natural tension between cost and service like there is in anything. What I think what was happening is that the cost people were sort of winning out, because everything was pretty stable and kept low cost. And, like many things in life, that was a great plan until it was not. And I think what people are increasingly realizing is that supply chain services are not a commodity. They are an incredibly strategic part of one’s business and having the right partners whom are not just best in class tactically but are also best in class strategically is absolutely critical. What I mean by strategically is a proactive orientation toward data. With an understanding of the market, you see what is coming and you back that up with data that people can digest, and then you are ultimately free to make decisions. We would go to shippers that shared an industrial park with another shipper and tell them they are shipping in the same lane as the other shipper that is not a competitor…you are just buying [capacity] in the same lane, but that other shipper is paying 15% less than you are. The reason for that is because on the front end of your facility has an average loading time of four hours and the back end it has an average loading time of five hours. That is costing the shipper a fortune. I was not sure if the shipper was actually aware of that, but I wanted it to be. It is a matter of telling the shipper what we see, what the best practice is, and here is how we can help you. I think people are going to feel very deeply the pain of being caught off guard and will probably not want to feel that ever again.

LM: Shifting gears towards the spot market, it is clear that rates and volumes remain up, due to the tight capacity environment and the need for shippers to supplement contract freight with spot coverage, as demand heads up. How do you view that situation, as we enter the home stretch of 2020?

McElroy: I am less confident in any prediction I make right now than I have ever been in this business. Unlike normally we are really slaves to biology right now. Anything I say can be proven to be totally wrong by a massive change in biology that we all in the supply chain have no control over. That could be good news or it could be bad news. That said, it is fair to say that, if there is no massive change in biology, it seems to me that between now and the end of the year, it is going to continue to be pretty intense. It goes back to the crosswinds. We have a combination of peak season, people stuck at home, and latent demand that may have gotten stuck in the network, when things were a little bit more constricted. Those things all sort of speak to things continuing to be pretty wild. On the other side, of course, you have the very large and unfortunate unemployment numbers, with general fear and uncertainty. You would think with this uncertainty that people would batten down the hatches and not spend any money, but that does not actually seem to be the case. Also, there was a fair amount of capacity that left the network in March and April, when it was real bad, and it has not all come back. There is also this layer of part time capacity that comes when it is lucrative and goes when it is not, but, at the same time, it has been fairly lucrative for a little while now and is remaining so.

LM: How long might that last, do you think?

McElroy: I would say at least through the election, which is viewed as a wild card, in that nobody knows what is going to happen. But at least from now until then the status quo is things being pretty wild.

LM: With UPS, FedEx, and Amazon and others bringing on additional seasonal help, which is a standard practice, this year has a different feel to it, with less certainty. Do you think these companies are in a tougher spot than they have been before, at this time of year, despite the number of people they are bringing on? It seems like there is more on the line this time, in terms of needing to rapidly adjust to a constantly changing playbook.

McElroy: I don’t want to speak for anybody, but I would say they are having the time of their lives and I don’t say that in a [crass] way, because it is obviously a scary time out there. But, from a pure supply chain perspective, they are getting what all of us dream about. They are super-busy, customers are demanding things of them, they are very needed, and they are not having those boring conversations for getting two cents a box versus three cents a box. They are hearing shippers telling them: “we are getting our clock cleaned here; how can you help us?” And that is the kind of thing that makes a supply chain executive smile, because then you get to do the fun stuff. Amazon is a net-positive for business at FedEx and UPS. My view is that Amazon is pushing the consumer expectations so hard that FedEx’ and UPS’s other customers are digging in that much deeper with them to make sure they can compete. Amazon is effectively further driving the strategic necessity of a strong supply chain, rather than a tactical supply chain, which, I think, is to the benefit of FedEx and UPS. I don’t know that they would say that out loud, but that is my read on it.