Brief Background
John Powell, president and founder of Powell Logistics Inc. (PLI), has built up a substantial business over the last 30 years and he has excelled in the profitable less-than-load (LTL) transport service. He founded the company in 1979, as a truck brokering service, with diverse truckload transportation requirements and local and international carriers with available capacity. PLI’s customer base has grown steadily as the company now serves hundreds of shippers each day, by developing a wide variety of strong loyal customer relationships, including some of the largest carriers in North America. The company grew to a mid-size company over time, contributing from the purchase of a high caliber fleet of straight trucks after their establishment into a for-hire motor carrier in 1983. As years passed, PLI was capable of showing high profitability by capitalizing on the higher margins associated with the LTL services.
With regards to location, PLI is renting two buildings in the expensive city of Toronto, Canada, providing local and regional services in Greater Toronto and Southern Ontario. The company is also licensed to operate in other parts of Canada, and to and from the United States. Revenues estimated to be close to $43 billion annually and employing close to 400,000 people because truck transportation services are such a large and vital part to the Canadian Economy (Cauterman). Which puts the trucking industry in a very competitive market since there are so many available options to transport goods.
John Powell, as a 50-year successful veteran in the trucking industry, had the main goal to provide for his family and have a dedication to the community of Ontario. He developed a good reputation among his peers and a pressing issue of retirement was starting to arise after his 50 years in this industry. John hired both of his sons and daughter at PLI with different responsibilities for the company and turned his company into a family business.
Problems or Issues the Firm Encounters
The trucking industry is now struggling with the depressed reality of a global economic downturn and razor thin profit margins. The new millennium has eclipsed the glory days of dirt-cheap diesel fuel and a very advantageous Canadian to American currency disparity. The cost of fuel has had a radical increase from the tough supply of oil the world has seen. These increases in fuel cost have caused all operating expenses to rise for all carriers because of the high gas prices to operate. This has forced many trucking companies to implement a fuel surcharge on their prices for customers and this shortage is expected to continue into the future. Along with the surge of fuel costs, another issue is the jammed rise in value of the Canadian dollar compared to the U.S. dollar. The conception for American companies to outsource and manufacture goods in Canada is becoming less appealing due to the decrease in the cost advantage of doing so. This issue has a straight affect on the Canadian manufacturing industry since the trucking industry expedites the transfer of goods between these two customers.
Furthermore, the economic downturn is forcing the trucking industry to have a shortage of qualified workers. The declining popularity of the occupation, along with the aging work force; are contributors to this problem of a shortage as well. Workers are attempting to find other jobs that will pay more money because the hard times the countries are facing with the economy.
Another problem is the high insurance costs related with the highly regulated transportation industry by both Canadian and U.S. governments. Shipments across the border are required to attentive security checks and standards for their weight and merchandise. Problems at these security checks cost the truck carrier’s time, which is money they have to pay their drivers. Along with the expensive charges that are linked with these violations of international agreements set by the North American Free Trade Agreement (NAFTA). Fuel prices, Insurance, and the Canadian dollar will continue to rise and remain high as the depressed economic environment will continue to ravage the motor-carrier industry.

Analysis
Although PLI is forecasted for continued growth with revenue expected to reach 28 million dollars in 2010, PLI still faces the problem of shrinking net income due to significant increases in their operating expense. When reviewing the financial ratios, I find PLI highly exerted, and they will be in a very risky position if there was a margin call on their debts. The increasing debt woes of PLI will most likely cancel any possibility of a leveraged expansion program.
A pressing issue is the looming retirement of John Powell. As a 50-year veteran in the trucking business, he has to release the reigns of the business he founded and decide which one of his children will be the successor. In addition to this, John Powell and his children have to decide if they are going to stay on board and look for ways to steer the company through these hard economic times, or should they structure the company to make it more appealing for investors who are presently waiting to buy out PLI.
When reviewing the Statement of Earnings for the years 2006 and 2007(Exhibit 1), the net income of PLI has a sharp decline even though there is an increase in revenue from 2006 to 2007. With closer examination, shows that PLI’s expenses in Administrative Wages and Benefits are raising dramatically, and they’re the main contributor to the increase of Operating Expenses. Operating Expenses as a percentage of Total Revenue has grown a .01% more than what Gross Revenue did from 2006 to 2007. The .01% is a real small number to judge from, but with the overall increase in expenses from year to year is something to worry about because it could be not much longer before Operating Expenses pass Gross Revenue and put PLI into a deficit.
There are some inconsistencies on the Balance Sheet, which are cause for concern; in particular, John Powell’s ‘related companies’. It shows the asset values for ‘related companies’ has decreased by about $160,925, which is nearly a 19.9% decrease in assets from 2006 to 2007. But on the liabilities side of the Balance Sheet, where the debt these ‘related companies’ have incurred has increased an abundant amount resulting in approximately 93%. This is obviously putting a tremendous strain on PLI’s financial health.
Given the forecast of PLI, the suggestion of a 10 million dollar expansion/integration project is very far fetched. By PLI’s estimations, a combined warehouse/main office will reduce salary costs with savings projected at $60,000 per year. A $10 million dollar loan would most likely be controlled by a higher risk interest rate because of the high debt to equity ratio (Exhibit 2). Therefore, I don’t believe any lending institution would approve this loan given the small profit margins of PLI in the extremely competitive truck industry environment.
In order to ensure PLI doesn’t continue towards bankruptcy and destroy the financial well being of the Powell family, decreasing Operating Expenses through improvements is crucial. And another critical move for PLI would be to decrease their liabilities and pay down on the debts to reduce leverage. Allowance for future expansion to PLI would only be supported if they were to maintain their competitive advantage in their specialty with LTL transportation services, and to maintain their loyal customers.

Ethics and Sustainability Issues
The hurting economy and increasing prices that result from it are tremendously affecting Powell Logistics. It is a direct effect on the sustainability of the company because of its slow maneuverability in the carrier market, as competing companies are already providing ideal services where PLI is unable to compete comparatively; is negatively impacting their profit margins and they are unable to effectively cope with the inverse relationships between their increasing expenses and the consumer demands for cheaper transport rates. PLI is operating in a very competitive market and a couple of their direct competitors, Travelers Transportation Services (TTS) and Yellow Transportation (Yellow), are some of the largest companies in the industry. Currently PLI is unable to match the low prices of TTS, nor can they come close to the financial resources and IT consumer interface technology publically traded Yellow. The only way for PLI to continuing operating in this market would be to improve the costs of their operations through streamlined improvements. Even then it’s going to be tough to match these other bigger companies because chances are, they’ve already improved their operations to the level they need to operate successfully. If PLI can maintain the competitive advantage they have with their LTL transport services and take it to the next level by increasing their margins more than the others, would be another way to retain PLI’s sustainability. Even though this strategy requires substantially more effort and expertise to co-ordinate the loads (Cauterman 3).
Powell Logistics is required to follow ethical obligations by each countries traffic regulations and strict governance on the amount of hours each driver is allowed to rest or drive. NAFTA is an international agreement that regulates the trucking industry and cross-border training. Carriers are required to abide by these policies because if they do not meet the standards of these regulations, then it can result in penalties and fines by the government. And this could have a negative affect on PLI because suppliers want the carriers who follow the agreements of the governments, which could prompt these customers to switch transportation carriers.

Plan of Action
The first order of business is for John Powell to name a successor who will guide PLI through a very painful corporate reorganization. I suggest that John Powell promote his eldest son Frank Powell to president. His birthright and experience in the company will negate hostilities amongst the Powell children. If the decision was for Frank Powell to take over the business, he has to announce the corporate restructuring plans that compel the reduction of staff, wages and operating expenses to remain competitive.
Frank Powell also has to engage in the sale of John Powell’s related businesses that are increasing the debt of burden of PLI. With the sale proceeds being paid towards their loans, severance packages, and other benefits. There should be a significant improvement in the financial health of PLI: provided there are no major economic or political disasters.
There should be a concentrated effort to engage in talks with lane competitors such as TTS or Yellow Transportation. PLI can be seen as a highly valuable motor-carrier with an expansive list of loyal clients and specialization in the high margin LTL transport service, with PLI’s operation margins under control. It’s not a safe bet in the long run for PLI to rely on loyal customers who don’t mind paying higher prices for friendly service. Eventually, business will become strictly business, and PLI’s so-called loyal clients might venture off in their pursuit to improve their operational margins.
I believe PLI has missed its opportunity to make a turn around and play catch up with its competitors in the motor-carrier business environment. Restructuring the company to make it attractive to outside investors or merge partners will help in a big way to save most of the jobs at PLI. Although I have been pessimistic to the future of PLI, there is the slim possibility that PLI, under the guidance of Frank Powell, will be able to be competitive and deliver service on par with their lane competitors. The corporate and debt restructuring will help to reduce their debt to equity and they might just be able to initiate the 10 million dollar integration/expansion program if Frank and Ryan Powell decide to continue along with their father’s legacy.

Conclusion
The trucking industry has been struggling with the global economic downturn and very thin profit margins. The difficulties from the tough supply of oil and currency appreciation of one countries dollar to the other is making it tough for PLI to operate in this industry. John Powell has built his business to be very successful over his last 30 years and has proved to be very profitable with the LTL transportation services; however, the slow maneuverability in the motor-carrier industry by PLI is impacting their margins negatively and making it harder to move towards consumer demands.
PLI’s hardship in the current carrier environment is that it requires the right location, the correct timing and a qualified person to execute the maneuver. Regarding the location of the two buildings in Toronto and a proposed plan to invest 10 million dollars into expansion and integration project is very unlikely. Secondly, the timing of PLI efforts to streamline and expand their operations is long overdue because competitors already have the competitive advantage in these services. Lastly, the founder and president John Powell is on his way to retirement, and the qualified person to ‘steer the company in the right direction’ is still unknown.
I suggest PLI enters into an aggressive debt-restructuring program and sell off toxic assets, which would put PLI in an attractive financial position for interested parties looking to buy the company outright, or to merge with PLI and take advantage of their expansive consumer base and their LTL expertise.

References

Cauterman, Sean. "Powell Logistics Inc." Powell Logistics Inc. (2009): 1-8. Richard Ivey School of Business. Web.

Powell Logistics Inc.
Case Study

Josh Grau
SCM 310 Spring 2013