C. F. Lynch & Associates

Global Outsourcing's Midlife Crisis

By Clifford F. Lynch

DC Velocity, May 2008

Although the supply chain industry represents the very essence of the global economy, a surprising number of logistics service providers (LSPs) and their clients seem to be having difficulty defining a clear global outsourcing strategy.

International trade is no longer something they can safely ignore. There is little doubt that we are part of the global economy and will continue to be so. U.S. international trade in goods and services has grown to 28 percent of GDP (gross domestic product) in 2007 from 10.7 percent in 1970.

As the number of companies getting involved in global trade has soared, so has demand for international expertise. Global trade requires a broad knowledge of regulations, cultures, operations, and currencies that many managers do not possess. The global LSPs often are in a much better position to manage international supply chains than the clients themselves are.

In fact, the explosion in global trade has already caused a dramatic shift in the logistics service industry. The nation’s strong domestic LSPs play a valuable role in U.S. logistics and will continue to do so for some time to come. But during the past five years, more and more shippers have suddenly found themselves in need of a freight forwarder’s or customs broker’s services. Because many of these shippers prefer to use a single provider for all their needs, they’re turning to global players for both their domestic and international requirements. As a result, the list of preferred provider candidates is quite different from what it was just a few years ago. Of the world’s top 20 global providers (by revenue) only four are based in the United States.

A number of these global players have their origins in freight forwarding, and several – such as UTi and DHL – have strong contract logistics capabilities as well. They have incorporated these capabilities into their overall offerings and, thus, enhanced their service menus.

Lately, however, some confusion seems to be developing regarding the LSP marketplace (particularly with the forwarding-based firms), resulting in some unwarranted concerns. Several of the larger providers are publicly traded, and it appears that in some cases, financial analysts have contributed to the confusion. When evaluating the forwarders’ contract logistics operations, they’ve looked at client turnover rates and sounded the alarm. What they apparently don’t realize is that forwarding and contract logistics are two very different kinds of businesses and cannot be judged by the same standards. In contract logistics, it’s normal for clients to come and go. It’s also normal for clients to change their own marketing and supply chain strategies from time to time, which leads them to re-evaluate and, perhaps, modify their distribution networks. This is the "nature of the beast;" it does not mean that the contract logistics service provider has failed to perform satisfactorily.

At the same time, it appears that corporate restructurings by some of the larger players have also given rise to misguided speculation. In order to concentrate equally on both segments of their business, some of the providers have recently split their forwarding and logistics units. Some industry pundits have seized on that as a sign of trouble or even possible divestiture. Others have publicly speculated that it will be more difficult for them to offer a total solution when separate entities are involved.

I would suggest that just the opposite is true. By placing highly qualified individuals in charge of the separate businesses, the freight forwarder-based providers appear to be re-emphasizing their commitments to each segment. As one well respected LSP executive has suggested: If you have two strong entities working together with a strong bridge in between, you can have the best of both worlds.



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