C. F. Lynch & Associates

The New Face of Outsourcing

By Clifford F. Lynch

DC Velocity, August 2007

The logistics outsourcing business used to be about providing transportation and warehousing services to the masses. Today, it’s about providing complex, technology-rich logistics solutions to targeted audiences. As The McKinsey Quarterly so succinctly put it, "Outsourcing is moving from economies of scale to economies of skill."

This transformation has been a rapid one. Logistics outsourcing, in the modern sense, dates back only to the birth of the railroads. But since its inception, it has changed in concept, character, and complexity every decade or so. The growth of motor carriage and public warehousing, the shift to long-term contracts, the emergence of value-added services, the arrival of the Internet, advances in operational technology…all of these have had a major impact on the functions shippers outsource and the ways in which service providers meet their demands.

The logistics service provider (LSP) industry as we know it today looks quite different from the LSP industry of the past. No longer is it characterized by small, unsophisticated outfits; it’s now populated by larger, more dynamic players that offer their clients a dazzling array of resources – modern systems, state-of-the-art facilities and material handling equipment, and the latest transportation techniques. They’ve also become more skilled at what they do – in many cases, their capabilities far surpass their clients’.

The industry continues to evolve. The business today is moving in new directions in response to a confluence of powerful market forces, not the least of which is globalization. The rush to offshore manufacturing has resulted in an explosion in demand for global logistics services. For evidence, you need look no farther than the "2006 Annual Third-Party Logistics Study" by Georgia Tech et al. That survey shows that customs clearance/brokerage and freight forwarding are now number three and four, respectively, on the list of most frequently outsourced functions (following transportation and warehousing).

The demand for global logistics services shows no sign of slowing. In fact, with as much as 80 percent of all goods in retail stores originating offshore, that demand can be expected to soar. Says Dan Sanker, president of logistics service provider CaseStack, "Even companies that have not embraced outsourcing will likely start moving toward third parties [that] are comfortable around the globe."

To accommodate the sheer volume of offshore traffic, super-sized import distribution centers, many of which are outsourced, have emerged. Buildings larger than any we have seen before are being devoted to the handling of the millions of cases of product originating offshore. For the same reason, foreign trade zones have bloomed around the country. Today there are 263 in the United States, compared to seven in 1970.

Globalization is not the only force shaping the outsourcing business, however. LSPs also report that their client companies have started to "unbundle" outsourced functions. That is, they’re turning to arrangements in which they provide buildings and technology to LSPs, which, in turn, manage the personnel and the operations. This, of course, gives the client more control and leaves the more difficult people management tasks to the LSP.

As the pace of change accelerates, today’s logistics manager is finding the implementation and maintenance of a sound, efficient outsourcing arrangement to be considerably more challenging than in the past. But whatever evolutionary twists and turns the business takes, the prerequisites of a successful relationship remain the same. What are those prerequisites? As I see it, there are three: a shared philosophy between client and LSP in the way business in conducted; a quality, motivated workforce; and a strong sense of collaboration between the parties and their personnel.



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