Drive thy business, or it will drive thee — so wrote Benjamin Franklin in 1758 in “The Way to Wealth,” the preface to his “Poor Richard’s Almanack.” Thousands of companies around the world have found this advice as true today as then and have adopted outsourcing as a strategic tool to enable them to focus on their core processes.
Over the past few years, outsourcing has branched from its traditional strongholds of data processing and payroll processing to new areas, such as H.R. and Logistics. OutsourcingJournal tracks these trends and, in this issue as well as future issues, our coverage of the industry will provide leadership insight to you, our readers, as to these new and different views of outsourcing. As outsourcing penetrates new industries, we’ll keep you informed about how it is done, whether it is working, and how outsourcing is adapting itself to deliver value in these areas. One exciting area, currently experiencing explosive growth, is logistics. This issue is devoted to hearing from buyers and suppliers who trade in this marketplace.
A Logical Maneuver
Logistics, for many companies, is an important process, but it is not a core competency; by this, I mean logistics is not the means by which the company differentiates itself. Yet, it is a significant operation, because it can show a dramatic return on investment. When there exists an industry segment, such as logistics, which is non core to a large number of companies, there is an opportunity for an outsourcing marketplace to develop. The logistics outsourcing market place is now exploding because many organizations have come to realize that, through outsourcing, they can take advantage of increased economies of scale and more sophisticated process expertise, which enables them to release scarce capital for more productive uses elsewhere. The outsourcing suppliers are able to make a profit by building sustainable economies of scale through increased purchasing power, warehouse space and information systems, and thereby also lower their customers’ cost.
MCI Systemhouse, the supplier voice in this issue of The Outsourcing Journal, explains how the sometimes unstable oil and gas industry has been able to operate efficiently and remain competitive because of its logistics operations. Our customer viewpoint outlines how Sears has used logistics maneuvers in its strategy to combat its competition.
My definition of when outsourcing has occurred is when a buyer transfers the ownership of a process to a supplier. Given this definition, a principle of outsourcing is that a buyer should only outsource if the supplier is more expert in a process than the buyer. In addition to economies of scale, logistics is an attractive marketplace for outsourcing because the suppliers have specialized process knowledge and process expertise which, in the large part, exceed those of the average company. When this capability is combined with economies of scale, it creates the opportunity for a buyer to achieve a higher quality, lower total cost solution and preserve its executive time to focus on the company’s core processes.
An example of such a supplier is AMR (parent company of American Airlines). It discovered through interaction with customers a need for a large range of cost-effective logistics services, and formed AMR Global Logistics. The SABRE Group uses its core expertise in the travel, transportation and software industries to provide solutions and lower costs in these areas for its customers. Grainger Technologies, Incorporated is another company reaping the benefits of supplying logistics services.
Another element making logistics an attractive outsourcing marketplace is clear and objective metrics. In logistics, the value proposition is clearly understood, and a supplier’s performance is relatively easy to measure. The buyer can easily measure inventory costs, inventory levels, the cost of warehousing space and transportation and so understand the benefit it receives from the outsourcing supplier. Outsourcing relationships that demonstrate increased inventory turns, reduce time to market and minimize warehousing and transportation costs are an easy sell in today’s competitive market place.
An example of the benefits of such a relationship are the Target stores, which outsource their transportation needs to Ryder Integrated Logistics. Target relies on Ryder for prompt, next-day deliveries and streamlined billing processes, thereby decreasing Target’s need for massive, in-store inventory. Chrysler, which has been outsourcing its logistics to Exel Logistics, is another example; Chrysler cut its parts delivery time in half. Procter & Gamble was able to cut costs and reduce inventory by outsourcing to Exel; and DuPont shortened its product turnaround time from three days to within one hour and still was able to cut labor and costs.
At this stage of explosive growth in logistics outsourcing, I feel a word of caution is warranted. The same lessons that have been learned at great expense in other areas of outsourcing have equal validity to logistics. Like all segments of outsourcing, logistics has its own peculiarities (with unique metrics and scope definitions); yet, it shares the need for the same disciplines as all other outsourcing industries. If you’re a buyer of logistics services, you’re still looking for transparency, for flexibility in your contract, and for quality performance and bottom-line impact. It’s a different industry area, but the principles are the same.