LATELY, WE’VE BEEN HEARING A LOT ABOUT THE COMMODitization of the third-party logistics service business. One recent survey
suggested that outsourcing customers were not totally satisfied with
their providers. As for the source of that dissatisfaction, much of it
came down to unmet expectations. What customers wanted from their
service providers, they said, was more innovation (that is, new and
creative ideas); what they were getting, by and large, were the standard
transactional and operational services. All this has created a perception
that the market is becoming commoditized, defined by Wikipedia as
“the process by which goods that … are distinguishable in terms of
attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers.” In
other words, the market moves to undifferentiated
price competition.
That certainly doesn’t sound like the market that
logistics service providers (LSPs) have worked to
build for the past several decades. In the early days
of outsourcing—say, prior to the 1990s—most
clients did view it as a cost-cutting measure, and
in fact, most LSPs encouraged that thinking. But
it wasn’t long before the more enlightened clients
realized they could gain an edge in the marketplace by providing superior service to their own
customers—and that outsourcing offered a way to
accomplish that. Over the years, the industry has matured, particularly
on the provider side, and today, many companies enjoy effective and
mutually satisfactory outsourcing relationships. What, then, is changing? The research suggests that much of the fault lies with the LSPs and
their failure to embrace new technology and bring innovative ideas to
the table.
This is probably true in a number of cases. What some providers
have considered to be value-added services have over time become
expected offerings—the price of admission to the bidding process—
thereby contributing to the perception of commoditization. Some simply haven’t added enough value in such areas as visibility and analytical
capabilities. Without question, it is time for LSPs to take a hard look
at their contributions to the process and how they set themselves apart
from the competition.
But what about their clients, the users of outsourcing services? These
arrangements are supposed to be partnerships, which suggests to me
that if there is a need for innovation or new technology, the parties
should sit down and discuss how they can make this happen. Although
some outsourcing customers make it a point to do that, an alarming
BY CLIFFORD F. LYNCH fastlane
A time for outsourcing reflection
number seem to have reverted back to the pre-
1990 mentality. The outsourcing of logistics
processes is not about cost savings. It’s about
adding value to the client company and its own
customers. These services are not commodities
and should not be treated as such.
The cost-cutting mindset, however, is
spreading quickly and will be hard to deflect.
Obviously, the recent downturn in the economy
had much to do with that. Cost reductions have
become the goal of every still-employed supply
chain manager. Never mind
that technology is expensive
and many good providers
have limited resources, particularly in the face of cutthroat price competition.
Organizationally, we have
contributed to the dilemma.
With increasing frequency,
corporations are turning the
purchase of supply chain services over to procurement
professionals who have little,
There’s no question that some providers must
change their attitudes toward new technology,
creativity, and innovation. This will be particularly difficult for companies like small LSPs
with limited funds for technology upgrades, but
it must be done. However, the clients also need
to reflect on the impact their actions will have,
not only on the providers, but longer term on
their own supply chains.
An outsourcing arrangement based solely on
price is doomed to failure.
Clifford F. Lynch is principal of C.F. Lynch & Associates, a provider
of logistics management advisory services, and author of Logistics
Outsourcing – A Management Guide and co-author of The Role of
Transportation in the Supply Chain. He can be reached at cliff@
cflynch.com.
