Manufacturers and grocery retailers are increasingly forming alliances with providers of logistics services in an attempt both to improve delivery for their customers and to reduce their own logistics costs. ?ven so, information on the logistics services market is scarce. National statistics are dispersed between transportation and warehousing classifications, and numbers often shift between categories when alliances are consummated. Though precise information is not available, we estimate that in Western ?urope alone logistics alliances to the annual value of one to two billion dollars are now in place. They are also spreading to markets as far apart as the United States and Australia.
For the purposes of the paper, I defined alliances as agreements that met three conditions: they must involve at least one full year of cooperation; cover both transportation and warehousing services; and employ a single provider for the services. In other words, I was seeking partnerships -- "win-win" situations from which both parties could benefit.
Although the frequency with which such alliances are happening is a recent phenomenon, some companies have been aware of their benefits for much longer. One of the earliest and most definitive of these alliances is that between Rank Xerox and the Dutch transport company Frans Maas, which has evolved over a decade with periodic increases in scope and value-added.
Logistics alliance development is still in its early stages. There are, as yet, no major service providers that dominate the ?uropean or Amerian scene. Almost half of the alliances in the research sample were less than two years old, and most had not changed their original scope.
By far the most important factor driving companies toward such alliances is corporate restructuring. In ?urope, typical motives are the need to reconfigure production facilities to respond to globalization pressures, and the increasing harmonization and deregulation within the ?uropean Union. Corporate restructuring can lead to a logistics alliance in two ways.
If it involves more specialized production and fewer factories, it will be accompanied or quickly followed by a re-evaluation of the logistics configuration. In more than 500 cases to date, disappearing borders, greater distances to market, and improving transport networks have prompted the setting up of one or more ?uropean or regional distribution centers. Recent analyses by Dutch information and research institution, Nederland Distributieland, show that one in four of these distribution centers will be outsourced. ?xperience indicates that major US and Japanese companies are in the vanguard of this type of restructuring. With their more numerous production facilities and more established national organizations, ?uropean companies have been slower to act. (Sherry, 2003)
A second group of companies approaches alliances for a different reason. Having decided to focus on core competences such as product development, manufacturing, and marketing and selling, they have concluded that part or all of their logistics is best outsourced to a specialist provider.
Logistics are widespread in the economy. Consumer packaged goods -- where the outsourcing companies include food and beverage manufacturers and large grocery retailers -- represent about a quarter of them. Major consumer-oriented and industrial product sectors are equally represented in logistics alliances, with about 40 percent of reported deals each. The balance of 20 percent consists of smaller sectors, both consumer and industrial. (Sherry, 2003) Consumer product sectors contain most of the pioneers of logistics alliances; about two-thirds are more than two years old.
Differences between the consumer and industrial sector logistics include shipment frequency and weight, average number of consignees, the percentage of dedicated versus shared provider assets, and geographic scope. Consumer sector customers are more likely to require their logistics provider to furnish dedicated assets to accommodate their larger flows, while industrial customers are more likely to seek the skills involved in international shipments.
By definition, the logistics service providers manage both transport and warehousing assets. But there is a distinctive bias in the origin of providers serving national and international alliances. Forwarders, such as Sweden's ASG and Germany's Kuhne and Nagel, are taking almost half the deals involving international flows. Service providers that entered alliances by building and operating warehouse facilities, such as Nedlloyd's Districenters and NFC's ?xel, are the overall market leaders and predominate in national markets. Integrators such as TNT Worldwide are now becoming more active in ?urope. (Sherry, 2003)
Most logistics services involve only a modest range of services. In virtually the stocking, handling, and transportation of finished goods are the core of the logistics. Accordingly, outbound logistics was the most commonly mentioned part of the overall supply chain. In addition, most mentioned were "basic services," and in 80 percent of the alliances that was what the company said it was paying for! Less frequently, companies reported that they had delegated management control of part or all of the supply chain to their alliance partner and/or were relying on provider-supplied IT/S services, such as tracking and tracing systems. Value-added services were mentioned in a few cases.
The modest scope of services was typically accompanied by a "middle of the road" delivery service level, rather than leading-edge performance. Only 10 percent of agreements stipulated order cycle times of less than a day; only one in four required a delivery window of one hour. (Wallendorf, Melanie and Arnould, 1999)
About a third of the agreements involved the service provider not only in setting up and implementing the logistics system, but also in configuring and designing it. We were surprised to find that this appeared to detract from the success of an alliance. A possible explanation is that client companies did not define their requirements clearly; alternatively, service providers may not -- as yet -- possess the expertise to help redesign a manufacturer's or retailer's logistics system.
Much has been written about the increasing importance of delivery service in customers' choices between company products. Nevertheless, when companies described their requirements when they chose between competing service providers, improvement in service generally took second place to cost reduction. This is probably because the stimulus for most such alliances is corporate restructuring. Other factors -- for example, strategic flexibility, faster implementation, and using a provider's existing distribution network -- derive from management's desire to achieve restructuring quickly, but without closing off future options.
In negotiating their alliances, only one in seven companies chose to negotiate with an existing service provider on a "sole source" basis. (Wallendorf, Melanie and Arnould, 1999) Most preferred a relatively hard negotiating approach involving competitive bidding (again with an eye to cost reduction) with an average of four potential providers, or undertook parallel negotiations with an average shortlist of five providers (the so-called "beauty contest" approach).
In contrast with Japanese practice, virtually all the logistics systems involved a formal contract; only one in seven reported a "gentlemen's agreement." Almost 90 percent of contracts set detailed performance targets for individual activities (for example, picking rates), and most specified in detail how those activities should be accomplished. In stark contrast to the micromanagement approach evident in the contracts, assessing the general performance of the logistics system -- whether in terms of customer satisfaction or integrated logistics costs -- proved a weak point. Only a minority focused their attention on major performance targets, and only 10 to 25 percent were able to quantify the improvements that the alliances had effected. (Gourdin, 2001)
Despite their preoccupation with detail, the contracts do contain implicit, as well as explicit, elements of flexibility. Perhaps reflecting the apparent difficulty of measuring overall results, no more than one contract in four specified penalties for unsatisfactory performance by the service provider. Penalties related to the obligations of the client company were equally rare, as were positive incentives for the service provider to meet specified performance levels.
Flexibility also tended to be evident in the absence of exclusivity for either party. Only one in five contracts restricted the service provider from taking on other customers in the same industry. Companies believe that, for the most part, cost reduction will derive from using people and facilities more effectively by sharing facilities with other users. Improved utilization received more than twice as many mentions as other potential sources of cost reduction such as better warehousing technology, superior logistics skills, or increased potential for use of ?DI. (Wallendorf, Melanie and Arnould, 1999)
Nevertheless, companies on the threshold of a logistics alliance shared several important concerns, which invariably declined after the alliance was implemented. Indeed, the chief concern, that prospective partners "don't know our business," quickly disappeared as client companies realized that service providers could learn their unique needs. On the other hand, companies discovered that alliances did not solve pervasive problems with their logistics information systems. Some companies also reported dissatisfaction with quality of service.
Nevertheless, most companies felt that their alliances brought them the benefits they expected. Typically, the delivery service they received exceeded their expectations, while cost reductions tended to be somewhat disappointing. As might be predicted, improvements in cost, service, and quality were driven by different forces.
Cost improvements came mostly from synergistic effects, such as the sharing of resources with other client companies. Service improvements materialized in the form of on-time delivery, in line with recent surveys that suggest customers prefer reliability of delivery to speed. (Gourdin, 2001) Logistics performance improved mostly through better access to information, bearing out the widespread sense that many logistics managers are dissatisfied with their information systems.
For that minority of respondents who succeeded in measuring the impact of their alliances, the results have been encouraging. Integrated logistics costs, including warehousing, transportation, and administration, have fallen by an average of 21 percent; order cycle times improved by 55 percent; and the few respondents who reported on-time delivery performance measured by consignees noted significant progress.
Companies entering logistics alliances were able to reduce the size of their logistics department by an average of 28 percent. (Hutt and Speh, 1992) They managed to involve fewer decision makers and levels, and took decisions faster. But improvements in decision-making procedures only appeared in alliances of more than two years' standing, proving that it takes time -- and a lot of communication -- before alliance partners develop trust and find effective ways of interacting.
Satisfaction with logistics systems is unusually high overall compared with other forms of close cooperation between separate organizations. For 43 percent of respondents, the alliance was clearly successful; 33 percent indicated that it was moderately so. (Hutt and Speh, 2001) Another strong indicator is the renewal rate: just under half of the alliances had already gone through a renegotiation. More than 80 percent of these had been renewed with the existing service provider; in only a few cases was the service provider changed or the service taken back in-house. Where the latter did occur, the most common reason was the increasing strategic importance of logistics, rather than inadequate performance by the external service provider.
Despite current high levels of customer satisfaction, our experience suggests that the future of such alliances is by no means guaranteed. Recently renegotiated contracts have tended to reduce price levels and margins for service providers. In the short term, this boosts customer satisfaction, but eventually the growing number of service providers will have to find ways of adapting their strategies to preserve viable economics.
As basic logistics services eventually become more and more commoditized, successful service providers will have to increase their level of value-added. They should begin by building high-quality negotiating teams capable of engaging at C?O and management board level, assisting customers in redesigning their logistics systems, and demonstrating the flexibility and benefits of well-designed alliances. (Gourdin, 2001) Service providers must also invest in effective, adaptable information systems that can provide accurate measurement of performance and can support joint decision making by the company and service provider. As noted above, many companies feel dissatisfied with their existing information systems and with their own skills in this field, and seek expert help from their alliance partners.
A successful logistics provider will thus be excellent at delivering not only the basic services of transportation and warehousing, but also value-added services. For example, as globalization or regionalization of primary production spreads to more and more industries, secondary manufacturing activities such as assembly, reconditioning, and, ultimately, full recycling will shift to ?uropean distribution centers or similar facilities. The successful service provider will need to set up and manage these activities to achieve either economies of scale or skill sharing in order to ensure profitability and revenue growth.
The success of logistics systems means that they are poised to become a building block of the "network economy" -- a system in which companies will increasingly focus on their core competences and outsource other activities to service providers that can execute them more cheaply, more efficiently, and/or more effectively. Since companies need to retain control of the outsourced operations that are closely linked to in-house tasks, alliances based on partner-like relationships are vital.
Currently, most logistics systems are in the earliest stage of development -- what is generally known as "contract logistics." In my view, the success of these alliances will depend on companies' willingness to deepen the relationship and service providers' ability to continue increasing the value they add.
Because customers ultimately control the logistics systems and tend to be several times larger than their service providers, there is always a tendency to revert to traditional "arm's length" purchasing methods, especially in tough times like the current recession. It is important to remember that companies' willingness to nurture their relationships, share information, and explore opportunities for further cooperation is a precondition for logistics alliances to flourish.
References
1. Kent N. Gourdin (2001)"Global Logistics Management " Blackwell Publishers.
2. Hutt, Michael D. and Thomas W. Speh (1992), Business Marketing Management: A Strategic View of Industrial and Organizational Markets, Orlando, FL: The Dryden Press.
3. Wallendorf, Melanie and ?ric J. Arnould (1999), "We Gather Together": Consumption Rituals of Thanksgiving Day," Journal of Consumer Research, 18(June): 13-31.
4. Hutt, Michael D. and Thomas W. Speh (2001), Business Marketing Management: A Strategic View of Industrial and Organizational Markets, Orlando, FL: The Dryden Press.
5. Sherry, John F., Jr. (2003), "Gift Giving in Anthropological Perspective," Journal of Consumer Research: 157-168.
