September 2003 | Commentary | 3PL Line

What's Next in Outsourcing's Evolution?

Tags: 3PL

Regardless of the complexities of Darwinian theory, it is easy to find similarities between the evolution of man and outsourcing supply chain functions. After all, there was a time in my career when "postponement strategies" seemed as foreign a phrase as "australopithecines" (an extinct humanlike primate). What was once fancy speak now seems no more than a natural evolution, one that points to the shape of things to come.

Looking back down the supply chain evolutionary trail, transportation was one of the first outsourcing steps taken by many manufacturers. The few companies that owned their own fleet began realizing that running an in-house trucking fleet was not a "core competency."

To operate a successful transportation company was, and still is, a difficult task. But back then, what now seems like an obvious conclusion was painful for many of those involved. Many companies believed their in-house fleet translated to superior service at a lower cost, and there was great debate and organizational protectionism. Still we moved forward.

Trimming the Fat

Next on the evolutionary ladder came outsourcing warehousing and distribution functions. Management again asked the questions: are these supply chain functions our core competency? Are they a strategic competitive advantage, and if so, do they translate into real profits?

It is now in vogue for management to come to the realization that logistics, albeit important, is not what defines them. They now proclaim they are focusing on what they do best, often selling non-core businesses so as to not divert their focus. Today, some very well-known companies are virtual manufacturers, in that they own no plants. But many companies that own and operate plants have evolved significantly from their inception. They are often underutilized or have high, burdensome overhead costs to support only one or two production lines.

Shape Up or Ship Out

Thus, it is not surprising to see a growing number of manufacturers proactively evaluate their in-house production capabilities. The majority of leading branded products have achieved their status not because of manufacturing power, but because of marketing power. Again the question: Do we, as a consumer products company, need to make everything ourselves? Is self-manufacturing a core competency?

Plants that operate at more than 70- percent capacity can generally achieve an optimal cost structure. But those with manufacturing assets that are only utilized 40 percent have a choice to make: find a way to fill them up, or lose hard-earned profits. Even the Cro-Magnon could have visualized the advantages of outsourcing manufacturing for these plants.

There are two sides to this outsourcing coin, of course. Just as those companies who made—at the time—the difficult decision to evolve into leaner, more profitable organizations, logistics providers, too, have adapted to the changing evolutionary landscape.

Survival of the Fittest

Providers that have taken risks and stayed ahead of the curve by offering integrated supply chain services have emerged standing taller, healthier, and smarter. Today, many emerging logistics providers challenge the very concept of supply chain management by providing end-to-end services.

Today's logistics vice presidents will discover a new species of third-party logistics provider that can transport, warehouse, and distribute, but also source, procure, manufacture, package, and service the end customer.

Full-service outsource providers are able to focus entirely on the task of operating facilities, warehouses, and truck fleets. They do not advertise, market, or test consumer products; they focus instead on operating supply chain functions. This is their core competency.

So, what is the next rung on the evolution ladder? Only time will tell. I think it's safe to say that the companies who are able to leverage and outsource those functions outside of their core will emerge better equipped to tackle the competition.