Logistics Partnership

The trend towards globalization means that more and more multinational businesses have cut their number of factories in Europe and concentrated production in fewer countries. Many such companies have also subcontracted their transport and warehousing services to a single outside provider of logistics services.

A recent study carried out jointly by McKinsey, the management consultancy, and the Centre for European Logistics examined logistics alliances between 50 customer companies and 20 logistics specialists across five northern European countries. The study's main conclusion was that most of the companies' outsourcing of logistics activities was excessively driven by cost reduction with insufficient focus on improving service quality to customers.

The study showed that logistics alliances were being set up rapidly in both industrial and consumer product sectors. So far, most involved the stocking, handling and transporting of finished goods. Less than 50 per cent of firms studied also developed alliances for handling the inflow of goods, parts and materials. The study highlighted two main motives for creating logistics alliances;

1. To specialize production across national borders.

2. To focus on the firm's core competences, such as production, product development, marketing and selling.

Tims it was deemed better to outsource logistics to a specialist provider.

The study showed that pioneers like the photocopier maker Rank Xerox and the Dutch transport company Frans Ma as have maintained an evolving relationship for over ten years, with periodic increases in the scope and value added by the arrangement. It takes a great deal of time to build this level of relationship. Almost half the arrangements studied which involved international flows were taken by freight forwarders such as Sweden's AS G and Germany's Kuehne & Nagel, If national alliances were included, the leaders were warehousing specialists, such as Nedlloyd's Districenters and NFC's Excel.

For the majority of logistics deals, the relationship would best be described as 'contract logistics', not a mature alliance. Companies tended to ehoose logistic service providers on the basis of hard, competitive cost bidding, with only one in seven of the customer companies opting to negotiate with an existing service provider on a 'sole-source' basis. The excessive focus on cost cutting and the lamentably low emphasis given to service improvement was largely due to the fact that the main stimulus behind many of the alliances was corporate restructuring.

The McKinsey consultants stress that such cost-oriented thinking underlying alliance negotiations inhibits a successful outcome. Rather, customer companies should prioritize delivery service. If this can be improved then, arguably, cost reduction will occur through improved methods and co-operation between the alliance partners.

Furthermore, to set up successful logistics partnerships, companies must nurture their relationship with service providers. For the relationship to flourish, there must be information sharing and a desire to explore means of extending the scope of the arrangement: for example, subcontracting management control of all or part of the company's inward and outward logistics, or supply chain.

Logistics alliances are a means of achieving competitive advantage in the supply chain. However, companies must balance cost pressures (efficiencies) against the pursuit of longer-run benefits, such as service delivery improvements and customer satisfaction. Ultimately, only by taking a more customer-driven approach will companies' logistics deals deliver.

SOURCES: IVtcr van Laarhoven and (Jraham iShitrman, 'LogLstius ;ilii;mue$: the European experience'. McKinsey Quarterly, 1 (1994), Christopher Lorenz, 'A deal that ;ums to deliver', Finanaial '/Times (1 June 1994), p. 19.

Marketing Highlight 21.3

satisfaction. Too often, however, logistics alliances are focused too much on cost reduction and too little on achieving real improvements in delivery performance and customer satisfaction (sec Marketing Highlight 21.3).

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