A growing tidal wave of supply-chain outsourcing

By William C Copacino -- Logistics Management, 9/1/1998

I've watched how quickly the field of third-party logistics (also known as contract logistics or logistics outsourcing) has been growing over the past few years. It seems likely that the supply-chain outsourcing market will exceed even the most optimistic of growth estimates.

What is driving this trend? Consider the perspective of a growing number of distinguished senior executives, such as John Leschley, chairman of SmithKline Beecham. Speaking at the New Venture conference in Philadelphia on May 11, 1998, Leschley said, "Take our supply chain--Who needs it? Who needs an internal supply chain?" Leschley and many other highly placed executives, while recognizing the importance of the supply chain, understand that it often is not a critical core competency for their organizations. They believe that others can do it faster, better, and cheaper.

Concurrently, the continuing corporate focus on shareholder value, effective capital utilization, and efficient asset management also has encouraged companies to outsource activities that are non-core, capital-intensive, or could be better performed by others. This trend will only intensify as more companies (such as Sara Lee) spin off their manufacturing and distribution activities in order to focus scarce capital on innovation (i.e., research and development investments) and greater marketing power.

Another factor is the range of capabilities that the third-party logistics (3PL) and emerging Fourth-Party LogisticsTM (4PL) players have continued to develop. (Fourth-Party Logistics companies offer analytic and decision-support capabilities, cutting-edge information technology, and capabilities in change management, organizational development, and alliance management in addition to logistics-management services.) Many are sharpening their skills, offering shippers their deep industry insights and industry-specific solutions. They are developing a track record of success, which increases the comfort level and reduces the perceived risk for new and potential customers.

Finally, the increasing level of sophistication that is required to implement effective logistics and supply-chain management programs will fuel demand for logistics outsourcing. Many companies are finding that they do not have that level of expertise in-house and therefore they need to purchase the increasingly complex knowledge, IT capabilities, and talent required to excel.

Where this movement to supply-chain outsourcing will end remains unclear. I suspect it will resemble the stock market of the '90s, going higher than anyone imagined!

William C. Copacino is managing partner of Andersen Consulting's Strategic Services Practice for the Americas. A frequent speaker before business and professional groups, Mr. Copacino has a number of publications to his credit, including the book Supply Chain Management: The Basics and Beyond (The St. Lucie Press, 1997). He is based in Andersen Consulting's Boston office, 100 William St., Wellesley, MA 02181. Phone (617) 454-4480.