Let's get two facts straight: Manufacturers' supply chains have become horribly complicated, and things won't get easier any time soon. Oh, and a third thing: If there is a winning logistics play that can cut through the complexity, logistics leaders have yet to find it.

It isn't to be found in the next great transportation-management software package or that new third-party logistics provider (3PL) in Guangzhou, China. It's not a function of how many or how few regional distribution centers you have in Europe or how far you go with cross docking. And it isn't directly tied to how much or how little you outsource your logistics functions.

In practice, it's all of those tactics and more. Most important of all, say longtime industry observers, is a "whole world" approach to logistics challenges as supply chains stretch and splinter further. In other words, it's critical to think and act in terms of total cost and shareholder value up and down the supply chain. But relatively few companies are taking that approach. "Only the top 20 percent or 25 percent of companies are dealing with this from a holistic point of view," says Joseph Martha, managing director of the supply chain practice at Mercer Management Consulting in Cleveland, Ohio.

There is some urgency to get with the program. According to new research from consultants Deloitte Touche Tohmatsu, manufacturing supply chains are fragmenting alarmingly fast. By 2006, 58 percent of North American manufacturers will either begin or increase sourcing from Chinese companies—nearly 60 percent already buy from China—and about a quarter have similar plans for sourcing from Mexico.

U.S. manufacturers are asking much more of their logistics teams on the outbound side as well. Asked about their selling plans for the next three years, between 40 percent and 54 percent of North American manufacturers said they plan to enter or expand into markets in Mexico, China, South America, and Europe. China consistently tops the list.

Even the "crown jewels" of research and development are mobile. More than a fifth of North American producers already have engineering operations in China, notes Deloitte. Another 13 percent plan to establish operations there by 2006, while others will locate engineering capabilities in India, Eastern Europe, Southeast Asia, and Central America.

What's driving this unprecedented degree of fragmentation? Shareholders are demanding revenue growth on the one hand and cost containment on the other—and companies can achieve both by sourcing and selling overseas. It's impossible, for example, to ignore increasingly affluent consumers in huge emerging markets such as China, India, Russia, and Brazil.

And pressures to provide customized products are intense. Product innovation cycles are accelerating, with concept-to-launch now averaging 16 months—12 percent less than three years ago. Mercer's Joe Martha notes the need to manage several different supply chains simultaneously: one for low-cost, high-volume product, another for promotions, and another for 'high-touch' service offerings. "The days of the one-size-fits-all supply chain are gone," he says. "Today it's all about asset rationalization and serving customers better."

Add falling trade barriers, industry consolidation, deregulation, technology's leveling effects, and the soaring power of retail giants such as Wal-Mart, and it's easy to see why global logistics today is no job for the timid. Says Jim Molzon, vice president of sourcing and logistics at U.S. electronics manufacturer Solectron: "We manufacture in 20-plus countries, and we're looking to buy locally. That puts a lot of challenge on logistics."

In response, logistics managers are trying everything to keep global supply chains under control. Many are turning to outsourcing, which is set to grow at 12 percent a year worldwide for the next few years.

Despite the trend toward contract distribution, some contrarian U.S. logistics chiefs are bringing work in-house to cut costs and simplify. In one recent survey, 44 percent of those who do not use 3PL services said they considered logistics to be a core competency. A case in point: Food producer Land O' Lakes, which recently said goodbye to its longtime 3PL, opting to match a core-carrier strategy with a collaborative-transportation approach driven by software from Nistevo. Land O'Lakes realized 15-percent savings on annual freight costs, and costs per load have been cut by up to 20 percent on some routes. Although this example is U.S.-based, it's a sign of what's in store for international supply lines.

Elsewhere, managers are simplifying their operations by consolidating multiple distribution centers into a few super-sized regional hubs. Cross docking and sophisticated warehouse management software, moreover, are maximizing picking efficiency and storage utilization as well as improving inventory visibility and trimming lead times.

Used piecemeal, those efforts may help blunt the edge of supply chain complexity, but they don't give U.S. manufacturers an enduring competitive advantage. The part that's missing, according to Pat Byrne, global managing partner of Accenture's supply chain management practice, is a mindset that embraces the entirety of the supply chain, from supplier's supplier to after-sales service. "Much of the effort to date has been cost transference. Now there has to be a value-added play. It's absolutely a CEO and a CFO issue," he says.

New logistics frameworks are needed now. The framework will differ somewhat at each company, but these underlying principles will be the same, say logistics leaders:

In many U.S. manufacturing firms, logistics officers are tasked chiefly with containing and reducing freight costs. But if those goals—and managers' incentives—don't align with other requirements such as on-time performance or consumption-driven replenishment schedules, then the value is lost. Says Solectron's Jim Molzon: "We're driving lean manufacturing with a global footprint. We're looking at total landed cost—piece price, lead time, transportation costs. Many companies are still looking only at piece price." What's needed, Molzon and others say, is an awareness of costs all across the supply chain—manufacturing and purchasing included—and of the costs of servicing customers.

A 2001 study of supply chain performance by consultants Bain & Co. showed a two-times performance gap between supply chain leaders such as Dell and Toyota and their competitors. Bain learned that they outperformed because they had a holistic view of their supply chains, collecting and using data from vendors, logistics providers, distributors, and customers to maintain a detailed and dynamic view of their entire cost picture.

Logistics leaders such as Dell and Solectron are not afraid to experiment with new tools and processes. They place a premium on accurate, detailed data and on the systems to capture and analyze it. They assess the capabilities of new logistics providers and constantly gauge the value of their in-house expertise against that of 3PLs. "We know what we are spending on a given carrier across the globe," says Molzon.

Experimentation, though, does not imply undue risk. Molzon and his team go to great lengths to conduct due diligence on their logistics suppliers and partners. He notes that even when a global or regional contract has been awarded to a name-brand provider, the actual work is often performed by a subcontractor whose standards may not be up to par.

Global logistics leaders adapt to local circumstances but never forget that their logistics practices must be governed by border-spanning processes. For example, Solectron practices lean manufacturing, but stages inventory for an Eastern European plant because it must account for the vagaries of local transportation there. Yet it still applies the overarching principle of measuring key supply chain characteristics. "If you optimize locally, you suboptimize in total," Molzon cautions.

U.S. manufacturers also must think dynamically about overseas logistics capabilities. If the United States and Europe ever had a lock on logistics expertise, they may not have it in five years. Twelve of the world's largest ocean shipping companies are based in Asia Pacific; the top four container ports are there and airfreight traffic is growing exceptionally fast in the region. National governments, moreover, are making significant investments in infrastructure. Across the continent, shippers and governments alike have come to recognize the competitive value of logistics. Thailand's National Shippers' Council, for example, plans to cut logistics costs by 25 percent by 2006. China, where logistics costs represent as much as 20 percent of GDP, has aggressive plans to streamline transportation and warehousing activities. India has been hosting a prominent logistics conference for several years now.

It is imperative for logistics officials to think outside of their companies as well as outside of their departments. New Web-based software tools enable collaborative transportation initiatives and increasingly, collaborative warehousing techniques. While such collaboration increases complexity—the security aspects of shared trucking routes or shelf space are just one headache—the cost savings can be substantial.

Companies on the leading edge of logistics aren't afraid to break apart dysfunctional business processes and organizational structures. It's a lesson that many companies have yet to learn, though. "The silos still exist between buying, making, and distributing," says Mercer's Joe Martha. "Many companies now combine two of those functions under one roof. Very few combine all three."

Global logistics leaders practice top-talent management. Their best hires are attuned to total-cost thinking, familiar with new optimization tools, and comfortable with international transactions. This new breed is aware of his or her department's core competencies, and has the metrics to tell when and which logistics services should be outsourced.

There is no shortage of challenges for U.S. manufacturers that do business abroad. Demand for air cargo services is expected to rise, yet there is little investment in new capacity. In emerging markets, patchy infrastructure and regulatory barriers will continue to confound. Security issues will keep tightening, whether or not there is another terrorist attack soon. And competitive cost pressures will ratchet up every quarter, to name just a few of the issues logistics managers will continue to face.

Without appropriate principles—a logistics framework that meshes with the overall goals of the business—it will be well nigh impossible to respond to those challenges, and tactical responses will be just so much busy work.