Aug 8, 2006
Logistics Quarterly has an article about The Coming Wave of Supply Chain Convergence in their latest issue. The lead in describes the following:
Over the past decade, we have seen warehousing companies become logistics companies, watched logistics managers become supply chain professionals
That sort of describes where I work right now as well as my current role. Nevertheless, the author Benjamin Gordon believes that the next big trend in the supply chain industry will be “supply chain convergence”. What does he mean by that phrase? Benjamin defines convergence in the following way:
Convergence is all about the combination of relevant services to provide customers with a broader set of solutions. In the 1990s, convergence meant the fusion of warehousing, freight forwarding, and transportation management to produce lead logistics providers or 4PLs. Companies like Menlo, UPS and Kuehne & Nagel, developed integrated supply chain solutions and enabled customers to reduce the number of logistics suppliers they used. Today, companies are increasingly choosing to compete by combining services. For instance, PWC Logistics acquired GeoLogistics, Trans-Link, and Transoceanic in order to add freight forwarding, event logistics, and project logistics to their arsenal of contract warehousing-based capabilities. Similarly, UTi has acquired Standard Logistics, Unigistix, and market transport in a bid to add warehousing, reverse/value-added logistics, and transportation management to their freight forwarding base. The convergence of logistics services is already well underway.
Benjamin seems to differentiate convergence in the past (which could be said to be about consolidation of multiple competencies under one broad roof) and convergence in the future (which could be said to be about proliferating specific services under the broad roof already created in the past). However, he rightly points out that this convergence is being really driven by the customer of integrated supply chain services i.e. large MNCs that have gone global (through outsourcing and in search of global markets for their products) in a substantial way. If today that seems largely one directional i.e. MNCs in the developed world driving globalization, that will change in the near future but integrated supply chain service firms will benefit nevertheless.
In the current decade, we are beginning to see the emergence of the next big wave of convergence: the combination of outsourced logistics with other forms of outsourcing. For example, in a recent survey of logistics CEOs at the International warehousing and Logistics Association (IWLA), we found that, out of five topics, the subject that generated the highest level of interest was titled: “Where logistics outsourcing converges with other outsourcing.”
I’m not biting. Yet. It is undoubtedly true that engaging a supply chain services partner might seem a lot like outsourcing your IT or accounting or manufacturing from the point of view of the customer and thus there might be an expectation from the customer that instead of using 5 solutions providers for as many outsourced functions, it might be better to use just 1 or 2 integrated solutions providers. Therefore, one might take the view that this might drive convergence of the solutions providers themselves.
Benjamin cites the following in support of his thesis:
First, just as GM’s move (over 15 years ago) to dedicated contract carriage with Schneider, ushered in a new era of dedicated contract carriage growth, so GM’s moves in IT outsourcing may represent a broader trend. Second, logistics outsourcing contracts are likely to follow the same path as the IT outsourcing route. Third, aggressive IT outsourcers are seeking logistics partners. Some are even pursuing mergers. Companies like EDS, Accenture, and other IT firms are looking at logistics acquisitions as a way to extend their outsourcing capabilities. Meanwhile, logistics companies like New Breed and Menlo are bolstering their IT capabilities in a bid to accomplish a similar goal, but from a different direction. Convergence is already underway!
I would offer the following: Outsourcing/offshoring takes advantage of real economic disparities distributed across the globe. It is cheaper for an MNC to produce an unnamed branded shoe for 50 cents an hour or day, whatever the case might be, in some third world country. It is also true that 50 cents an hour or day is a boon as far as employment goes in that part of the world as well. However, the production/shipment/marketing/sales of the shoe involves several competencies. If you outsource your competencies to a third party (rather than retaining those competencies when you offshore your production), then you’re indirectly narrowing the range of competencies from which you can then derive competitive advantage. Moreover, you’re unwittingly giving leverage to third parties when it comes to negotiating power for those same services. Some of that leverage is probably mitigated by the fact that third parties can be switched in and out but that is true only for commoditized products and services. This can be boiled down to the following that it makes sense to outsource non-value added processes but not value-added processes. From the point of view of a customer, outsourcing non-value added services to a third party creates a middle man of non-value added services that can only function profitably on scale and breadth of services offered. While the third party is hired with the idea that on an ongoing basis, better services will be had for cheaper prices, the third party will try (or die trying) to offer “value” as a justification for same or higher prices for services rendered. However, that brings up an interesting paradox – while it is specifically non-value added processes that a firm initially outsources/should ideally outsource (non-value added from the point of view of a customer), the third party can only exist by creating value in those outsourced services – otherwise, it really wouldn’t be profitable except in the scenario that third parties would merge into 1-3 large entities in order to create efficiencies of scale.
This is why I think that such convergence would be limited because firms survive by creating competitive advantages in the portfolio of value creating activities that they engage in or offer. Offshoring makes sense in that line of thinking. Outsourcing any activity other than non-value added services doesn’t make sense.
An interesting aside, I’m plagued by the idea that all this designation of value added or non-value added services is being driven by some accounting allocation of overhead. That would be horrible.