Current Research: Making Logistics Alliances Work
Lal, Shyam, Laarhoven, Peter van, Sharman, Graham, The McKinsey Quarterly
Logistics alliances - formal or informal relationships between companies and logistics providers - are rapidly emerging in Europe, North America, and, increasingly, the Far East. While no precise information is available, we estimate that annual value in Europe and North America is over $15 billion, with a number of leading providers enjoying almost $1 billion in revenues. The success of these alliances means that they are poised to become a building-block in the coming "network economy": a system in which companies focus on their core competencies and outsource other activities to external providers that can perform them more quickly, more cheaply, and more effectively.
We conducted a survey of alliances in the automotive, electronics, and packaged consumer goods industries. We examined 50 customers in Europe and 60 in North America, visited a number of logistics providers, and carried out several in-depth case studies.(1) We discovered that logistics alliances often bring in large service and cost benefits [ILLUSTRATION FOR EXHIBIT A OMITTED]. These come from more efficient operations, tailored logistics solutions, an expansion in services, and the capture of synergies and scale effects. Six best practices emerged:
1. Shipper-led process design and evaluation. In most successful alliances, the shipper takes the lead in strategic activities, while the provider steers day-to-day execution. Providers are always closely involved in bringing existing services and new solutions to bear on shippers' logistics, but in the best alliances it is the shipper that leads the process of customizing these approaches to its needs.
2. Outsourcing coupled with supply-chain restructuring. While outsourcing is not always prompted by restructuring, most successful companies have found that the shift to external providers does help them make bigger changes more quickly at a lower cost. This trend is more prevalent in Europe than in North America, and in industries with evolving supply chains (such as consumer packaged goods and electronics) rather than in those with mature supply chains (for example, JIT shipments into auto assembly plants). One European electronics company seeking to meet different performance needs across divisions flexibly and quickly was able to restructure its supply chain by outsourcing logistics via multiple alliances and shifting hundreds of people and millions of dollars of assets to the external providers.
3. Using tiered provider structures. Over half of the successful alliances we observed in the US computer and automotive industries use a sole primary supplier which in turn purchases services from second-tier subcontractors [ILLUSTRATION FOR EXHIBIT B OMITTED]. (All the remaining alliances are based on sole sourcing with no secondary providers.).The second-tier services most commonly purchased include air freight, motor carnage, and variable labor. Focused subcontractors deliver cost reductions and service improvements, while the primary logistics provider tackles the complexity of logistics management and coordination. …