Falls in costs and rise in value-added services

When manufacturers and retailers realised the savings they could make by outsourcing to specialist logistics service providers, costs were initially high due to the lack of available logistics service providers capable of handling outsourcing.

As the outsourcing market grew and more traditional transport and warehouse businesses decided they could become logistics service providers, competition increased and costs fell for buyers of their services until now manufacturers and retailers treat logistics outsourcing as a commodity.

Many supply chain businesses continually offer their outsourced businesses to tender to test the market and force a price cut with their existing logistics provider. This has forced logistics providers to adopt differentiated strategies and offer unique value-added services (VAS) that cannot be easily duplicated by competitors. This trend has been confirmed by a survey undertaken by AT Kearney and the European Logistics Association (2009) and demonstrates Porter’s value chain and differentiation strategies in action.

As supply chain complexity has increased, so has the logistics providers’ service offering to the extent that the relationship between both has become strategic in nature and less transactional. Co-operation between both the supply chain business and their logistics provider has become more complex and this has made it more difficult for competing logistics providers.

Outsourcing activities between manufacturers, retailers and logistics providers have gone from a single function transactional relationship to a strategic multi-functional partnership. Logistics services have started local and regionally and grown to global door to door coverage.

Manufacturers and retailers have managed to shed expensive assets and slim processes with the help of integrated IT solutions and logistics providers taking on the asset risks. Cost reduction has become a continuous innovation expectation from buyers of logistics services. Services are charged at cost, plus a management fee, with the understanding that both parties jointly accept risks.

This relationship between global branded supply chain businesses and the various logistics providers has an important impact on global distribution network design. The more complex the relationship between the two, the more stability in the network and the more opportunity for the logistics provider controlling the network to innovate new solutions to give the supply chain business a competitive advantage. This makes supply chains complex and interconnecting, and this can have far-reaching effects on logistics networks.

Your task

Discuss in the comments area the issues of supply chain businesses seeking to reduce costs and logistics providers’ attempts to offer higher price value-adding services.