Executive Briefings

Globalization, New Customer Demands Drive Logistics Outsourcing to the Next Level

Companies have warmed to the idea of outsourcing logistics. At the same time, they're calling on providers to broaden both their service menus and geographical scope.

Every business faces periodic moments of truth, when it must redefine itself to face the future. For IBM, the latest turning point came about 13 years ago. Challenged by younger and nimbler rivals, the company was hemorrhaging money, people and market share. Then Louis V. Gerstner Jr., former chief executive officer of RJR Nabisco and a well-known turnaround expert, was named CEO. Among his moves was to keep the behemoth in one piece. The decision had huge ramifications for IBM's supply chain and logistics strategy.

Nine years later, senior vice president Bob Moffat would lead the charge to create an integrated supply chain organization for all of IBM. But first, the company had to get its arms around the logistics function. Gary Smith, vice president of global logistics, came aboard back in 1995 to revamp the way IBM moved and managed inventory worldwide. Outsourcing was a key part of his plan, with the company handing off big pieces of its transportation and warehousing management to independent providers.

Fast-forward to 2006. IBM is still committed to logistics outsourcing, but in an even more meaningful way, says Smith. In fact, the company's evolving philosophy on outsourcing mirrors the development of logistics service providers as a whole. LSPs today are bigger, better and more comprehensive in their offerings. The grand outsourcing experiment has been a success, and changes in the way global business is done are driving even more companies to embrace the practice.

IBM's initial foray into outsourcing derived from a determination that logistics wasn't a core competency that deserved a hefty strategic investment. At the same time, says Smith, it wanted to take an end-to-end view of the global supply chain. LSPs, still a young industry, provided the answer. Gradually, IBM shed unwanted logistics assets, including trucks, warehouses and other equipment.

Ten years ago, IBM's ratio of fixed to variable logistics cost was about 50-50. Today, fully 93 percent of its cost structure is variable, says Smith. He intends to bump that up by another two percentage points within two years.

Cost is an obvious factor in choosing to outsource. IBM cut logistics expense by around 20 percent before even putting contracts out to bid. Then it negotiated another 15-percent reduction with the chosen partners. Overall, says Smith, IBM's savings on logistics over the past 11 years are approaching $1.5bn. But the real reason why it went to outsourcing-and a growing motivation behind many such contracts today-was to improve the way it moved product around the world.

"Prior to us coming together as a team, outsourcing was done on a very localized basis," says Smith. "There wasn't an overall underlying strategy. I was brought in because IBM wanted to create a global logistics function."

Bertrand Augere joined the company's logistics team around the same time as Smith. Today he is director of global logistics for Europe, the Middle East and Africa. He says IBM's prior dealings with outside partners were more a case of "vendorizing" than true outsourcing. Key logistics functions were kept in-house.

IBM was an early believer in minimizing the number of partners, another trend in logistics outsourcing today. It had a vision of one LSP for each major part of the world. And while that goal initially proved unfeasible, IBM got close: currently it works with two LSPs for all of Europe, Geodis for finished goods and UPS Supply Chain Solutions for service parts, and two for North America, Menlo Worldwide for finished goods and UPS SCS again on the service-parts side. IBM continues to rely on multiple providers in Latin America and Asia, due to issues of distance, culture and a less-mature LSP industry in those regions. But the "ultimate vision" remains one provider for each geography, Smith says.

A big customer like IBM, with $2.1bn in global logistics spend, can help to make that happen. According to Smith, the company nudged Geodis into areas well beyond its primary operations in France. The existence of IBM logistics assets in other European countries gave the provider an instant presence there, with the transfer of some 1,500 people and 1.5 million square feet of warehouse space to Geodis. (Globally, says Smith, around 2,500 IBMers made the switch to an LSP.) Boasts Augere: "We helped to drive the transition of LSPs to pan-European scope."

Outsourcing doesn't mean abdication. IBM runs an "operational control tower" in each region, staffed by internal logistics experts who not only monitor vendor performance but suggest new and innovative approaches. The company's trade compliance program, covering import and export regulations, remains in-house. "That's extremely important to our image," says Smith.

The Concept Spreads
The early days of outsourcing saw only the biggest companies embracing the concept. In the last few years, that has started to change. Companies well outside the Fortune 100 have seen the benefits of relying on partners to handle their logistics needs. In 2001, 24 percent of companies ranked 400 through 500 on the Fortune list were outsourcing, according to Richard Armstrong, chairman and CEO of Stoughton, Wis.-based Armstrong & Associates. Today, the figure is 52 percent.

Infinera, a seller of optical networking systems to telecommunications providers, didn't even consider doing its own logistics when it was formed five years ago. Still, the company has complex needs in the area of customer service. Spare parts must be rushed to users within a matter of hours.

"Logistics is not our core competency," says Lonny Orona, vice president of customer service, echoing the conclusion of a growing number of companies. "We don't have logistics facilities around the world."

Infinera hired D.W. Morgan Co., an LSP based in Pleasanton, Calif., as its exclusive provider of logistics and supply chain management services. Spare modules flow from Morgan-owned depots in Frankfurt and Tokyo, as well as Infinera's own manufacturing site in Sunnyvale, Calif. Orona says the provider can support deliveries within four hours or next business day, depending on the customer's need. Full systems move on pallets in truckload service, while replacement modules travel via planes and express courier services.

Having an LSP on tap means Infinera can quickly adjust to changes in the business. "Within a matter of 30 days or less, we can have a depot set up and running," says Orona. Discussions with Infinera are already under way for additional locations, he says, with Europe a prime target.

"The future logistics provider will be more global, concentrated, segmented around customer types and better at execution."
- Tig Gilliam of IBM Business Consulting Services

The growing complexity of global supply chains has prompted more companies to examine the outsourcing option, says Grant Opperman, president and chief strategy officer of D.W. Morgan. In the case of Infinera, the company was young, growing quickly and in need of an existing depot network on the ground. Yet it never ceded oversight of the process. Infinera can view the status of inventories at various depots through a single screen over the internet. As Opperman sees it, "We help restore simplicity to the supply chain for our customers."

Infinera approached Morgan at a "perfect moment," says Opperman, when it was shipping enough product to merit the attention of an LSP, yet lacked a "calcified" structure of logistics assets. Morgan does a substantial amount of business with companies generating revenues between $100m and $2bn. "They are competing against larger companies," he says, "but don't have all the resources."

Jeff Ferry, Infinera's senior director of communications, says the company is likely to call on Morgan for a wider array of services. One possibility is exchanging replacement modules on site, a transaction that has previously been handled by customers. Some are asking Infinera to take on that task, Ferry says, and the company might ask Morgan to support the service.

Spare parts management, along with other aspects of reverse logistics, are big opportunities for LSP growth, says Opperman. "There's an awareness from the customer side that the supply chain does not end when you deliver the finished goods."

An Expanding Business
Growth, it seems, is the order of the day. For LSPs in the U.S., gross revenues rose 16.1 percent in 2005 to $103.7bn, according to a new report by Armstrong & Associates. It was the first time that the industry had broken the $100bn mark in revenues. Sales and net-income increases were seen in all segments of the business, including domestic and international transportation management, dedicated contract carriage and value-added warehousing.

There have been no recent earthshaking changes in the way LSPs do business, says Richard Armstrong. But the quality and sophistication of their services have risen. Tracking and tracing capabilities "are at a much better level" today, he says. Many trucks are equipped with satellite technology to monitor their progress in real time. And warehouse management software is doing a better job of tracking labor and inventory.

Value-added services, especially in warehouses, have blossomed, along with a growing reliance on private, contract warehousing. The most popular activities in such facilities including kitting, labeling, customized packaging, subassembly, reverse logistics and transportation optimization, reports Armstrong. Public warehouses, by contrast, are busier with such bread-and-butter functions as sorting, basic transportation management, cross-docking and fulfillment. The latter group of services is less lucrative for LSPs, whose entry into the value-added universe was motivated in large part by a desire for better margins. According to Armstrong, after-tax margins for value-added warehousing and contract logistics currently stand at 4 percent, versus 2 to 2-1/2 percent a few years ago.

The shift away from "tactical" functions is good for customers as well, says Brooks Bentz, partner in the supply chain management practice of Accenture. A maturing LSP industry means such entities can lighten their customers' supply chain burden to an even greater degree. Frequently that involves more than traditional logistics activities-and more than a traditional LSP. Accenture, which built its business as a consultant and systems integrator, now runs the entire information technology departments of some large companies, Bentz says.

The old debate over asset- versus non-asset-based providers continues to rage. Bentz argues for the use of "neutral" entities-called fourth-party logistics (4PL) providers by some-to oversee a layer of carriers, warehouses, forwarders and other entities with physical logistics assets. Others have questioned whether such an entity justifies the extra cost it incurs, but Bentz says it does a better job of matching the right assets with a given need. Neutral parties aren't torn by the need to utilize the resources of their parent company, he says.

More than 20 years after the deregulation of surface transportation in the U.S., it's getting harder to squeeze cost out of the logistics function. Bentz's answer: cut out unnecessary subcontractors. Like IBM, companies should strip their roster of providers down to the bare minimum. One client of Accenture, a global chemical company, went from 35 freight forwarders to three. But there is still a need for one central point of contact between a shipper and its universe of physical logistics providers, Bentz says.

Nothing Is Sacred
When companies today look for things to outsource, almost everything is fair game. Clients of Nashville, Tenn.-based Ozburn-Hessey Logistics haven't just outsourced activities that are traditionally associated with the supply chain, says CEO Scott McWilliams. They have handed over payroll, accounts receivable, IT and systems architecture, electronic data interchange, even certain aspects of project management.

As LSPs get better at what they do, clients increase their level of trust and become willing to take more risks with outsiders, McWilliams says. One company asked Ozburn-Hessey to purchase inventory on its behalf. The LSP dutifully took on around 50 highly perishable items for eventual sale to retailers. At the same time, it closely monitored inventory levels and product quality.

Ozburn-Hessey doesn't have to sit on the goods for long-they turn between 40 and 50 times a year-but it nevertheless assumed a responsibility that would have been unthinkable a few years ago. (And still is for many LSPs.) The arrangement put the LSP much closer to the point of consumption and gave the retailer an easy contact for making order changes on the fly, McWilliams says.

Regardless of the services offered, LSPs bring to the table the benefit of aggregated volumes. As a result, they can often get better deals from carriers and other underlying providers. McWilliams envisions combining the products of multiple suppliers for a single consignee-the ultimate in logistics efficiency. Retailers would have fewer incoming shipments while Ozburn-Hessey would make better use of cost-efficient truckload services. But that practice is only just starting to get under way. "People are willing to talk about it now," says McWilliams. "There's an amazing amount of dialogue."

There's no doubt that the LSP sector is maturing, says Tony Zasimovich, vice president of international services with Oakland, Calif.-based APL Logistics (APLL). The concept has caught fire with the shifting of more manufacturing overseas, especially in China, he says. As supply chains grow more complex, businesses become more willing to let someone else handle the logistics end.

A good international LSP is one that has been on the ground the longest in the country in question, says Zasimovich. APLL's origins are in Asia, where it began doing consolidations and other value-added services for users of the vendor's ocean-carrier sister company, APL. But like all big LSPs, it has branched out to other regions with additional services.

APLL has a strong focus on vendor management. It acts as the client's "eyes and ears" at origin points within Asia and elsewhere, says Zasimovich. Responsibilities include confirming the right size, quantity and quality of a shipment, plus ensuring that it makes the designated shipping window. The company also oversees vendor-managed inventory (VMI) programs, though not to the extent of taking title to goods.

Value-added services performed at APLL facilities include the handling of individual cartons, garments on hangers, kitting, sequencing, label printing and capturing of information at the SKU level. More recently, the company has developed software that allows vendors to print labels at its location. Items can be scanned as they are packed, with all information sent on to the customer.

A Question of Trust
Bill Roberts, director of marketing communications with Kuehne + Nagel Inc., finds his company having to do a bit less explaining about the value of outsourcing today. The skepticism that greeted LSPs at their inception "has diminished significantly," he says. The practice has penetrated deep into the Fortune 500, and even mid-sized companies are looking beyond basic transportation and warehousing to such value-added options as network optimization. More and more, companies are calling on outside partners to advise on the placement of distribution centers to balance cost and customer requirements. "Ten years ago," says Roberts, "that was not necessarily [an LSP's] strong point."

Customers are also showing increasing interest in VMI programs, Roberts says. He expects the presence of LSPs in that area to increase dramatically, as companies look to get a tighter grip on overseas vendors. The LSP's role can include inventory management for the end customer, integration of systems and procedures with multiple vendors, management of related documentation, and the setting of optimal inventory levels.

Still to come is the truly global LSP. Despite their marketing claims, logistics providers tend to be strong in certain geographical and service areas, and weak in others. That's why even the biggest companies haven't been able to find a single provider that can provide a consistently high level of service around the globe.

Instead, the controlling LSP is required to oversee local operators in places where it is less established. Roberts says a handful of LSPs are moving in the direction of global coverage, but there's work to be done. Based in Switzerland, Kuehne + Nagel has traditionally been strong in North America and Europe, and is building infrastructure in Asia. Its recent acquisition of ACR Logistics, a European contract logistics provider, was another step toward creating a worldwide entity, Roberts says.

Big LSPs might end up in the same place, but their origins are varied. Miami-based Ryder System Inc. has its roots in trucking, dedicated contract carriage and other transactional services, says David Bouchard, senior vice president of high-tech and consumer industries. Now it's moving in the direction of integrated service-if not a one-stop shop, then the smallest possible collection of providers. Bouchard says customers are also drawing on the vendor's expertise in global visibility, administrative functions and customer service.

Companies are driving toward supply chain optimization through the acquisition of planning and execution software, says Bouchard. But many lack the skills to get the most out of those systems. An LSP like Ryder can help choose the right applications and fit them into the larger supply chain. "It's more about intellectual capital," Bouchard says.

Customers are pushing LSPs to perform on a global scale. But Ryder has no illusions about its ability to do everything equally well. It might provide transportation and warehousing while declining to hold physical inventory on its books. "We have to be prepared to run it ourselves," says Bouchard, "or have the professional maturity to acknowledge that someone else can do it better."

In years to come, companies will turn up the pressure on LSPs to provide even higher service levels, lower costs and greater collaboration, says Tig Gilliam, global supply chain management leader with IBM Business Consulting Services. The same will be true for IBM as for much smaller companies. For their part, LSPs will have to choose between offering high-margin, value-added services and commodity-type functions with lower margins. Those traveling the latter path may find themselves becoming irrelevant, as global supply chains become ever more complex.

"The future logistics provider will be more global, concentrated, segmented around customer types and universally better at execution," says Gilliam. "The payoff for customers is extensive, including greater reliability, lower total costs, consistent global capabilities and deeper integration with buyers and partners."

Every business faces periodic moments of truth, when it must redefine itself to face the future. For IBM, the latest turning point came about 13 years ago. Challenged by younger and nimbler rivals, the company was hemorrhaging money, people and market share. Then Louis V. Gerstner Jr., former chief executive officer of RJR Nabisco and a well-known turnaround expert, was named CEO. Among his moves was to keep the behemoth in one piece. The decision had huge ramifications for IBM's supply chain and logistics strategy.

Nine years later, senior vice president Bob Moffat would lead the charge to create an integrated supply chain organization for all of IBM. But first, the company had to get its arms around the logistics function. Gary Smith, vice president of global logistics, came aboard back in 1995 to revamp the way IBM moved and managed inventory worldwide. Outsourcing was a key part of his plan, with the company handing off big pieces of its transportation and warehousing management to independent providers.

Fast-forward to 2006. IBM is still committed to logistics outsourcing, but in an even more meaningful way, says Smith. In fact, the company's evolving philosophy on outsourcing mirrors the development of logistics service providers as a whole. LSPs today are bigger, better and more comprehensive in their offerings. The grand outsourcing experiment has been a success, and changes in the way global business is done are driving even more companies to embrace the practice.

IBM's initial foray into outsourcing derived from a determination that logistics wasn't a core competency that deserved a hefty strategic investment. At the same time, says Smith, it wanted to take an end-to-end view of the global supply chain. LSPs, still a young industry, provided the answer. Gradually, IBM shed unwanted logistics assets, including trucks, warehouses and other equipment.

Ten years ago, IBM's ratio of fixed to variable logistics cost was about 50-50. Today, fully 93 percent of its cost structure is variable, says Smith. He intends to bump that up by another two percentage points within two years.

Cost is an obvious factor in choosing to outsource. IBM cut logistics expense by around 20 percent before even putting contracts out to bid. Then it negotiated another 15-percent reduction with the chosen partners. Overall, says Smith, IBM's savings on logistics over the past 11 years are approaching $1.5bn. But the real reason why it went to outsourcing-and a growing motivation behind many such contracts today-was to improve the way it moved product around the world.

"Prior to us coming together as a team, outsourcing was done on a very localized basis," says Smith. "There wasn't an overall underlying strategy. I was brought in because IBM wanted to create a global logistics function."

Bertrand Augere joined the company's logistics team around the same time as Smith. Today he is director of global logistics for Europe, the Middle East and Africa. He says IBM's prior dealings with outside partners were more a case of "vendorizing" than true outsourcing. Key logistics functions were kept in-house.

IBM was an early believer in minimizing the number of partners, another trend in logistics outsourcing today. It had a vision of one LSP for each major part of the world. And while that goal initially proved unfeasible, IBM got close: currently it works with two LSPs for all of Europe, Geodis for finished goods and UPS Supply Chain Solutions for service parts, and two for North America, Menlo Worldwide for finished goods and UPS SCS again on the service-parts side. IBM continues to rely on multiple providers in Latin America and Asia, due to issues of distance, culture and a less-mature LSP industry in those regions. But the "ultimate vision" remains one provider for each geography, Smith says.

A big customer like IBM, with $2.1bn in global logistics spend, can help to make that happen. According to Smith, the company nudged Geodis into areas well beyond its primary operations in France. The existence of IBM logistics assets in other European countries gave the provider an instant presence there, with the transfer of some 1,500 people and 1.5 million square feet of warehouse space to Geodis. (Globally, says Smith, around 2,500 IBMers made the switch to an LSP.) Boasts Augere: "We helped to drive the transition of LSPs to pan-European scope."

Outsourcing doesn't mean abdication. IBM runs an "operational control tower" in each region, staffed by internal logistics experts who not only monitor vendor performance but suggest new and innovative approaches. The company's trade compliance program, covering import and export regulations, remains in-house. "That's extremely important to our image," says Smith.

The Concept Spreads
The early days of outsourcing saw only the biggest companies embracing the concept. In the last few years, that has started to change. Companies well outside the Fortune 100 have seen the benefits of relying on partners to handle their logistics needs. In 2001, 24 percent of companies ranked 400 through 500 on the Fortune list were outsourcing, according to Richard Armstrong, chairman and CEO of Stoughton, Wis.-based Armstrong & Associates. Today, the figure is 52 percent.

Infinera, a seller of optical networking systems to telecommunications providers, didn't even consider doing its own logistics when it was formed five years ago. Still, the company has complex needs in the area of customer service. Spare parts must be rushed to users within a matter of hours.

"Logistics is not our core competency," says Lonny Orona, vice president of customer service, echoing the conclusion of a growing number of companies. "We don't have logistics facilities around the world."

Infinera hired D.W. Morgan Co., an LSP based in Pleasanton, Calif., as its exclusive provider of logistics and supply chain management services. Spare modules flow from Morgan-owned depots in Frankfurt and Tokyo, as well as Infinera's own manufacturing site in Sunnyvale, Calif. Orona says the provider can support deliveries within four hours or next business day, depending on the customer's need. Full systems move on pallets in truckload service, while replacement modules travel via planes and express courier services.

Having an LSP on tap means Infinera can quickly adjust to changes in the business. "Within a matter of 30 days or less, we can have a depot set up and running," says Orona. Discussions with Infinera are already under way for additional locations, he says, with Europe a prime target.

"The future logistics provider will be more global, concentrated, segmented around customer types and better at execution."
- Tig Gilliam of IBM Business Consulting Services

The growing complexity of global supply chains has prompted more companies to examine the outsourcing option, says Grant Opperman, president and chief strategy officer of D.W. Morgan. In the case of Infinera, the company was young, growing quickly and in need of an existing depot network on the ground. Yet it never ceded oversight of the process. Infinera can view the status of inventories at various depots through a single screen over the internet. As Opperman sees it, "We help restore simplicity to the supply chain for our customers."

Infinera approached Morgan at a "perfect moment," says Opperman, when it was shipping enough product to merit the attention of an LSP, yet lacked a "calcified" structure of logistics assets. Morgan does a substantial amount of business with companies generating revenues between $100m and $2bn. "They are competing against larger companies," he says, "but don't have all the resources."

Jeff Ferry, Infinera's senior director of communications, says the company is likely to call on Morgan for a wider array of services. One possibility is exchanging replacement modules on site, a transaction that has previously been handled by customers. Some are asking Infinera to take on that task, Ferry says, and the company might ask Morgan to support the service.

Spare parts management, along with other aspects of reverse logistics, are big opportunities for LSP growth, says Opperman. "There's an awareness from the customer side that the supply chain does not end when you deliver the finished goods."

An Expanding Business
Growth, it seems, is the order of the day. For LSPs in the U.S., gross revenues rose 16.1 percent in 2005 to $103.7bn, according to a new report by Armstrong & Associates. It was the first time that the industry had broken the $100bn mark in revenues. Sales and net-income increases were seen in all segments of the business, including domestic and international transportation management, dedicated contract carriage and value-added warehousing.

There have been no recent earthshaking changes in the way LSPs do business, says Richard Armstrong. But the quality and sophistication of their services have risen. Tracking and tracing capabilities "are at a much better level" today, he says. Many trucks are equipped with satellite technology to monitor their progress in real time. And warehouse management software is doing a better job of tracking labor and inventory.

Value-added services, especially in warehouses, have blossomed, along with a growing reliance on private, contract warehousing. The most popular activities in such facilities including kitting, labeling, customized packaging, subassembly, reverse logistics and transportation optimization, reports Armstrong. Public warehouses, by contrast, are busier with such bread-and-butter functions as sorting, basic transportation management, cross-docking and fulfillment. The latter group of services is less lucrative for LSPs, whose entry into the value-added universe was motivated in large part by a desire for better margins. According to Armstrong, after-tax margins for value-added warehousing and contract logistics currently stand at 4 percent, versus 2 to 2-1/2 percent a few years ago.

The shift away from "tactical" functions is good for customers as well, says Brooks Bentz, partner in the supply chain management practice of Accenture. A maturing LSP industry means such entities can lighten their customers' supply chain burden to an even greater degree. Frequently that involves more than traditional logistics activities-and more than a traditional LSP. Accenture, which built its business as a consultant and systems integrator, now runs the entire information technology departments of some large companies, Bentz says.

The old debate over asset- versus non-asset-based providers continues to rage. Bentz argues for the use of "neutral" entities-called fourth-party logistics (4PL) providers by some-to oversee a layer of carriers, warehouses, forwarders and other entities with physical logistics assets. Others have questioned whether such an entity justifies the extra cost it incurs, but Bentz says it does a better job of matching the right assets with a given need. Neutral parties aren't torn by the need to utilize the resources of their parent company, he says.

More than 20 years after the deregulation of surface transportation in the U.S., it's getting harder to squeeze cost out of the logistics function. Bentz's answer: cut out unnecessary subcontractors. Like IBM, companies should strip their roster of providers down to the bare minimum. One client of Accenture, a global chemical company, went from 35 freight forwarders to three. But there is still a need for one central point of contact between a shipper and its universe of physical logistics providers, Bentz says.

Nothing Is Sacred
When companies today look for things to outsource, almost everything is fair game. Clients of Nashville, Tenn.-based Ozburn-Hessey Logistics haven't just outsourced activities that are traditionally associated with the supply chain, says CEO Scott McWilliams. They have handed over payroll, accounts receivable, IT and systems architecture, electronic data interchange, even certain aspects of project management.

As LSPs get better at what they do, clients increase their level of trust and become willing to take more risks with outsiders, McWilliams says. One company asked Ozburn-Hessey to purchase inventory on its behalf. The LSP dutifully took on around 50 highly perishable items for eventual sale to retailers. At the same time, it closely monitored inventory levels and product quality.

Ozburn-Hessey doesn't have to sit on the goods for long-they turn between 40 and 50 times a year-but it nevertheless assumed a responsibility that would have been unthinkable a few years ago. (And still is for many LSPs.) The arrangement put the LSP much closer to the point of consumption and gave the retailer an easy contact for making order changes on the fly, McWilliams says.

Regardless of the services offered, LSPs bring to the table the benefit of aggregated volumes. As a result, they can often get better deals from carriers and other underlying providers. McWilliams envisions combining the products of multiple suppliers for a single consignee-the ultimate in logistics efficiency. Retailers would have fewer incoming shipments while Ozburn-Hessey would make better use of cost-efficient truckload services. But that practice is only just starting to get under way. "People are willing to talk about it now," says McWilliams. "There's an amazing amount of dialogue."

There's no doubt that the LSP sector is maturing, says Tony Zasimovich, vice president of international services with Oakland, Calif.-based APL Logistics (APLL). The concept has caught fire with the shifting of more manufacturing overseas, especially in China, he says. As supply chains grow more complex, businesses become more willing to let someone else handle the logistics end.

A good international LSP is one that has been on the ground the longest in the country in question, says Zasimovich. APLL's origins are in Asia, where it began doing consolidations and other value-added services for users of the vendor's ocean-carrier sister company, APL. But like all big LSPs, it has branched out to other regions with additional services.

APLL has a strong focus on vendor management. It acts as the client's "eyes and ears" at origin points within Asia and elsewhere, says Zasimovich. Responsibilities include confirming the right size, quantity and quality of a shipment, plus ensuring that it makes the designated shipping window. The company also oversees vendor-managed inventory (VMI) programs, though not to the extent of taking title to goods.

Value-added services performed at APLL facilities include the handling of individual cartons, garments on hangers, kitting, sequencing, label printing and capturing of information at the SKU level. More recently, the company has developed software that allows vendors to print labels at its location. Items can be scanned as they are packed, with all information sent on to the customer.

A Question of Trust
Bill Roberts, director of marketing communications with Kuehne + Nagel Inc., finds his company having to do a bit less explaining about the value of outsourcing today. The skepticism that greeted LSPs at their inception "has diminished significantly," he says. The practice has penetrated deep into the Fortune 500, and even mid-sized companies are looking beyond basic transportation and warehousing to such value-added options as network optimization. More and more, companies are calling on outside partners to advise on the placement of distribution centers to balance cost and customer requirements. "Ten years ago," says Roberts, "that was not necessarily [an LSP's] strong point."

Customers are also showing increasing interest in VMI programs, Roberts says. He expects the presence of LSPs in that area to increase dramatically, as companies look to get a tighter grip on overseas vendors. The LSP's role can include inventory management for the end customer, integration of systems and procedures with multiple vendors, management of related documentation, and the setting of optimal inventory levels.

Still to come is the truly global LSP. Despite their marketing claims, logistics providers tend to be strong in certain geographical and service areas, and weak in others. That's why even the biggest companies haven't been able to find a single provider that can provide a consistently high level of service around the globe.

Instead, the controlling LSP is required to oversee local operators in places where it is less established. Roberts says a handful of LSPs are moving in the direction of global coverage, but there's work to be done. Based in Switzerland, Kuehne + Nagel has traditionally been strong in North America and Europe, and is building infrastructure in Asia. Its recent acquisition of ACR Logistics, a European contract logistics provider, was another step toward creating a worldwide entity, Roberts says.

Big LSPs might end up in the same place, but their origins are varied. Miami-based Ryder System Inc. has its roots in trucking, dedicated contract carriage and other transactional services, says David Bouchard, senior vice president of high-tech and consumer industries. Now it's moving in the direction of integrated service-if not a one-stop shop, then the smallest possible collection of providers. Bouchard says customers are also drawing on the vendor's expertise in global visibility, administrative functions and customer service.

Companies are driving toward supply chain optimization through the acquisition of planning and execution software, says Bouchard. But many lack the skills to get the most out of those systems. An LSP like Ryder can help choose the right applications and fit them into the larger supply chain. "It's more about intellectual capital," Bouchard says.

Customers are pushing LSPs to perform on a global scale. But Ryder has no illusions about its ability to do everything equally well. It might provide transportation and warehousing while declining to hold physical inventory on its books. "We have to be prepared to run it ourselves," says Bouchard, "or have the professional maturity to acknowledge that someone else can do it better."

In years to come, companies will turn up the pressure on LSPs to provide even higher service levels, lower costs and greater collaboration, says Tig Gilliam, global supply chain management leader with IBM Business Consulting Services. The same will be true for IBM as for much smaller companies. For their part, LSPs will have to choose between offering high-margin, value-added services and commodity-type functions with lower margins. Those traveling the latter path may find themselves becoming irrelevant, as global supply chains become ever more complex.

"The future logistics provider will be more global, concentrated, segmented around customer types and universally better at execution," says Gilliam. "The payoff for customers is extensive, including greater reliability, lower total costs, consistent global capabilities and deeper integration with buyers and partners."