Worley Blog

A TIME FOR OUTSOURCING REFLECTION

Posted on: November 1st, 2021 by Clifford F. Lynch

 

Although many outsourcing firms are becoming increasingly dependent on logistics service providers (LSP) to initiate innovations and logistics solutions, too many are still attempting to commoditize LSP services, concentrating primarily on price. This can be an unproductive, or even dangerous practice. First, let’s understand exactly what commoditization is. Wikipedia provides a succinct definition – “when the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers.” In other words, the market moves to undifferentiated price competition.

That certainly does not sound like the market that providers have tried to build for the past several decades. Prior to the 1990’s, most firms saw outsourcing as a cost cutting measure; and in fact, most LSP’s encouraged that thinking. But the more enlightened outsourcers began to realize that their own competitive edge was to be found in enhanced customer service and relationships and that in many instances, outsourcing offered a way of accomplishing this. This was particularly true of smaller companies that could contract with logistics service providers that would offer service superior to that which they could facilitate on their own. Over the years, the industry, particularly the providers, has matured; and today there many efficient and mutually satisfactory outsourcing relationships in place. What then, is changing? The surveys suggest that much of the fault lies with the LSP’s and their failure to embrace new technology and/or innovations in the field.

In a number of cases, this is probably true. What some providers have considered to be value-added services have become expected offerings – the price of admission to the bidding process, thereby supporting the commoditization concept. Some simply have not added enough value in such areas as visibility and analytical capabilities. Without question, it is time for logistics service providers to take a hard look at their contributions to the process and how they set themselves apart from the competition.

But what about their clients, the outsourcing firms? These arrangements are supposed to be partnerships which suggests to me that if there is a need for more innovation or new technology, the parties should sit down and discuss how they can make this happen. Some firms recognize this and have established and nurtured long-standing, state of the art relationships. On the other hand, an alarming number seem to have reverted back to the pre-1990 mentality. The outsourcing of logistics processes is not about cost savings. It is about adding value to the outsourcing firm and its customers. These services are not commodities and should not be treated as such.

This mindset, however, is gaining momentum and can be hard to deflect. Obviously, the pandemic and increasing logistics costs have been major factors. Cost reductions have become the goal of every still-employed supply chain manager. At the same time, outsourcing firms view services such as sophisticated technology as required standard offerings. Never mind that technology is expensive and many good providers have limited resources, particularly in the face of severe price competition. Organizationally, we have contributed to the dilemma. With an unfortunately increasing frequency, firms are turning the purchase of supply chain services over to procurement professionals who have little, if any concept of what they are negotiating for, other than the lowest price.

There is no question that some providers must change their attitudes toward new technology, creativity and innovation. This will be particularly difficult when competing with larger firms that can afford to make the necessary investments, but it must be done. However, the client firms also need to reflect on the impact they will have, not only on the providers, but longer term on their own supply chains.

An outsourcing arrangement, based solely on price, is doomed to failure.