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Logistics alliances: the European experience.

An early report on the development to date of one key building block of the coming "network" economy

A new type of logistics-based alliance is quickly gaining speed in Europe, driven, in large part, by the pressure for restructuring. These alliances represent formal or informal relationships between companies operating in a broad range of industries -- and markets -- and logistics service providers. Despite the current focus of such arrangements on providing "contract" logistics services, they have the potential to offer a much broader range of value-added services, including secondary manufacturing and supply chain integration.

COMPANIES AS DIVERSE as computer manufacturers and grocery retailers are increasingly forming alliances with providers of logistics services in an attempt both to improve delivery for their customers and to reduce their own logistics costs. Even so, information on the logistics services market is scarce. National statistics are dispersed between transportation and warehousing classifications, and numbers often shift between categories when alliances are consummated. Though precise information is not available, we estimate that in Western Europe alone logistics alliances to the annual value of one to two billion dollars are now in place. They are also spreading to markets as far apart as the United States and Australia.

To find out more about logistics alliances and why their popularity is increasing, we have cooperated with the Center for European Logistics (CELO)(*) in a research program that involved visits and in-depth interviews with 50 customers and 20 logistics services providers across five Northern European countries. Our aim was to build a database covering both sides of the alliances.

What is a logistics alliance?

For the purposes of the project, we defined alliances as agreements that met three conditions: they must involve at least one full year of cooperation; cover both transportation and warehousing services; and employ a single provider for the services. In other words, we were seeking partnerships -- "win-win" situations from which both parties could benefit.

Although the frequency with which such alliances are happening is a recent phenomenon, some companies have been aware of their benefits for much longer. One of the earliest and most definitive of these alliances is that between Rank Xerox and the Dutch transport company Frans Maas, which has evolved over a decade with periodic increases in scope and value-added.


Though every alliance is different in purpose, structure, scope, needs, and results, our research with CELO identified a number of common features.


Logistics alliance development is still in its early stages. There are, as yet, no major service providers that dominate the European scene. Almost half of the alliances in the research sample were less than two years old, and most had not changed their original scope.

By far the most important factor driving companies toward such alliances is corporate restructuring. In Europe, typical motives are the need to reconfigure production facilities to respond to globalization pressures, and the increasing harmonization and deregulation within the European Union. Corporate restructuring can lead to a logistics alliance in two ways.

If it involves more specialized production and fewer factories, it will be accompanied or quickly followed by a re-evaluation of the logistics configuration. In more than 500 cases to date, disappearing borders, greater distances to market, and improving transport networks have prompted the setting up of one or more European or regional distribution centers. Recent analyses by Dutch information and research institution, Nederland Distributieland, show that one in four of these distribution centers will be outsourced. Our own experience indicates that major US and Japanese companies are in the vanguard of this type of restructuring. With their more numerous production facilities and more established national organizations, European companies have been slower to act.

A second group of companies approaches alliances for a different reason. Having decided to focus on core competences such as product development, manufacturing, and marketing and selling, they have concluded that part or all of their logistics is best outsourced to a specialist provider.

Market structure

Logistics alliances are widespread in the economy. Consumer packaged goods -- where the outsourcing companies include food and beverage manufacturers and large grocery retailers -- represent about a quarter of them. Major consumer-oriented and industrial product sectors are equally represented in logistics alliances, with about 40 percent of reported deals each. The balance of 20 percent consists of smaller sectors, both consumer and industrial. Consumer product sectors contain most of the pioneers of logistics alliances; about two-thirds are more than two years old.

Differences between the consumer and industrial sector alliances include shipment frequency and weight, average number of consignees, the percentage of dedicated versus shared provider assets, and geographic scope. Consumer sector customers are more likely to require their logistics provider to furnish dedicated assets to accommodate their larger flows, while industrial customers are more likely to seek the skills involved in international shipments.

By definition, the logistics service providers in our survey manage -- and in many cases own -- both transport and warehousing assets. But there is a distinctive bias in the origin of providers serving national and international alliances. Forwarders, such as Sweden's ASG and Germany's Kuhne & Nagel, are taking almost half the deals involving international flows. Service providers that entered alliances by building and operating warehouse facilities, such as Nedlloyd's Districenters and NFC's Exel, are the overall market leaders and predominate in national markets. Integrators such as TNT Worldwide are now becoming more active in Europe.


Most alliances involve only a modest range of services. In virtually all the cases we studied, the stocking, handling, and transportation of finished goods are the core of the alliance. Accordingly, outbound logistics was the most commonly mentioned part of the overall supply chain. In addition, most mentioned were "basic services," and in 80 percent of the alliances that was what the company said it was paying for! Less frequently, companies reported that they had delegated management control of part or all of the supply chain to their alliance partner and/or were relying on provider-supplied IT/S services, such as tracking and tracing systems. Value-added services were mentioned in a few cases.

The modest scope of services was typically accompanied by a "middle of the road" delivery service level, rather than leading-edge performance. Only 10 percent of agreements stipulated order cycle times of less than a day; only one in four required a delivery window of one hour.

About a third of the agreements involved the service provider not only in setting up and implementing the logistics system, but also in configuring and designing it. We were surprised to find that this appeared to detract from the success of an alliance. A possible explanation is that client companies did not define their requirements clearly; alternatively, service providers may not -- as yet -- possess the expertise to help redesign a manufacturer's or retailer's logistics system.

Negotiating an alliance

Much has been written about the increasing importance of delivery service in customers' choices between company products.(*) Nevertheless, when companies described their requirements on entering an alliance and when they chose between competing service providers, improvement in service generally took second place to cost reduction. This is probably because the stimulus for most such alliances is corporate restructuring. Other factors -- for example, strategic flexibility, faster implementation, and using a provider's existing distribution network -- derive from management's desire to achieve restructuring quickly, but without closing off future options.

In negotiating their alliances, only one in seven companies chose to negotiate with an existing service provider on a "sole source" basis. Most preferred a relatively hard negotiating approach involving competitive bidding (again with an eye to cost reduction) with an average of four potential providers, or undertook parallel negotiations with an average shortlist of five providers (the so-called "beauty contest" approach).

In contrast with Japanese practice, virtually all the alliances surveyed involved a formal contract; only one in seven reported a "gentlemen's agreement." Almost 90 percent of contracts set detailed performance targets for individual activities (for example, picking rates), and most specified in detail how those activities should be accomplished. In stark contrast to the micromanagement approach evident in the contracts, assessing the general performance of the alliance -- whether in terms of customer satisfaction or integrated logistics costs -- proved a weak point. Only a minority focused their attention on major performance targets, and only 10 to 25 percent were able to quantify the improvements that the alliances had effected.

Despite their preoccupation with detail, the contracts do contain implicit, as well as explicit, elements of flexibility. Perhaps reflecting the apparent difficulty of measuring overall results, no more than one contract in four specified penalties for unsatisfactory performance by the service provider. Penalties related to the obligations of the client company were equally rare, as were positive incentives for the service provider to meet specified performance levels.

Flexibility also tended to be evident in the absence of exclusivity for either party. Only one in five contracts restricted the service provider from taking on other customers in the same industry. Companies believe that, for the most part, cost reduction will derive from using people and facilities more effectively by sharing facilities with other users. Improved utilization received more than twice as many mentions as other potential sources of cost reduction such as better warehousing technology, superior logistics skills, or increased potential for use of EDI.


Companies on the threshold of a logistics alliance shared several important concerns, which invariably declined after the alliance was implemented. Indeed, the chief concern, that prospective partners "don't know our business," quickly disappeared as client companies realized that service providers could learn their unique needs. On the other hand, companies discovered that alliances did not solve pervasive problems with their logistics information systems. Some companies also reported dissatisfaction with quality of service.

Nevertheless, most companies felt that their alliances brought them the benefits they expected. Typically, the delivery service they received exceeded their expectations, while cost reductions tended to be somewhat disappointing. As might be predicted, improvements in cost, service, and quality were driven by different forces.

Cost improvements came mostly from synergistic effects, such as the sharing of resources with other client companies. Service improvements materialized in the form of on-time delivery, in line with recent surveys that suggest customers prefer reliability of delivery to speed. Logistics performance improved mostly through better access to information, bearing out the widespread sense that many logistics managers are dissatisfied with their information systems.

For that minority of respondents who succeeded in measuring the impact of their alliances, the results have been encouraging. Integrated logistics costs, including warehousing, transportation, and administration, have fallen by an average of 21 percent; order cycle times improved by 55 percent; and the few respondents who reported on-time delivery performance measured by consignees noted significant progress.

Companies entering logistics alliances were able to reduce the size of their logistics department by an average of 28 percent. They managed to involve fewer decision makers and levels, and took decisions faster. But improvements in decision-making procedures only appeared in alliances of more than two years' standing, proving that it takes time -- and a lot of communication -- before alliance partners develop trust and find effective ways of interacting.

Satisfaction with logistics alliances is unusually high overall compared with other forms of close cooperation between separate organizations. For 43 percent of respondents, the alliance was clearly successful; 33 percent indicated that it was moderately so. Another strong indicator is the renewal rate: just under half of the alliances had already gone through a renegotiation. More than 80 percent of these had been renewed with the existing service provider; in only a few cases was the service provider changed or the service taken back in-house. Where the latter did occur, the most common reason was the increasing strategic importance of logistics, rather than inadequate performance by the external service provider.

Despite current high levels of customer satisfaction, our experience suggests that the future of such alliances is by no means guaranteed. Recently renegotiated contracts have tended to reduce price levels and margins for service providers. In the short term, this boosts customer satisfaction, but eventually the growing number of service providers will have to find ways of adapting their strategies to preserve viable economics.

Improving an alliance

Our research indicates that some simple guidelines can improve the success rate of an alliance. They relate to each of the major activities involved, from design to communication, and can help both companies and service providers to benefit from their relationships.


Most alliances resulted from -- or accompanied -- a reconfiguration of a company's logistics chain. The new configuration that the company seeks is thus the motive for and foundation of the alliance. Its success depends on having a clear definition -- up front -- of delivery service levels, material flows, approaches to inventory control, and so on. It is not necessary for the eventual logistics provider to be involved in this phase, although the company must find either internal or external expertise to sketch out how the restructured logistics system will work.

The scope of the alliance should initially be kept simple -- by concentrating on finished goods or components or spare parts, for instance. Similarly, the services required should be confined to basics in the early stages. Once the alliance has been set up successfully, with confidence and trust established, there will be plenty of opportunities to add further products and value-added services.

Negotiation. Alliances can bring improvements in logistics costs and delivery service and quality. Too much emphasis on cost reduction in negotiating the alliance actually inhibits a successful outcome. Given that improvement is needed and possible, customers should emphasize delivery service as their first priority. Cost reduction opportunities will arise through improved methods and cooperation once the alliance has settled down.

For the company, involving its CEO in negotiations increases the likelihood of success. It helps to overcome middle managers' natural reluctance to contract out activities that were previously under their control. Taking time to iron out possible misunderstandings is also important: the more successful alliances took 20 to 25 percent more time to negotiate, on average, than less successful ones.

Contract. A careful description of activities and working procedures is clearly helpful in setting expectations in the initial stage of an alliance. The strong message from our research was that the contract should include clear overall performance measures, which should then be systematically and regularly reviewed. Such systematic measurement was found to correlate with alliance success, though the existence of penalties or incentives did not. The contract should not, however, be a straitjacket. It needs built-in flexibility to expand the scope of a successful alliance, to permit service providers to serve other companies with similar needs, and to resolve conflicts.

Operation. Once the negotiations were over and the agreement had been made, a one-off changeover was more successful than a phased approach. Provided the alliance's scope is kept simple, this should be the preferred method of implementation. Even so, our survey showed that the more successful alliances took an average of 20 weeks for the change -- roughly twice as long as the less successful collaborations. Comments from respondents suggest that using joint company-provider teams to start up and operate alliance activities has a positive influence.

Communication. Companies and service providers share a belief in the importance of frequent, systematic communication. The more successful alliances we studied seemed to need intense communication in order to understand one another better. In fact, compared with less successful collaborations, they actually reported fewer instances where decisions were reached more quickly or via shorter decision-making chains.

Service providers

Logistics service providers can look forward to a future of increasing opportunities for growth. The continuing restructuring and integration of production and distribution within Europe will force companies to concentrate on their core competences and seek improved performance in their logistics chains. But as more transporters, warehousers, forwarders, and integrators pile into the market for integrated logistics services, growth alone will not protect existing service providers from declining margins. To be successful, they will need both a focused strategy and an emphasis on adding more value beyond their basic logistics services.

Their strategy could entail focusing on one or two major sectors where alliances are more common, or targeting a few specific customers from those sectors. One approach is to look for customers that value alliances and the synergies they can bring, as opposed to those concerned only with cost reduction.

To ensure a successful outcome, providers should ideally limit the complexity of their services when first working with new customers. Over time, however, expanding the scope of existing alliances is likely to yield more profitable business than trying to bring in new customers, which takes an average of six months of negotiation and has only a one in four probability of ending in a deal.

As basic logistics services eventually become more and more commoditized, successful service providers will have to increase their level of value-added. They should begin by building high-quality negotiating teams capable of engaging at CEO and management board level, assisting customers in redesigning their logistics systems, and demonstrating the flexibility and benefits of well-designed alliances. Service providers must also invest in effective, adaptable information systems that can provide accurate measurement of performance and can support joint decision making by the company and service provider. As noted above, many companies feel dissatisfied with their existing information systems and with their own skills in this field, and seek expert help from their alliance partners.

A successful logistics provider will thus be excellent at delivering not only the basic services of transportation and warehousing, but also value-added services. For example, as globalization or regionalization of primary production spreads to more and more industries, secondary manufacturing activities such as assembly, reconditioning, and, ultimately, full recycling will shift to European distribution centers or similar facilities. The successful service provider will need to set up and manage these activities to achieve either economies of scale or skill sharing in order to ensure profitability and revenue growth.

The success of logistics alliances means that they are poised to become a building block of the "network economy" -- a system in which companies will increasingly focus on their core competences and outsource other activities to service providers that can execute them more cheaply, more efficiently, and/or more effectively. Since companies need to retain control of the outsourced operations that are closely linked to in-house tasks, alliances based on partner-like relationships are vital.

Currently, most logistics alliances are in the earliest stage of development -- what is generally known as "contract logistics." In our view, the success of these alliances will depend on companies' willingness to deepen the relationship and service providers' ability to continue increasing the value they add.

Because customers ultimately control the alliances and tend to be several times larger than their service providers, there is always a tendency to revert to traditional "arm's length" purchasing methods, especially in tough times like the current recession. It is important to remember that companies' willingness to nurture their relationships, share information, and explore opportunities for further cooperation is a precondition for logistics alliances to flourish.

For their part, service providers must develop their value-adding capabilities, such as running repackaging, labeling, and price-marking operations; taking over secondary manufacturing tasks (customizing, final assembly, repair, and recycling); assisting companies in supply-chain integration and the development of logistics planning and monitoring systems; and perhaps even consulting on the overall design of their partners' future logistics approaches.

If these conditions are met, the future for logistics alliances looks very promising indeed.

* Author's note: CELO consists of the following institutions: ManDat/Fraunhofer (Germany), Universite d'Aix -- Marseille 2 (France), Erasmus University Rotterdam and Eindhoven University of Technology (Netherlands), Linkoping Institute of Technology (Sweden), and Cranfield School of Management (United Kingdom). The authors would like to acknowledge the contributions of the following leaders, from each of the above institutions respectively: Dr H. J. Klopper, Professor N. Fabbe-Costes, Professor H. B. Roos, Professor A. G. de Kok, Professor S. Wandel, and Professor J. Cooper.

* See Anil Kumar and Graham Sharman, "We love your product, but where is it?," Sloan Management Review, Volume 33, Number 2, Winter 1992; and The McKinsey Quarterly, 1992 Number 1, pp. 24-44.

Peter van Laarhoven is a consultant and Graham Sharman is a director in McKinsey's Amsterdam office.
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Author:Laarhoven, Peter van; Sharman, Graham
Publication:The McKinsey Quarterly
Date:Jan 1, 1994
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