Transportation, logistics and outsourcing

Transportation, logistics and outsourcing

July is the month that the U.S. celebrates Independence Day. India, the world's most-populous democracy, celebrates next month, on Aug. 15. The night before India became independent in 1947, Jawaharial Nehru, India's first prime minister, gave a speech declaring, "Long years ago, we made a tryst with destiny, and now the time comes when we will redeem our pledge, not wholly or in full measure, but very substantially."

Today, Nehru's comments might just as well apply to India's assent in the service outsourcing industry. Indian technology companies and call centers are often able to offer services for 60 to 80 percent less than Western firms. More and more, increasingly complex activities are moving overseas.

Outsourcing is now a political issue. In February, Gregory Mankiw, chairman of the President's Council of Economic Advisers, asserted that the U.S. economy benefited from outsourcing jobs. While this claim may have been politically tone-deaf, it was a valid recognition that outsourcing jobs - like trade - allows our economy to find cheaper ways to function.

Almost everyone in the transportation and logistics industry is in favor of global trade. We must also recognize, though, that our industry has also always relied upon outsourcing. In fact, we've often led the way.

In the 1950s and 1960s, domestic transportation carriers - like public utilities - were regulated on a rate-of-return basis. Many carriers found themselves with insufficient capital to invest. Shipping companies had long used the vessel charter market as an asset-rental model, and those practices were effectively applied to other modes. Leasing became an essential source of transportation assets - whether by the manufacturer or a financial entity.

In the 1960s and 1970s, vertical integration became a common industrial structure. Carriers developed subsidiaries for specific purposes - especially terminal operations. The development of containerization advanced considerably due to steamship lines, such as Sea-Land, which constructed networks of container terminals around the world.

Regulatory factors occasionally inspired vertical integration. Many railroads created intermodal trucking companies to provide local pickup and delivery, along with ramp operations. These motor carriers enjoyed blanket operating authority to haul prior or subsequent intermodal moves, which in turn, developed the railroad intermodal business. But railroads ultimately realized that third parties could better manage intermodal sales and customer service. This desire to outsource gave birth to the intermodal marketing company.

In the 1980s, surface transportation was deregulated. Costs resulting from inefficiencies could no longer be passed along to customers. Simultaneously, financial re-engineering came into vogue. As Wall Street started looking at a company's "break-up value," vertical integration was no longer an unquestioned benefit. Many railroads divested their subsidiaries and began outsourcing work that had been performed in-house. Immediate savings were realized by forgoing legacy labor contracts. In liner shipping, the development of non-vessel-operating common carriers was driven by steamship lines that sought to avoid the onerous "50-mile" rules imposed on less-than-container load cargo handling by longshore labor.

When interest rates in the early 1980s approached 20 percent, companies began to recognize the financial drain of inventory. The development of just-in-time supply chains forced transportation providers into better performance, as inventory financing was outsourced from the customer to the provider. This phenomenon led to the development of logistics as a discipline distinctly separate from transportation.

Third-party logistics grew in the 1990s as manufacturers discovered re-engineering and engaged in downsizing. 3PLs provided immediate relief to companies seeking to restructure their balance sheets by shedding assets (that could be acquired by the 3PL) involved in "non-core" transportation and warehousing. Positions of workers performing those jobs were also eliminated.

3PLs have kept growing into the new millennium. As information technology has advanced in importance, 3PLs now compensate for the shortcomings of the carriers' information technology. International scope matters increasingly as a range of sources now supply goods and services. (It is interesting to note the confluence of these two forces in the booming IT-outsourcing trend.)

The transportation and logistics industries are key players in the global economy. Most of us are vocal advocates for free trade, but we must also recognize that trade includes goods and services. It is difficult to predict where outsourcing will occur next, but it is likely that our industry will be involved.

Ted Prince is senior vice president of Optimization Alternatives Ltd. He can be reached at (804) 754-2291, or via e-mail at ted@oax.com.