Logistics alliances—formal or informal relationships between companies and logistics providers—are rapidly emerging in Europe, North America, and, increasingly, the Far East. While no precise information is available, we estimate that annual value in Europe and North America is over $15 billion, with a number of leading providers enjoying almost $1 billion in revenues. The success of these alliances means that they are poised to become a building-block in the coming "network economy": a system in which companies focus on their core competencies and outsource other activities to external providers that can perform them more quickly, more cheaply, and more effectively.

We conducted a survey of alliances in the automotive, electronics, and packaged consumer goods industries. We examined 50 customers in Europe and 60 in North America, visited a number of logistics providers, and carried out several in-depth case studies.¹ We discovered that logistics alliances often bring in large service and cost benefits (Exhibit 1). These come from more efficient operations, tailored logistics solutions, an expansion in services, and the capture of synergies and scale effects. Six best practices emerged:

1. Shipper-led process design and evaluation. In most successful alliances, the shipper takes the lead in strategic activities, while the provider steers day-to-day execution. Providers are always closely involved in bringing existing services and new solutions to bear on shippers’ logistics, but in the best alliances it is the shipper that leads the process of customizing these approaches to its needs.

2. Outsourcing coupled with supply-chain restructuring. While outsourcing is not always prompted by restructuring, most successful companies have found that the shift to external providers does help them make bigger changes more quickly at a lower cost. This trend is more prevalent in Europe than in North America, and in industries with evolving supply chains (such as consumer packaged goods and electronics) rather than in those with mature supply chains (for example, JIT shipments into auto assembly plants). One European electronics company seeking to meet different performance needs across divisions flexibly and quickly was able to restructure its supply chain by outsourcing logistics via multiple alliances and shifting hundreds of people and millions of dollars of assets to the external providers.

3. Using tiered provider structures. Over half of the successful alliances we observed in the US computer and automotive industries use a sole primary supplier which in turn purchases services from second-tier subcontractors (Exhibit 2). (All the remaining alliances are based on sole sourcing with no secondary providers.) The second-tier services most commonly purchased include air freight, motor carriage, and variable labor. Focused subcontractors deliver cost reductions and service improvements, while the primary logistics provider tackles the complexity of logistics management and coordination. One US Big Three auto assembly plant manages several second-tier trucking companies through its alliance partner, allowing it to handle all inbound and outbound shipments with just two people, compared with the hundreds that would normally be involved.

4. Turnkey outsourcing. Outstanding companies tend to outsource almost everything, instead of worrying about keeping the most important operations in-house. They typically outsource 80 percent or more of their transportation, warehousing, value-added services (price tagging, packaging, secondary assembly, manufacturing), and information management. The best outsource everything in turnkey arrangements.

One major automotive OEM has outsourced all transportation, cross-dock operations, sequencing center activities, and value-added services to a single lead logistics provider at each of its assembly plants. Although it has negotiated volume discounts with most of its second-tier carriers, it allows the lead providers to control all day-to-day subcontractor activity. The system now covers over 95 percent of parts value, and includes part and rack returns, as well as garbage disposal. Order cycle times have been halved, delivery times cut from three days to just one, and inventories slashed.

5. Close, dedicated working relationships. The best alliances have dedicated provider staff working closely with the shipper through open communication channels at multiple levels of its organization. They also involve long and thoughtful negotiation, design, and startup phases. In most, providers work on site with full information, open books, and easy access to management. The arrangements appear seamless. One UK company even shared its telephone directory with its service provider.

6. Strong performance orientation. Successful alliances were based on well-defined objectives that aspired more strongly to service level improvement than to cost reduction. Performance measurement was systematic, closely monitored, and frequently discussed by the alliance partners. While the alliances are intended to last indefinitely, and tend to continue for three to five years, exit clauses are not uncommon. At most companies, performance was reviewed at least monthly.

Logistics alliances are proving to be powerful tools for enhancing supply chain performance. The best are based on close working arrangements, a shipper lead in design and evaluation, a tendency to outsource almost everything, ambitious targets, and a strong performance ethic. Most concerns about losing control, insufficient provider knowledge or capability, and "putting all the eggs in one basket" seem quickly to fade.