July 27, 2011
Column | fastlane

Setting the story straight on outsourcing

You can imagine my surprise when a young consultant informed me that outsourcing was "invented in 1990," given that I've been involved in some form of the practice since the early 1960s.

By Clifford F. Lynch

Rick Blasgen of the Council of Supply Chain Management Professionals recently floated the idea of assembling some of the group's more senior members to talk about the profession and how it progressed to where it is today. Personally, I think it's a wonderful idea. It's not just that a look back at the industry's history would be interesting; it would also be educational. Better yet, it would provide an opportunity to clear up a few myths and misconceptions.

For instance, there seems to be widespread confusion about the origins of outsourcing. A newly published white paper stated that "outsourcing was formally identified as a business strategy in 1989." Also, last year I had a young consultant inform me it was "invented in 1990." This came as something of a surprise to me since I've been involved in some form of outsourcing since the early 1960s.

While outsourcing has gained renewed emphasis in the last 20 years, the practice can be traced back almost as far as one would care to research it. I think it's important to set the story straight.

In his book Warehousing Profitably, Ken Ackerman suggests that one of the first business logistics arrangements is described in the Bible (Genesis, Chapter 41). The passage he cites is an account of how the people of Egypt prepared for the predicted seven years of famine by stockpiling crops in public storehouses for distribution during the lean times. In Europe, a number of logistics service providers (LSPs) can trace their origins back to the Middle Ages. The first commercial warehouse operations were established in Venice, Italy, in the 19th century and served as collection and distribution points for merchants from all across Europe. In a nutshell, any person or firm that has ever subcontracted an activity has outsourced.

As for more recent history, the 1950s and 1960s saw an upsurge in the outsourcing of warehousing and transportation. The relationships, for the most part, were short term, but a few companies—like DuPont and Quaker Oats—engaged in long-term outsourcing agreements. During the 1970s, manufacturers placed heavy emphasis on cost reduction and improved productivity. Longer-term relationships became more common, particularly in the warehousing area. Single-tenant facilities were built and operated by warehouse companies in major markets across the United States.

The 1980s brought a wave of mergers and acquisitions, and in many cases, firms found themselves saddled with more DCs than they could possibly need. Consolidation became a necessity, and many of the new facilities were outsourced. By 1990, corporations were showing increased interest in contracting out any activities that weren't directly related to the company's core business. More and more companies came to realize that the real competitive edge was to be found in enhanced customer service and relationships, and many turned to outsourcing as an effective method of accomplishing this.

The end of the decade saw a flurry of mergers and consolidations among LSPs, and users of these services found themselves dealing with different companies and individuals, as well as different cultures. Mergers introduced larger, and in many cases, foreign entities into the outsourcing equation. Many of these alliances were a response to the increasing global needs of outsourcing firms.

The first decade of the 2000s brought us a bigger and better industry with more sophisticated providers and expanded services, particularly in the technology area. Today, the industry continues to expand, and concepts such as vested outsourcing are beginning to take hold.

But let's not forget our roots. In the words of philosopher and essayist George Santayana, "Those who cannot remember the past are condemned to repeat it."

About the Author

Clifford F. Lynch
Clifford F. Lynch is principal of C.F. Lynch & Associates, a provider of logistics management advisory services, and author of Logistics Outsourcing – A Management Guide and co-author of The Role of Transportation in the Supply Chain. He can be reached at cliff@cflynch.com.

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