Peter Drucker who is often credited as the father of modern management once wisely stated whenever you
see a successful business someone once made a courageous decision.
I couldn’t agree more effective decision making is of course critical to a company’s success in making
those decisions often takes quite a bit of courage.
The make or buy decision is the very first assessment made in the purchasing process and often the most
important decision made by the company.
At first glance it seems like a pretty straightforward decision.
But think about this a minute.
Whether you do something yourself or hire someone to do it for you actually defines your company and
how it will operate.
The first thing we want to do is to define the expression make or buy.
And let’s first define it in the context of the product itself.
You were actually making two decisions here.
One decision is to determine if you will make the item yourself or if you will outsource that production.
In short hire someone else to make it for you.
But it is not just a question of whether you make or buy.
It is also a question of where you make or where you buy.
Are you going to manufacture internationally as many large U.S. companies do today.
Or are you going to manufacture domestically.
Multinational enterprises operate their own factories in strategic locations around the world.
Those companies that choose to buy the item from a supplier often outsource globally often seeking the
lowest cost producer.
The extreme version of this strategy is called cost grazing continuously searching the globe for the
lowest cost supplier.
Of course when I speak of a supplier you can assume I am speaking of a qualified supplier.
When that can and will produce the item to your specifications.
Now we can easily apply the concept of Maker by to the logistics world.
Do we operate our own fleet of trucks or ships or airplanes or do we hire a transportation company to
deliver our products for us.
Do we build our own warehouses and distribution centers or do we outsource that to someone else or do
we lease the buildings from someone else but operate the distribution centers with their own people.
These are indeed courageous decisions and we really have to understand our company’s business to make
the right decision here.
Oh by the way as your business changes over time you have to reassess the situation and adjust this
decision again and again.
Which brings us to an important question.
What are the reasons a company might want to do the logistics function themselves.
One of the first things that comes to mind is the concept of core competency.
Most companies want to keep in-house the things that they do best.
The things that give them a competitive advantage in the marketplace.
This protect your intellectual property and gives you much more control over your logistics operations.
If you’re really good at on time delivery to your customers for example then do it yourself.
Someone who is an expert in logistics might be able to handle those functions at a much lower cost simply
because it is their core competency.
Because they are hired by many different companies logistics firms benefit from economies of scale in
that they can operate their facilities and equipment and vehicles at full capacity which lowers their
cost per unit.
Which leads to the other side of this question.
One of the reasons a company might want to outsource their logistics functions the other side of the
core competency issue factors in here for those items or functions that I am not really very good at.
I might want to have someone else do that for me.
I remember many years ago when the chip maker Texas Instruments decided that logistics was just too
hard and hired Federal Express to deliver their products for them.
One of the most obvious reasons to outsource is that I save my company the expense of owning and operating
a fleet of trucks and a set of warehouses and distribution centers the capital outlay is quite extensive.
Today’s logistics with all the special issues involved with global suppliers and global customers is
Special handling customs clearance import export laws tariffs and taxes and many more considerations
simply make international logistics much more difficult and that by itself is a good reason to outsource.
But never forget that you still have to supervise any company that you hire to handle your logistics
Always remember that you are taking a risk any time you outsource an activity that lies between you
and your customer.
Companies that outsource customer service activities for example have experienced this kind of issue
Another issue to consider is on time delivery which is critical to attracting new customers and keeping
And quite often this is the primary way your customers will measure you.
Hiring someone else to deliver to your customers on time is a courageous decision cost grazing for the
low cost delivery service could be a foolish one.
One of the largest issues is simply that you do not have the same level of control when outsourcing.
If situations change during the term of a contract you will find the suppliers are not as flexible as
It is much more difficult for them to handle the change in a customer order for example.
Therefore you must be able to accurately predict your needs and we all know the one truism of forecasting
forecasts by definition are always wrong.
The more stable and mature customers lend themselves to outsourcing much better.
But then again these might also be your best customers.
Remember the make or buy decision is often your company’s most important business decision and it applies
to logistics just as much as it applies to manufacturing.
There can be no doubt that the transportation sector is the most critical sector of our economy transportation
accounts for 60 percent or more of the total logistics costs each year.
This means that more money is spent on transportation that is spent on warehousing distribution center
expenses inventory management and order processing combined beyond just the financial figures.
Transportation is the function that connects all the partners of your companys supply chain partners
who are a distance by time and location.
Transportation moves the goods from one organization to another right up to the customer.
We’re all familiar with the primary methods or modes of transportation.
Truck rail air water and pipeline and each of these has its place in the effective movement of goods
truck carriers for example are usually at both ends of the transportation journey.
The first to pick up the goods and the last to drop them off clearly it takes a good system of roads
and highways to support effective truck transport.
That is why we see such effort being put into building roads in developing countries and maintaining
roads in developed countries.
Controlling costs is another very important consideration for truck fleets and transportation companies.
There is a clear benefit in operating full truckloads around the country rather than less than truck
Of course for local delivery we use small package carriers like the very familiar U.P.S. trucks because
of the door to door requirement of most deliveries just about all goods spend some time on a truck.
So it is important to recognize that the trucking industry is constantly challenged with rising fuel
cost drivers shortages and intense competition among motor carriers.
When don’t have a lot of stuff to move a long distance say across the country for example.
I will look to railroads for the answer.
Raw materials and low priced products are good examples of things usually transported by rail and of
course it usually is done in large quantities so raw materials moving from one end of the country to
another are good candidates as our goods shipped in from China and destined for distribution centers
in Chicago or Dallas.
And we have all seen stacks of new cars moving from the assembly plant to the dealer along the railroads.
The U.S. has a very complex network of railroad lines and railroad companies that work together to service
the entire country.
However there are limits to these to rail transportation.
Rail lines have very specific routes.
So they are not very flexible in comparison to trucks.
They’re also quite slow.
When I want speed I usually think of air transportation but I also think expensive here e-commerce global
sourcing and the desire for faster delivery have all contributed to a steady annual increase in the
use of air transportation in the U.S. prime candidates for air shipment or products and components that
are low weight and high value like electronic devices and computer chips.
Air transportation is provided by air cargo carriers who only handle packages and freight and common
carriers who fly both freight and passengers.
Water transportation is the key enabler of global commerce.
Most goods move internationally on ocean carriers but we also want to consider barges and ships that
navigate shores and rivers and the Great Lakes and the United States world trade is dominated by container
ships tankers and cargo ships.
This is your low cost transportation method.
But of course it’s also the slowest of your choices.
We round off our discussion of transportation modes with the pipeline.
Believe it or not pipelines provide the lowest cost per unit of all the transportation modes the U.S.
has the largest network of pipelines in the world.
Of course pipelines are fixed in place and they have special uses like moving crude oil or natural gas
It is important to understand each of these methods of transportation because most goods use more than
one method when moving from their origin to their destination.
This is called intermodal transportation.
Let’s look at a company like Wal-Mart as an example.
Wal-Mart might order a large volume of bathroom towels from China to be sold in its retail stores throughout
the Midwestern U.S. several trucks will pick up the towels from the factory in China or possibly several
factories are needed to fill this order.
The trucks will drive to the port of Shanghai for example where the boxes of towels are loaded into
a shipping container which is then loaded onto the container ship once the ship reaches the port of
The container is now loaded onto a rail car and is transported to the rail station in Chicago.
Once there the container is lifted off the rail car and placed on the trailer of a truck to be driven
to a regional distribution center.
After the container is unloaded additional trucks will deliver pallets and boxes of towels to smaller
distribution centers or directly to Wal-Mart stores.
How that is a lot of movement because trucks are the only way to deliver door to door.
Almost all goods have an intermodal transportation experience.
So what’s your transportation network look like a really good way to find out is to pick one specific
product and Trace’s transportation routes back to the original source of all materials.
Many electronics companies and all pharmaceutical companies routinely do this.
Once you understand this big picture view you may find some really good opportunities to dig a little
deeper for ways to increase your efficiency or possibly decrease your costs because transportation is
such a huge part of the logistics function.
It is well worth the look.