The Gorilla vs. the Elephant, Part 2: The Elephant

Last time, I talked about those 800-pound gorilla companies that can and do use their market position to browbeat their outsourcing partners to get the lowest-cost contracts and to otherwise achieve their own strategic objectives.

It’s a classic case of Vested Outsourcing’s Ailment 1, Penny Wise and Pound Foolish, which might gain some short term returns, but usually goes wrong at the expense of all concerned, even the gorilla.

The recent economic unpleasantness brought this type of activity into stark focus across many outsourcing and logistics sectors. As the economy tanked customers often were able to force pricing renegotiations at ridiculous levels, or ignore contracts entirely in desperate attempts to ride out the storm with their bottom lines and market shares somewhat intact. Suppliers had to succumb or risk going out of business; in many case they went under anyway.

In a recent post I talked about the yearly dysfunction between shippers and carriers on rate and service contracts, which was only heightened when recession hit. Carriers slashed rates and idled ships to preserve market share as trade, especially on the trans-Pacific, went south. As economic conditions improved in the latter stages of 2009, carriers seized an opportunity to bully their shipper partners – who needed shipping space to replenish inventory – by raising their rates dramatically while continuing to keep capacity at low levels.

Rates are still rising on shipping trade routes and capacity and equipment constraints, along with slow-steaming, are still evident.

Needless to say collaboration has never been a shipper-carrier strong-point. This same dynamic occurs regularly between supplier and customers.

Many shippers and suppliers now say they will never forget what happened to them, and that is where the 800-pound gorillas will have to face some angry elephants with long memories.

As supply has tightened with increasing demand and some suppliers have gone bankrupt, the power likely will shift to the remaining elephants, er, suppliers.

Those suppliers are like elephants because they never forget. They not only will try to make up for the profits they lost in this past recession, but they are going to try provide a cushion to make up for future profits they know they will likely loose when the power shifts again, as it inevitably does.

Of course there is a more rational alternative to acting like gorillas and elephants, in good times and bad: Vested Outsourcing.

If the recession illustrated anything, it is that fashioning long-term, flexible, collaborative partnerships that are mutually-beneficial and create a ‘What’s in it for We’ environment through pricing incentives and credible contract structures is the best way to play.

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