In modern logistics, information technology systems are as common as forklifts. But the best companies have gone beyond putting bar codes on their containers and tracking shipments by computer. According to a survey of more than 100 logistics services providers (LSPs)—companies that primarily offer shipping and warehousing services—and of manufacturers and retailers using their services, the best performers are investing in highly integrated systems across internal and external supply chains.¹

This global survey, conducted in 1998-99 by McKinsey and the Department of Planning and Logistics at the University of Cologne (Professor Werner Delfmann), confirmed that IT expenditures alone can't create or maintain a top-performing logistics service: once the fundamentals are in place, IT investment must create greater transparency and integration in both internal and external applications. The survey also suggested that shippers might outsource more logistics work to LSPs if their information systems provided higher-quality data.

Basic operational IT applications are no longer a competitive advantage for LSPs or their customers. About 75 percent of all shippers surveyed use planning and scheduling software known as enterprise resource-planning (ERP) systems,² and most have warehouse-management systems as well. LSPs that operate warehouses almost all use bar codes and warehouse administration systems. Even among the low-performing logistics providers, 80 percent use tracking and tracing systems for their transportation networks.

One factor that separates the high- from the low-performing LSPs in warehouse operations is a greater IT emphasis on vehicle management. Some 80 percent of the top LSP performers (as opposed to only 30 percent of the laggards) use prescheduled and dynamic dock scheduling—the real-time routing of trucks and forklifts to different gates of a warehouse (Exhibit 1). Automatic picking (the programmed retrieval of goods from a warehouse) is also more common among the top performers (80 percent) than the low ones (20 percent).

Another factor that sets the top performers apart is their use of order-management IT. The survey showed that far more of the efficient shippers (79 percent) used links called electronic data interchanges (EDIs) to handle orders and to send customers or LSPs relevant information; among the less efficient shippers, only 47 percent used EDIs. Likewise, more than half of the efficient shippers have IT links with both their customers and LSPs, compared with 12 percent of the less efficient shippers.

LSPs benefit from strong links with their clients: the survey shows that 83 percent of the best (and only 8 percent of the worst) performers offer on-line booking. Furthermore, efficient shippers rate IT connections with their LSPs far more highly than do their less efficient counterparts.

As for the handling of orders, the stars among the shippers stress integration and transparency in processes such as automatic capacity checking, the monitoring of orders, and the maintenance of quality control (Exhibit 2). Internal networking across departments is closely linked to success, especially in industries whose logistical needs are complex. Of the 11 top-performing shippers, 10 had connected all the relevant departments: sales, logistics, and production. None of the less efficient shippers had achieved this level of electronic integration.

Smart IT investment makes a large difference in order planning. Most shippers—72 percent of the high performers and 56 percent of the low ones—use or plan to use sophisticated warehouse databases to retrieve and aggregate information quickly. Once these planning systems are in place, the high performers invest in customer analysis and in sales and purchase planning. Meanwhile, the lower-performing shippers (52 percent of them, as compared with 24 percent of the high performers) are struggling with IT infrastructure projects, such as efforts to shift from mainframe to client-server systems.

The survey also found that shippers tend to outsource such tasks as warehousing and transportation to LSPs because they offer higher operational effectiveness (Exhibit 3), along with labor costs that are 20 to 30 percent lower. But shippers are reluctant to outsource the operation and, especially, the management of the integrated parts of the supply chain. All of the retailers interviewed see logistics as part of their core business, and many doubt that LSPs can provide enough information to optimize processes beyond company borders. Sophisticated, integrated IT systems can help remove these doubts and persuade shippers to outsource more of their logistics, including warehousing, to LSPs.

No matter how tasks are shared along the supply chain, the increasing level of IT integration—especially between high-performing shippers and the LSP stars—will probably improve the performance of both considerably.