Ronald Coase laid the foundations for structure of the contract logistics sector

The Nobel Prize winning economist, Ronald Coase, who died last week, was probably the first to understand and explain the concepts of what would later be called ‘supply chains’. His theories outlined the logic behind outsourcing and the structure of the contract logistics sector. He was possibly the one of the greatest British economists since John Maynard Keynes.

The early part of his work was concerned with what today would be called the supply chain of the automotive sector in the United States. He was one of the first to ask questions about the structure of big corporations in Detroit making motors cars and the companies that supplied them with components. Although the activities were simple compared to those of contemporary supply chains, he identified ‘transaction costs’ as being the key determinant in shaping large companies.

In a speech in 2002, Coase restated what he had understood in the 1930’s, “getting rid of the operations at which you are inefficient enables you to lower the costs of your core activity. And this may in effect lead to greater activity, greater production, and therefore larger firms”. What stands in the way, however, is the need to control the relationships with suppliers. If a company cannot cheaply or reliably trade with supplier it will be less likely to outsource. In essence this is the description of outsourcing on any supply chain.

It was a quite brilliant insight to perceive in inter-war America that the economy was not determined by simple ‘make or buy’ calculations but was shaped by the nature of relationships between supplier and the supplied. This relationship was governed by the contract, something he described as “the neurons of the economic system”.

The existence of contract logistics is a testament to the accuracy of Coase’s theories. For it is not merely the provision of more economic utilisation of warehousing or transport that underpins contract logistics, but the ability to create a satisfactory relationship between customer and the logistics service provider through differing types of contract that shape the structure of the sector.

Similarly as supply chains in different sectors such as electronics or retailing become ever more complex, Coase’s fundamental observations provide a foundation for understanding their present and future dynamics.