Outsourcing of

Outsourcing of logistics logistics

functions: a literature survey functions

Mohammed Abdur Razzaque

Department of Marketing, National University of Singapore, Singapore 89
and
Received June 1997
Chang Chen Sheng Revised April 1998
YCH Group of Companies, Singapore

Introduction
Management of logistics functions in modern organizations involves decision
making for the complete distribution of goods and services in the marketing
function (Watson and Pitt, 1989) with a view to maximize value and minimize
cost. A growing awareness that competitive advantage comes from the delivery
process as much as from the product (Muller, 1991a) has been instrumental in
upgrading logistics from its traditional back-room function to a strategic
boardroom function (Foster, 1994). The following reasons have been proposed to
explain this trend:
• There is a growing need to be more responsive to customer service and
market demand (Horne, 1989). As an integrative concept that cuts across
the traditional functions of the business (Christopher, 1993), logistics can
deliver better customer service.
• Logistics activities involve a large commitment of capital.
• The logistics function can be the key facilitator in the cross-functional
effort towards supply chain integration (Harrington, 1995a). Hence it is
not surprising that concepts such as supply-chain management have
now assumed strategic importance.
In order to handle its logistics activities effectively and efficiently, a company
may consider the following options.
(1) It can provide the function in-house by making the service.
(2) It can own logistics subsidiaries through setting up or buying a logistics
firm (Candler, 1994).
(3) It can outsource the function and buy the service.
Currently, a growing interest in the third option, i.e., outsourcing has been
indicated by the volume of writings on the subject in scholarly journals, trade
publications and popular magazines. Although its evolution is “one of the most
widely discussed contemporary topics in the field of business logistics” (Lieb, International Journal of Physical
Distribution & Logistics
1992, p. 29), efforts to organize them in an integrated broad-based body of Management, Vol. 28 No. 2, 1998,
pp. 89-107. © MCB University
knowledge have so far been rather limited. With the exception of a very recent Press, 0960-0035
IJPDLM publication by Sink and Langley (1997), most other publications in the area
28,2 either focus on specific aspects of third-party logistics, or are narrow in their
scope and objectives. This paper makes an attempt to bridge the gap and aims
at developing a comprehensive literature on outsourcing.

Outsourcing: definition and evaluation

90 Outsourcing, third-party logistics and contract logistics generally mean the
same thing (Lieb et al., 1993). Jon Africk of consultants A.T. Kearney has
defined them as multiple logistics services provided by a single vendor on a
contractual basis. They offer “at least two services that are bundled and
combined, with a single point of accountability using distinct information
systems that are dedicated to and integral to the logistics process” (Bradley,
1994c). It should, however, be noted that outsourcing “may be narrow in scope”
and limited to one type of service (e.g., warehouse) only (Lieb et al., 1993).
According to Bradley (1994a) there is no difference between outsourcing
logistical functions and any other procurement process. He asserts that like a
reliable supplier of materials and parts, contract logisticians should also
provide a high level of customer satisfaction so that their clients can become a
tougher competitor.
Traditionally handled by the firms internally as support functions, logistics
activities such as transportation, distribution, warehousing, inventory
management, order processing, and material handling have been given low
priority compared with the other business functions. However, the need for
developing sustainable competitive advantage, the growing emphasis on
providing good customer service effectively and efficiently, and the strategic
value of focusing on core businesses and re-engineering (Hill, 1994; Lieb, 1992;
Sheffi, 1990) resulted in the evolution of contract logistics which is very different
from traditional logistics (see Table I).

Service considerations and outsourcing

Quality of a logistics system has often been equated with service quality (TM
Staff, 1991). As part of its strategic positioning process, a company must choose
its customer service strategy; and developing logistics excellence is an
important option through which customer satisfaction can be achieved
(Kearney, 1994; Schary, 1992). Consistent service at the appropriate level is the
natural output of a strategically focused, well-designed and well-run logistics
system. Such a system has extraordinary power in achieving goals such as
high-quality service despite some cost constraints or low cost despite some
service constraints. The logistics system of the company can be differentiated to
produce its target service level (Byrnes et al., 1987). The close relationship
between logistics and customer service, and its effects on a firm’s
competitiveness dictate that companies handle their logistics function
prudently so as to achieve its full potential as a source of competitive
advantage. Outsourcing the function appears to be an important mechanism to
realize that objective.
Traditional services Contract services
Outsourcing of
logistics
Not tailored Tailored functions
Usually one-dimensional – trucking or Are multi-dimensional, linking transportation,
warehousing for example warehousing, inventory management, systems
and others
Shippers aim to lower transportation cost Goal is to lower total cost while providing 91
through a contract better service and more flexibility
Contracts tend to run for a year or two Contracts are more likely to be of longer
duration, multi-year arrangements negotiated
at a higher management level
Require expertise in, say, transportation of Requires broad logistics and analytical skills
packaged materials
Contracts generally take less time to negotiate Contracts generally take more time to negotiate Table I.
Simpler arrangement and relatively low Complexity of arrangements leads to higher Differences between
switching costs switching costs traditional and contract
Source: Adapted from Jon Africk of A.T. Kearney consultants, quoted in Bradley (1994c) transport service

Drivers of outsourcing
Of the many factors that may act as driving forces behind outsourcing,
globalization of business has been viewed by many (Byrne, 1993; Foster and
Muller, 1990; Rao et al., 1993; Sheffi, 1990; Trunick, 1989) as the most prominent.
The continued growth in global markets and foreign sourcing has placed
increasing demands on the logistics function (Bovet, 1991; Cooper, 1993;
Fawcett et al., 1993; McCabe, 1990; Whybark, 1990). Consequently, it has led to
more complex supply chains (Bradley, 1994a) and has involved more
transportation and distribution managers in international logistics. Lack of
specific knowledge of customs and infrastructure of destination countries
forces firms to acquire the expertise of third-party logistics vendors.
The increasing popularity of just-in-time (JIT) principles is another major
factor promoting outsourcing (Goldberg, 1990; Sheffi, 1990; Trunick, 1989).
With the shift to JIT delivery, inventory and logistics control have become even
more crucial to manufacturing and distribution operations. The complexities
and costs of operating in a JIT environment are prompting many of its potential
adopters to supplement their own resources and expertise by using sources
outside their corporate structure.
Trunick (1989) suggests emerging technology and versatility of third parties
as two other important drivers of outsourcing. Since it would be time
consuming and expensive to develop and implement new technologies in-house,
firms can easily employ those of a third-party. On the other hand, versatility of
the third parties enable them to provide an improvement in control, technology,
and location, turning fixed costs into variable costs. They have the ability to
reconfigure the distribution system to adjust to changing markets or
technological advances. Small companies tend to be more interested in third-
party use (Maltz, 1994) since they are in greater need for expertise and
assistance in the area of technology (Harrington, 1995b). The KPMG Peat
IJPDLM Marwick’s third annual logistics benchmarking study shows that cost control,
28,2 followed by information technology and inventory management are the major
logistics concerns in respondent companies, and as such, have resulted in
further emphasis in outsourcing (Bradley, 1995a). Many other logisticians have
suggested various other reasons for outsourcing. A representative list of these
reasons is presented in Table II.
92

Drivers of outsourcing Identified by

Improved productivity measurements

Increase in cost-efficient foreign competition
Management demand for a financial contribution from all sectors of the
company
Mergers and acquisitions that require keeping assets off the books
Need to move inventory faster
Need for flexible production
Retrenchment to core business Muller (1992)
A company’s need to assess present and future market prospects for its
product
Company restructuring
Development of supply chain partnerships
Increasing customer demands and
Increasing environmental awareness
To determine the products’ competitive advantage in the marketplace Byrne (1993)
Change in management
Existing facilities and/or systems
Expanding into unfamiliar markets and
Taking on new product lines Maltz (1995)
Table II. The success of firms using contract logistics Bradley (1994a)
Some reasons for The focus on temporal aspects of logistics management Cooke (1994b)
outsourcing Trend towards centralized distribution systems Bence (1995)

Importance of outsourcing
A recent survey by Lieb and Randall (1996) found that the CEOs of third-party
logistics companies perceived growing customer interest in outsourcing as the
top industry dynamics. This awareness of contract logistics’ role has been
instrumental in compelling the logisticians to learn to adapt to this new
intrusion into their territory (Gooley, 1994b). Since firms can often replicate or
improve on a competitor’s offering with relatively little difficulty, gaining
sustainable advantage through product differentiation is rare. Also, it is harder
to compete on manufacturing excellence alone. Outsourcing can contribute to
profits by enabling users to gain competitive advantage, adding measurable
value to products, enhancing customer service, assisting in opening new
markets, and providing dedicated resources (Foster and Muller, 1990). Third
party logistics providers can enhance value creation for customers leading
them to become more competitive and profitable through speedy and superior
customer service (Daugherty and Pittman, 1995). Value creation involves the Outsourcing of
understanding of the dynamic interaction within the customer’s supply chain. logistics
One of the most important reasons for employing third-party logistics functions
providers is their ability to provide their clients with expertise and experience
that otherwise would be difficult to acquire, or costly to have in-house (Byrne,
1993; Dillon, 1989; Goldberg, 1990; Richardson, 1990; 1992; 1993a; 1993b;
Sheehan, 1989; Trunick, 1989). Their expertise gained from working with other 93
clients allows users to benchmark against other companies and may lead to
opportunities to lower costs and improve customer service. It is believed that a
contract logistics company with national and regional expertise can even
provide a customer a local image even though that company may have no local
presence in assets and logistics employees (Bradley, 1994b; 1994c). With the
contract logistics firms as their advisors and innovators, companies can gain
since the former “add value that translates to profit” (Wood, 1993).
At the strategic or management level, companies lacking sophisticated
information systems might look to outside sources for database management
techniques used in forecasting or for handling the information flow loop
(Richardson, 1990). Use of contract logistics enables firms to spend more time to
pursue strategic planning and management issues, and focus on their core
business competency, rather than on logistics (Africk and Markeset, 1996;
Foster and Muller, 1990; Lynch et al., 1994; Richardson, 1992; Saw, 1995;
Sheehan, 1989; Trunick, 1989).

Types of contract logistics vendors

According to Goldsmith (1989), public warehousing may be the oldest form of
outsourcing in logistics. Later, Richardson (1992) added marketing, packaging,
transportation, distribution, import and export to this list. This is justifiable
since third parties do have some role in determining where goods are stored,
how they are packaged for shipment, and in choosing the best mode for
transporting them to the customer (Hill, 1994). Since the third-party providers
are also increasingly being utilized for value-added activities such as assembly
and quality control (Fawcett et al., 1993) the list is, however, expanding. Some
companies are not involved in moving goods at all: they sell software and
consulting services that help their customers develop their own efficient
transportation networks. Others handle chores such as paying bills and
tracking costs of transportation for their customers. Many third-party logistics
companies have been found to offer services such as logistics information
systems, shipment consolidation, warehouse management/operation, carrier
selection, rate negotiations, fleet management/operations, product returns,
order fulfillment, customer spare parts, vendor selection and purchasing (Lieb
and Randall, 1996).
Muller (1993b) appears to be the first to propose two basic types of contract
logistics service providers, i.e., operations-based and information-based third-
party logistics vendors. Later, Muller (1993a) himself modified this
classification scheme by suggesting the following four types of vendors:
IJPDLM (1) Asset-based vendors. Companies which offer dedicated physical logistics
28,2 services primarily through the use of their own assets, typically a truck
fleet or group of warehouses or both.
(2) Management-based vendors. Involved in offering logistics management
services through systems databases and consulting services, often
acting as a subcontracted traffic department, either for part, or all, of a
94 client’s business segments. These firms do not own transportation or
warehouse assets.
(3) Integrated vendors. These companies own assets, typically trucks,
warehouses or a combination of both. They are not, however, limited to
using those assets, and will contract with other vendors on an as-needed
basis.
(4) Administration-based vendors. Firms which mainly provide
administrative management services such as freight payment.
This classification scheme is similar to a more recent one proposed by Africk
and Calkins (1994) endorsing that asset-based and non-asset-based providers
are the two main types of third-party logistics service providers along with a
third type providing hybrid services. The asset-based providers could either be
capacity-dedicated or assets-dedicated. In the capacity-dedicated situations, the
provider commits to meeting certain volume and service levels specified by the
buyer, but will use its assets to serve multiple customers. In the assets-dedicated
situations, the equipment or facilities service only one customer. The buyer
makes a trade-off between a lower price for the capacity-dedicated project, and
greater assurance of meeting service requirements with assets-dedicated
undertakings. In contrast, the non-asset-based providers generally do not own
or lease physical assets but provide human resources and systems to manage
the buyer’s logistics function. The hybrid services providers are subsidiaries of
asset-based contract logistics companies generally specializing in project-based
services with some of the physical services offered by the parent company. In
terms of their service offerings and relationships with buyers, the hybrids lie
somewhere between the asset-based and non-asset-based competitors.
There are many benefits of choosing asset-based service providers (Africk
and Calkins, 1994). They:
• have the knowledge and experience in handling and maintaining
equipment, facilities, and physical operations;
• can pass on savings to users; and
• help to reconfigure operations to improve efficiency, reduce costs and/or
improve service.
On the other hand, many of the management companies generally tend to focus
on a niche, such as international or domestic in-bound logistics. They are a
logical alternative when value addition results from co-ordination and
integration of flows rather than from a core service such as transportation or
warehousing (Bradley, 1994c). It should be noted that no one category of the Outsourcing of
logistics vendors is inherently superior to another. Buyers should have logistics
knowledge about the various providers and make a selection based on their own functions
goals and needs (Muller, 1993b; Sink and Langley, 1997). It has been advocated
that instead of focusing on the service providers’ assets, firms should consider
their skills, and see how those skills compliment what the firms have in-house
(Minahan, 1995). 95

Advantages of outsourcing
Outsourcing offers many advantages to those using it. It reduces capital
investment in facilities (Foster and Muller, 1990; Richardson, 1992; 1995),
equipment (Fantasia, 1993; Foster and Muller, 1990; Richardson, 1995),
information technology (Fantasia, 1993; Goldberg, 1990; Lacity et al., 1995;
Richardson, 1995; Sheffi, 1990; Trunick, 1992) and manpower (Foster and
Muller, 1990; Richardson, 1992; 1995). This allows the using firm greater
flexibility in adapting to changes in the market and access to leading edge
technology (Lieb, 1992; Sheffi, 1990). Firms only need to contract for the
necessary level of service to meet current demand. When demand surges
beyond the capability of a firm to fulfill, a third-party may be called in to help
the firm. Thus, the contract logisticians convert a fixed cost to a variable cost
for users (Bradley, 1994b; 1994c; Richardson, 1993a).
By coordinating production and shipping schedules, outsourcing reduces
inventory and improves inventory turnover rate (Richardson, 1990; 1995)
resulting in faster transit times, less damage, and less paper work. Contract
logistics also enables firms to respond quickly to marketing, manufacturing,
and distribution changes (Byrne, 1993) and helps to improve on-time delivery
(Richardson, 1995).
Third-party logistics users generally agree that it costs less to use such firms
than to carry out the same functions in-house (Candler, 1994; Lieb, 1992).
Logistics being their core business, these firms can lower costs by being more
efficient than a manufacturer (Bradley, 1994c; Lieb, 1992). Since the use of an
outside multiple service provider reduces the needed multiple service contacts
for the firm to a single point of contact (Richardson, 1990), coordination costs
are also reduced. In a recent Purchasing Magazine survey, more than 50 percent
of the participating contract logistics users cited cutting transportation/
distribution costs, freeing up or reducing staff, focusing on the core business
and cutting internal administrative costs as major reasons for using third-party
logistics. Other reasons cited included acquiring outside expertise,
consolidating services, improving service to the company, improving customer
service and satisfaction, simplifying the logistics process, avoiding capital
expenditures, using provider’s logistics information systems, increasing
productivity and reducing number of service suppliers (Bradley, 1995a). This
study reveals that reasons for outsourcing have not varied much over the years.
IJPDLM Obstacles and problems in outsourcing
28,2 Just as there are many reasons that favor outsourcing, there are many others
that discourage its use. Loss of control to third-party provider(s) appears to be
the most commonly cited reservation that inhibits firms from using contract
logistics (Bardi and Tracey, 1991; Bowman, 1995; Byrne, 1993; Cooke, 1994b;
Lynch et al., 1994; Richardson, 1993a). However, in reality firms do not totally
96 relinquish their control as outsourcing does not absolve firms of the need to
monitor their vendors (Bowman, 1994). The two sides need to meet frequently
to map strategy and resolve problems as they arise. Byrne (1993) adds that the
lack of advanced information technology linking manufacturer, carrier,
warehouse, and customer operations has often caused hindrance to contract
logistics management.
Besides losing control, losing touch with important information, failure to
select or manage providers properly, unreliable promises of the providers, their
inability to respond to changing requirements, their lack of understanding of
the buyer’s business goals and difficulty of changing providers have also been
cited as potential problems by their users (Bradley, 1995a).
A major obstacle to outsourcing is the difficulty of obtaining organizational
support (Bowman, 1995). Management’s lack of confidence in an outside
company to deliver service at as high a level as the company employees is a
major issue: the third party may be inadequate in its capabilities to meet users’
requirements (Cooke, 1994b; Maltz, 1995). Difficulty of assessing the savings to
be gained through outsourcing creates additional problems. Also, the use of an
outside firm may make the firm’s logistics people apprehensive about their job-
security: they may develop a fear of being retrenched (Cooke, 1988; Muller,
1991b).
Companies planning to outsource their logistics function must address each
of these issues carefully, so that contract logistics can be a catalyst for
improvement, rather than another problem to handle. By considering various
aspects of the outsourcing process cautiously, firms can expect to achieve
greater success with third-party logistics.

Considerations in the outsourcing process

The outsourcing decision is a variant of the classical make/buy decision (Maltz
and Ellram, 1997): companies can either invest in building a logistics
organization, or they can contract this function out (Sheffi, 1990). Heinritz et al.
(1991, pp. 161-6) consider factors related to quality, capacity, labor, scheduling
and skill to be important in a make-or-buy decision. The firm also needs to
determine the benefits of outsourcing according to some criteria, such as, return
on assets (Trunick, 1989) and include the risk factor in the sourcing decision
(Bradley, 1994c). Other considerations include fit with corporate objectives;
strengths and strategy; social, political and environmental concerns; secrecy
and market conditions (Leenders and Nollet, 1984).
To make use of external logistical services to their greatest benefits, firms
must first understand the various types of logistics functions that may be
outsourced. The next step involves the evaluation of these functions to choose Outsourcing of
the specific ones for outsourcing (Dobler et al., 1984, p. 95). Decision-makers logistics
need to know how their product and the organization can be affected by functions
outsourcing the logistics function. They need to gain insight into key issues
relating to the acquisition of these services (Sink and Langley, 1997). Goldsmith
(1989) believes that the best way for a firm to begin to assess its current
logistics capabilities and needs is by posing a series of questions. Some of the 97
key questions are:
• What are our company’s most significant logistics considerations:
Competitive position? Bottom-line cost? Inventory control of finished
goods?
• Do we have adequate manpower for these functions? Do we have a
knowledgeable logistics staff, enough support, and third-party help?
• Have we made a current cost-benefit analysis of internal staffing versus
outsourcing to accomplish our goals?
The answers, or even the process of reviewing these questions, should provide
top management with an understanding of the strengths, weaknesses and
future needs of its logistics operations. Companies should choose third-party
logistics providers by matching up the needs of their companies with the
essential competencies of the potential logistics service providers (Buxbaum,
1994).
Copacino (1994a; 1994b) presents a comprehensive framework to help
managers in assessing how their logistics decisions will affect their companies’
operations at the strategic, structural, functional, and implementational levels.
It addresses customer service issues at the strategic level; channel design and
network strategy issues at the structural level; warehouse design and
operations, transportation management, and materials management issues at
the functional level; information systems, policies and procedures, facilities and
equipment, and organization and change management issues at the
implementational level. Use of this framework helps companies to decide
whether to make or buy logistics services. It should, however, be noted that the
factors critical to the design of a logistics structure include:
• an accurate definition of customer service;
• some inside knowledge on competitors; and
• flexibility of the structure to incorporate a speedy response to future
needs of the existing or new customers (Bingham, 1994).
Modeling, a more objective and systematic method to determine make-or-buy,
has also become an integral part of logistics analysis and decision making.
Optimization (Powers, 1989), heuristics (Ballou, 1989) and simulation models
(Bowersox, 1989) may be instrumental at this juncture. A buy decision prompts
the firm to determine, explicitly, its reason(s), measurable objective(s) and
requirement(s) for outsourcing (Bowman, 1995; Maltz, 1995; Traffic
IJPDLM Management, 1992; Trunick, 1989). It is essential to take into consideration
28,2 whether the firm plans to be a service leader or compete on costs. The firm must
ask whether it needs someone merely to take over discrete functions, such as
warehousing or transportation, or to revamp a distribution operation. More
specifically, a thorough evaluation of how the functions that have been selected
to be outsourced have been performing in-house is a must. It is crucial to match
98 a third-party’s strength to the firm’s weaknesses. The firm needs to determine
how well these services can be integrated into its operations (Trunick, 1989).
Achievement of a high level of customer service demands a match between a
firm’s logistics requirements and the offerings of the logistics providers.
After choosing the logistics function to be outsourced, the firm is required to
select from among the prospective vendors. Following this would be the
negotiation stage (Heinritz et al., 1991, pp. 150-59). Some key ingredients in a
logistics contract are competitive rates, equipment needs, service standards,
extraordinary items, e.g. special handling for products, escape clause to
terminate contract, provision for performance reviews, provision for reports,
options to extend the length of the contract term or increased pricing and
insurance requirements (Richardson, 1993d).

Selection of third-party logistics providers

One of purchasing’s paramount responsibilities is to select a capable group of
suppliers (Dobler et al., 1984, pp. 95-112; Soukup, 1987). According to Maltz
(1995), a proper supplier selection procedure is critical for two reasons:
(1) Good procedures will maximize a firm’s chances of picking the third
party most suited to its needs.
(2) Correct procedures will insure that all the stakeholders can contribute to
the selection and as a result, accept the final choice.
Hence, understanding the characteristics and capabilities of third-party
logistics providers, appears to be a logical first step in this selection process. An
effective selection process uses cross-functional teams to evaluate and review
third parties. There should be a constant effort in measuring the performance of
the service providers and the firm’s entire logistics operations (Foster, 1994).
Some important criteria that are commonly used in the evaluation of third
parties include:
• Ability to provide highly detailed logistics data preceding, during and
following shipments (Bradley, 1994b; Cuthbertson, 1995; Maltz, 1995).
• Business arrangements, e.g. incentives for performance, replacement of
equipment, etc. (Bradley, 1994a).
• Business development, e.g. accounts gained and lost (Bradley, 1994a).
• Business experience, e.g. how long in the third-party business, depth of
management experience, the strength of operating management, the
quality of the work force, etc. (Bradley, 1994a; Harrington, 1994).
 • Capabilities/competency, e.g. ability to meet the firm’s need, provide a Outsourcing of
variety of services, wide geographic coverage and utilize specialized logistics
equipment (Bradley, 1994a; 1994b; Harrington, 1994; Maltz, 1995). functions
• Compatibility of third party’s technology and the firm’s requirements
(Harrington, 1994).
• Financial stability/strength (Bradley, 1993a; 1994a; Cavinato, 1991; 99
Maltz, 1995; Minahan, 1995).
• High and improving standards, e.g. having a formal quality process
(Bradley, 1994a).
• Location, e.g. near manufacturing facilities (Bradley, 1994a).
• Management structure (Cavinato, 1991).
• Opportunities to develop long-term relationships (Maltz, 1995).
• Price (Bradley, 1994b; Maltz, 1995).
• Reliability (Bradley, 1994b).
• Reputation (Maltz, 1995).
• Service quality (Bradley, 1993a; Maltz, 1995).
• Speed (Bradley, 1994b; Cooke, 1994a).
• Supplier certification (Gibson et al., 1995).
• Support services, e.g. availability of assets and human resources,
information and communications systems, etc. (Bradley, 1994a).
• Systems flexibility and capacity (Maltz, 1995).
The unstructured nature of the decision problem makes the task of evaluation
of suppliers difficult and requires a multi-criteria decision-making method to
help solve the problem (Mohanty and Deshmukh, 1993). However, the use of
quantitative analytical method (Weber and Ellram, 1993) and an expert system
(Ozsomer et al., 1993) to aid in the evaluation of logistics providers have also
been suggested.

Caveat in outsourcing logistical services

Firms must be mindful that certain functions should be kept in-house. Those
advocating the use of outsourcing tend to assert that if a particular logistics
function is part of a firm’s core competency, then it should be kept in-house
(Lieb, 1992; Sheffi, 1990). Through its core-competencies a firm can gain both
efficiency and stability (Quinn, 1993) and reduce costs by focusing its resources
on what it does best. It has also been suggested that primary responsibilities
such as, customer service, materials replenishment, and inventory control, on
which logistics managers are measured, should be kept in-house: outsourcing
them tantamount to abrogating firms’ management responsibility (Bradley,
1994a). David G. Waller of Andersen Consulting has been reported to have
IJPDLM advised firms not to underestimate the value of their own operations (Bradley,
28,2 1995b).
Since quality logistical support is crucial to meeting the challenge of
distributing products and services in a timely and cost-effective manner,
customer service has gradually become one of the commonly outsourced
logistics activities (Daugherty et al., 1996). Indeed, the range of third-party
100 services seems to be expanding to encompass activities generally associated
with customer service (Cooke, 1995).
Small firms must be more careful in outsourcing. They must first adopt a
more strategic view of logistics that looks at outsourcing as a potential source
for competitive advantage. They must view logistics as a profit center, not a
cost center (Foster, 1994).

Critical success factors of outsourcing

In order to ensure the success of using contract logistics, certain additional
factors are to be considered during and after the implementation of the
outsourcing process. The first and foremost is that decision to outsource must
come from the top. Communication between logistics users and providers
(Andel, 1994; Bowman, 1995; McKeon, 1991; Trunick, 1989), which is essential
for the coordination of internal corporate functions and outsourced logistics, is
also a very important factor in this respect. Firms need to specify clearly to
service providers their role and responsibilities as well as their expectations and
requirements.
Internal communication is also equally important. It has been asserted that
managers must communicate exactly what they are outsourcing and why –
then get the support of every department (Bowman, 1995). Richardson (1990)
and Maltz (1995) also emphasize the importance in educating management of
the benefits of contract logistics. Management needs to be convinced to try
outsourcing and view it as a strategic activity.
Success of outsourcing depends on a user-provider relationship based on
mutual trust and faith (Bradley, 1994c; Sheehan, 1989). This does not imply that
control measures are redundant, firms should mandate periodic reporting by
the service providers (Distribution, 1995; Richardson, 1990). The need to select
third parties wisely and maintaining control while building trust is very
important (Richardson, 1994). Any deal must be tied to internal controls that
link all payments to invoices, bills of lading, or purchase orders (Bradley,
1994a). A crucial aspect of successful outsourcing linking to trust is that users
ought to be willing to part with proprietary information, which can help a
capable third party to reduce total logistics costs (Bowman, 1995). On the other
hand, service providers have the responsibility and obligation to protect users’
sensitive data on products, shipments and customers (Distribution, 1995).
According to Richardson (1990), there are several other critical factors that
make outsourcing work. They include focus on the customer; establishing
operating standards and monitoring performance against those standards;
knowing the payback period, benefits expected by the firm, and the means to
achieve those benefits. Factors such as being aware that outsourcing may Outsourcing of
require a longer term of service than the firm is used to and building logistics
information systems that will allow the firm to make ongoing cost/value functions
comparisons are also critical. However, for McKeon (1991) understanding each
other’s cultures and organizational structure to ensure a good match, and
knowing logistics strategy, i.e., understanding the logistics function’s role in
meeting the business objectives of the firm (e.g. differentiation or low cost) are 101
the most important factors for successful outsourcing. The business objectives
of the firm may dictate the extent to which it will use partners: outsource a
single function or outsource all key functions.
The importance of the human factor in outsourcing also cannot be
undermined. The firm must involve the people currently providing the logistics
service since their expertise enables them to facilitate the transition from in-
house logistics to third-party logistics. Furthermore, they must be given an
opportunity to move with the function if outsourcing is implemented, proving
how valuable they can be. However, there is the risk that the fear of getting
retrenched due to outsourcing of a function may prompt current employees to
sabotage the process (Maltz, 1995).
The success criteria needed to establish sustainable partnerships in the area
of contract logistics are the various relationships between the people involved.
Open and honest environment, key management, coherent and effective internal
measurement systems, mutual respect and empathy, commitment to
investment, and financial and commercial arrangements are of particular
importance in this aspect. Mark Bedeman of Excel Logistics maintains that a
successful contract logistics program requires cross-functional management
commitment to logistics as a process involving purchasing, operations and
physical distribution, and it must interact with sales and marketing (Byrne,
1993). Trunick (1989) reports that according to Joseph Nicosia, vice-president –
sales and marketing for Customized Transportation Inc., success in contract
logistics also depends on repeatability (to perform consistently every day), and
discipline (to maintain low margin for error).
It is evident that, to make contract logistics work, a high level of commitment
and resolution is needed on the part of the buying firms. Management must
examine critically each of these success factors to determine how they can be
put into practice. Only then firms can truly harness the benefits of outsourcing
and to develop long-term partnerships that manifest the many advantages that
are possible with the use of third-party logistics.

Outsourcing: toward logistics partnership

Robert V. Delaney of Cass Logistics has suggested that “the objective of both the
service user and the service provider is to achieve an open, long-term business
relationship that applies the learning curve in order to continually improve the
business process” (Bradley, 1994c). Fully contractual relationships range in
scope from outsourcing to strategic alliances, with increasing complexity at
each level of the relationship (Transportation and Distribution, 1988).
IJPDLM Outsourcing is a specifically defined contractual relationship that is dependent
28,2 on the supplier meeting the buyer’s defined performance goals. A strategic
alliance, on the other hand, is a planned ongoing relationship where both parties
have needs that the other can fulfill, and both firms share values, goals and
corporate strategies for mutual benefits. This includes sharing of information
(Bowersox, 1990; Sheehan, 1989) along with the risks and rewards of the
102 relationship (Gentry, 1993) thus highlighting the importance of winning
together (Buxbaum, 1995). In addition, the benefit of synergy (Bowersox, 1990),
strong communication and commitment (TM Staff, 1993), organizational,
cultural and managerial compatibility (Ellram, 1990); and a high level of inter-
dependence have also been emphasized as integral to the strategic alliance.
Outsourcing of logistics functions can have major consequences for a
company’s customer relationships. The full benefits of outsourcing is
manifested in partnerships and these partnerships require commitment of third
parties on a continuing long-term basis, not just on a short-term, contractual
basis (Heinritz et al., 1991, p. 174). Scholars (e.g. Matz and Ellram, 1997) have
recognized the importance of such relationships in making outsourcing
decisions. However, the transition from transactional purchasing arrangements
to something approaching true partnerships in a third-party logistics
relationship proves more an ideal than a reality. Bernard La Londe is on record
to have said that most of the problems derive from causes such as
management’s lack of trust on third parties, reluctance of buyers to share
information with the supplier, and third-party providers’ unwillingness to make
the commitment necessary to form real partnerships – they turn away quickly
when they think they cannot meet the buyer’s requirements (Bradley, 1993b).
Successful partnerships tend to fall into two categories: those in which both
sides have made substantial financial investments, and those where the
relationship has developed and expanded over a long time (Bradley, 1993b).
According to Gooley (1994a), successful partnerships generally follow the
following five principles:
(1) Concentrate business with relatively few partners. By doing so, the buyer
gets better pricing and better service.
(2) Carry out joint improvement efforts with partners – identify operational
and service areas that need improvement.
(3) Institute a formal system for measuring partners’ performance – help to
verify provider’s compliance with the service contract’s terms, and to
help identify trouble spots.
(4) Employ a two-way feedback system. Partnerships thrive on
communication that allows both parties to discuss problems and decide
on plans of action.
(5) Let partner performance determine routing choices and rate level.
Gentry (1993) argues that although every partnership is unique, increased
partnering efforts typically share the same common goals of attaining superior
quality conformance, cooperating on cost reduction programs with a Outsourcing of
minimization of risks, and sharing expertise, and new technology. In a strategic logistics
alliance, there is a commitment between the buying and selling firms to jointly functions
improve quality and productivity to reduce overall costs. Buyers and suppliers
in strategic partnerships utilize joint problem-solving efforts to develop mutual
responses to changes in the marketplace.
Partnership between firms demand high level of understanding (Richardson, 103
1993c) by firms of their own business as well as the business of their
counterparts. Buying firms are able to achieve superior customer service by
working closely with their partners to improve the logistics process. Together,
they could offer faster deliveries and more accurate information. It is through
such long-term relationships that contract logistics draws its strength as a
powerful and effective source of strategic advantage.

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