relative importance of cost and quality in the outsourcing of warehousing, The

Journal of Business Logistics, 1994 by Maltz, Arnold B

Logistics in the United States remains heavily oriented toward company-owned operations such as proprietary field warehouses and private trucking fleets. Delaney estimates that private carriage accounts for over half of all intercity motor carriage.(1) Both Delaney(2) and La Londe and Maltz(3) estimate that private warehousing provides over 85% of all domestic warehousing services. At the same time, various surveys of logistics practitioners indicate an increasing interest in using third parties to perform part or all of the logistics function.(4) The increased interest in third-party logistics should translate into significant growth opportunities for logistics services companies, provided they position themselves to compete effectively against internal service groups.

The premise of the research reported here is that the logistics make-or-buy decision is essentially an industrial purchasing issue. Findings from the transportation, warehousing, industrial marketing, and purchasing literatures are integrated to form a proposed model of the logistics outsourcing decision. The model is then tested in a multi-industry study of warehouse usage. The findings of the study should help third-party providers compete more effectively with internal logistics service groups.

The paper is divided into four parts. The first section is a selective review of the relevant industrial marketing, transportation, and purchasing literature, with particular emphasis on the cost/quality trade-off. Since the details of the warehousing market are important to the study, a summary of warehousing alternatives is also included in the first section. The second section details the research design including the survey instrument, sample selection, and nonresponse bias tests. The third part of the article reports the results of the survey and the tests of model fit. The final section discusses the implications of the research findings for marketers of third-party logistics services.

This paper takes into account work from several disciplines, all of which have addressed either the general purchasing decision, the make-or-buy/vertical integration decision, or both. The thrust of the work is to assess the applicability of this previous work to the logistics outsourcing question. Findings from previous work are summarized in Table 1. (Table 1 omitted) A separate discussion of the conclusions from each area follows.

The need to balance cost versus quality in the purchase decision has been taken for granted in both the industrial marketing(5) and purchasing areas. Models of industrial buyer behavior emphasize the importance of rational motives, which are characterized by trade-offs between quality and cost.(6) Purchasing texts emphasize the need to balance quality and price,(7) or to "buy materials of the right quality...at the right price."(8) Lehmann and O'Shaughnessy(9) found that economic criteria and performance criteria were the dominant factors in most industrial purchasing decisions, although the relative weighting varied by type of product.

The outsourcing or make-or-buy question has been discussed specifically in the general management literature since 1914.(10) However, the decision usually has been addressed in terms of the costs of the competing alternatives. As Porter notes, "many vertical integration decisions are framed in terms of the 'make-or-buy' decisions, focusing on the financial calculations such a decision entails."(11) The emphasis on cost savings as a key factor in outsourcing is reflected in the research of Cavinato and others,(12) who found that cost savings was the most important benefit expected from outsourcing.

There also exists a large body of literature directed specifically at logistics purchasing decisions. Prior empirical work in warehousing is relatively sparse. La Londe and Cooper found that private warehousing was approximately two-thirds of total warehousing in 1987.(13) However, they did not pose the outsourcing issue directly. Speh and Blomquist(14) studied sixteen warehouse users in depth. Although the primary focus of the study was financial evaluation procedures, Speh and Blomquist note that, "generally, the decision to own is based more heavily on service requirements and corporate policy than on hard and fast financial rates of return associated with ownership."(15) Finally, McGinnis, Kohn, and Myers found that both a qualitative/intuitive factor and a quantitative financial factor seemed to characterize the decision to invest in private warehousing.(16)

The transportation choice literature has consistently found that service quality, rather than price or cost, is the most important factor in mode selection and carrier selection. The issue of cost vs. service was directly addressed by McGinnis.(17) In a survey of twelve empirical studies over a twenty-year period, service was consistently rated above cost in terms of importance to the mode and/or carrier selection decision. However, only the study by Jones(18) addressed the make-or-buy issue. Jones found that shippers ranked service considerations substantially above cost considerations for using private carriage.