Managing effective third party logistics relationships: What does it take?

Journal of Business Logistics, 1999 by Boyson, Sandor, Corsi, Thomas, Dresner, Martin, Rabinovich, Elliot

INTRODUCTION

The outsourcing of logistics functions to companies, known as "third party logistics providers," has increasingly become a powerful alternative to the traditional, vertically integrated firm. A growth in the number of outsourcing relationships has contributed to the development of more flexible organizations, based on core competencies and mutually beneficial longer-term relationships. A 1995 survey of the chemical industry by A.T. Kearney,1 for example, found that the average number of outsourcing relationships per company had grown from 1.5 in 1989 to 5.5 in 1994. Overall, some 60% of Fortune 500 companies report having at least one contract with a third party logistics provider.2

The development of logistics relationships has brought mixed results. Across many industries, logistics outsourcing is a rapidly expanding source of cost savings, competitive advantage, and customer service improvements. For example, Lieb, Millen, and Van Wassenhove3 report that some firms routinely have achieved 30 to 40 percent reductions in logistics costs and have been able to greatly streamline global logistics processes as a consequence of outsourcing. However, in other cases, logistics outsourcing has become a source of corporate failure and disappointment. Unsuccessful outsourcing relationships have been generally attributed to unclear goals and unrealistic expectations, internal sabotage by managers at the firm engaging in outsourcing, and flaws in the contractual agreement linking the parties involved.4

Clearly, the success of logistics outsourcing agreements depends heavily upon the management skills of the firms engaging the services of third party logistics providers. This research focuses on how best to manage a third party logistics relationship5. In particular, it has the following primary objectives:

To identify the primary reasons for outsourcing logistics functions.

To identify the most effective means and methods for evaluating and selecting third party logistics providers.

To identify the most effective means for organizing, operating, and monitoring third party logistics relationships.

To measure the contribution of logistics outsourcing to a firmis competitive advantage, customer service levels, and overall logistics costs.

The remainder of the paper is structured as follows. Section two briefly examines the literature on logistics outsourcing; Section three describes the research methodology; Section four presents the research results; Section five draws conclusions from the research; and Section six provides managerial implications from this work.

LITERATURE REVIEW

There has been extensive research on logistics outsourcing in the United States.6 In a seminal effort, Bowersox, Daugherty, Droge, Rogers, and Warldlow7 identified the use of specialized skills, the ability to achieve scale economies, a reduction in capital risk levels, and the need for creative management as basic justifications for the acquisition of external logistics services. They also identified several guidelines for forging successful logistics alliances.8

Sheffi9 identified the major contributing factors to the development of logistics outsourcing as pressures from increased competition, increasingly high levels of service expectations, worldwide deregulation, and advances in computers and communication technology. Leahy, Murphy, and Poist" surveyed 37 third party logistics providers and identified factors considered as influential to successful outsourcing relationships. Their respondents perceived customer orientation and dependability as the most important factors in a successful outsourcing relationship.

Bardi and Tracey' and Lieb and RandallI2 surveyed firms using outsourcing services (rather than third party providers, themselves) to determine the extent to which they used the services of outsourcing partners. In general, the results from these surveys suggested that: ( I ) the outsourcing of logistics functions is becoming increasingly common; (2) the most commonly outsourced functions are those that are non-core, routine-based, or asset based; (3) cost reductions and customer service level improvements are the main reasons behind the outsourcing decision; (4) firms are, in general, satisfied with the improvements resulting from outsourcing; and (5) fear of loss of control, and uncertainties about the service levels to be provided by third party providers, are the main obstacles toward logistics outsourcing.

Finally, Sink and Langley performed a comprehensive literature review, conducted 11 in-depth interviews with logistics executives, and surveyed 116 logistics managers in the United States and Europe, in order to explore the outsourcing trend.13 The authors found that logistics outsourcing involves a high degree of communication and interaction between different levels of the outsourcing firm and between the firm and the third party provider. 14 They also concluded that an ongoing third party logistics service evaluation is important to sustain effective performance of the logistics functions outsourced.'5 Some other findings in the Sink and Langley study parallel those of Bardi and Tracey"6 and Lieb and Randall. 7 For example, Sink and Langley indicated that the majority of survey respondents are satisfied with the service provided by third party logistics companies. 18 They also reported that outbound transportation, freight paymentlauditing, and warehousing operations are the functions more commonly outsourced by survey respondents, while information systems, cross docking, and traffic management/fleet operations are the functions more likely to be outsourced in the future.19 Finally, they indicated that the majority of their survey respondents perceive a considerable opportunity for their firms to outsource integrated logistics functions to third party providers in the future.20