International Journal of Research in Management, Science & Technology (E-ISSN: 2321-3264) Vol. 2, No. 3, December 2014 Available at www.ijrmst.org Coping Strategy for Outsourcing Services to Third Party Logistics (3PL) Providers *1Ugwu, K. E., 2Okoroji. L 1Department of Financial Management Technology; 2Department of Transport Management Technology 1, 2 Federal University of Technology Owerri, PMB 1526 Owerri Imo State, Nigeria Corresponding Author: nzeribe20@yahoo.com Abstract— Logistics has been identified as a very significant factor that triggers business and the economy. Study investigates impact of logistics outsourcing on third party logistics (3PL). Increase in globalization and international competition, use of information communication technology (ICT) have triggered most firms to outsource their none competence to third party logistics so that they can focus only on their core competence with the purpose of achieving cost reduction, economics of scale production, quality improvement, maintain flexibility among others. Study was conducted using secondary data sourced from; journals, books, archival data among others to achieve study objective. Again, this paper attempts to explain reasons for outsourcing logistics services to 3PLs and conclude by pointing critical success factors necessary for outsourcing. Study found that critical success factor for outsourcing should focus on the following; 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, like being aware that outsourcing may require a longer term of service than the firm is used to and building information systems that will allow the firm to make ongoing cost/value comparisons, are also critical. Finally, primary business focus of outsourcing is also based on service, rather than cost. Based on conclusion, the author recommends further study to consider problems and prospect of outsourcing logistics services to third party logistics. It is also important for future researchers and practitioners to consider possible ways of managing logistics complexities with 3PLs. Again, young researchers can replicate this study using alternative research approach to see if similar or different result will obtained. Finally, the research approach adopted were mainly secondary data, based on this, study is limited to this. decision is made to outsource part or whole of logistics operations to third parties providers to take full advantage of operational efficiencies within the supply chain to be able to focus only on those activities these firms do best (i.e. core competence). Due to this reason, third-party logistics providers have taken over the activities or functions of some businesses to be able to manage them in a better way than what their contemporaries would otherwise do on their own part. The 3PL firms originated in the 1970‟s during the era of globalization and an increased use of information technology (Song & Regan, 2001). These trends have necessitated increased in demands of firms, and potential companies to function more competitively in the emerging market. Sequel to this, the first generation of 3PL‟s have been identified to exist between the period of (1970‟s-1980‟s). They offered services like; transportation, brokerage, and shipping; while, second generation of 3PL‟s existed between the periods of (1980-1990) were mostly asset or non-asset based companies with increased service offerings; and, third generation of 3PL‟s also existed between (2000 and above) were mostly web-based 3PL‟s with increased supply chain integration (Nemoto & Koichiro, 2007). Sequel to this, outsourcing logistics services to 3PL firms have resulted to alot of advantages and disadvantages. Basically, one of the merits of outsourcing logistics services can be triggered due to cost reduction and competitive advantage. However, outsourcing decisions can also resulted to a variety of problems in the following; increased costs, disrupted service and even business failure according to (Cross, 1995). On the otherhand, the same author maintain that poor outsourcing practices also results to an unintended loss of operational level knowledge. An example is a case of Toyota automobile industry that outsources the design and manufacturing of electrical systems for its automobiles, andfocus on its competitive advantage to be able to understand the processes required for this highly specialized work. As a result of this, Toyota was unable to control its own technological advances during product development as pointed by (Lindner 2004). Although, problems resulting from outsourcing of goods and services were common issues detracting managers from outsourcing decisions especially contracting firms. Keywords: Logistics, Third Party Logistics, Outsourcing, One stop Shop, Shipper. 1. I. INTRODUCTION This chapter introduces the following; outsourcing to third party logistics „abbreviated‟ (3PL) firm; reasons and circumstances for outsourcing to 3PL firm; one stop shopping, pre-requisites and reasons for using one stop shopping; types of firms that uses one stop shopping; and critical success factors of outsourcing. In today‟s world of business operations, most companies are competing favourably with their rivals, this is not quite different from the case of logistics firms. Outsourcing has become one of the major coping strategy firms use to remain active in business and this 2321-3264/Copyright©2014, IJRMST, December 2014 93 International Journal of Research in Management, Science & Technology (E-ISSN: 2321-3264) Vol. 2, No. 3, December 2014 Available at www.ijrmst.org Cost reduction: Most firms in the same industry compete with each other for the purpose of reducing cost and a typical example is third party logistics firms. The need for competition triggers 3PL firms to expand their networks with other firms in the same industry towards reaping gains of economies of scale. Apart from that, it is also imperative and expedite for firm to reduce their operational cost, management cost, personnel cost and capital investment cost (Sowinski, 2005). On the other hand, Laarhoven, Berglund and Peters (2000), argue that logistics outsourcing is driven by cost rather than service or quality. Due to these problems, research objective is formulated. Based on this, research objective focus to investigate impact of logistics outsourcing and coping strategy for 3PL providers. Although, a lot of research have been identified on outsourcing. However, very little or no study have been identified on coping strategy for outsourcing logistics services to third party providers (3PL‟s). Based on this reason, this research is necessitated. In addition, this study is quite different from other studies because it attempt to explain reasons for outsourcing and circumstances for outsourcing logistics services to 3PLs and conclude by pointing out critical success factors necessary for outsourcing. The above gap demarcates this study from previous study. To be able to fulfill study objectives, several research questions were asked in the following;  Why do third party logistic firms outsource?  What are the success factors for outsourcing logistics services to third party logistics providers? Although, Wilding (2004) argues that primary business focus on outsourcing is based on service, rather than cost. As mentioned before, out of five main reasons for outsourcing (i.e. cost reduction, coordination of activities, quality improvement, core competence and strategic flexibility); only one is cost related; while others are directly or indirectly service-related which implies that service considerations surpass or control over cost ones. The author stresses that outsourcing decisions in the consumer goods logistics tend to be less cost-driven than they are on average over all industries. Recent study by Langley (2009) state that the most frequently outsourced activities tend to be those that are more transactional, operational and repetitive. These include domestic and international transportation (86% and 84% across all regions), customs brokerage (71%), warehousing (68%), and forwarding (65%). On the other hand, study conducted by Szymankiewicz (1994) also found that most grocery retailers take for granted low cost and good service from 3PLs. The author suggest that costs is a qualifying factor, although not a winning factor for outsourcing. The author believe that companies assume low costs from 3PLs and make outsourcing decisions on other grounds, such as service. To explore this research further, the remaining part of this paper is divided into sections and sub-section in the following; theoretical framework; merits and demerits of outsourcing to 3PL; circumstances for outsourcing to TPL for a specific; firm and product; one stop shopping; pre-requisites for using one stop shopping; reasons for using one stop shopping; types of firms that use one stop shopping; conclusion. 2. II. THEORITICAL FRAMEWORK This section introduces review of previous studies related to main study. A third party logistics (TPL) firm is defined as an external provider who manages, controls and delivers logistics activities on behalf of a shipper (Alfredsson & Hertz, 2003). Related to this, Green et al., (2008) and Skjoett-Larson (2007) note that a first party logistics is a core company providing services or products; second party as the customer (customers) and a third-party, as a firm hired to do that which neither the first nor second party desires to do. According to Green at al., (2008) a third-party logistics firm is a firm that provides outsourced services, some portion or all of their supply chain management functions on behalf of companies. Coordination of activities: One of the reasons for outsourcing to third party logistics (3PL) firms is due to the fact most firms coordinate several activities of customers at the same time with focus to adapt to their individual‟s customers (both products and systems) and/or in problem solving respectively (Sowinski, 2005). Quality improvement: By using the information system of the firms, first party logistics (shippers) and their customers (second party logistics) could more easily improve efficiency in the control of goods through tracking and tracing (Sowinski, 2005). Similarly, Sowinski (2005) emphasizes that some of the logistics services provided by 3PLs includes the following; dedicated contract transportation and transportation procurement, inventory management, logistics management and consulting, freight bill auditing and payment, shipment tracking and tracing, reverse logistics and value added services. Basic reasons for outsourcing to third party logistics firms‟ includes: Cost reduction, coordination of activities, quality improvement, core competence and strategic flexibility. Core competencies and strategic flexibility: Most firms have logistics functions as a support activity which could hire complexity in companies view. Using 3PLs helps firms to concentrate on what they do best and improve on it continuously, while outsourcing other activities (i.e. non core activities) with target to make more profit in the long term (Sowinski, 2005). 2321-3264/Copyright©2014, IJRMST, December 2014 94 International Journal of Research in Management, Science & Technology (E-ISSN: 2321-3264) Vol. 2, No. 3, December 2014 Available at www.ijrmst.org Source : Adapted from the work of Farris (2004); Advantages and Disadvantages of Using Third-Party Logistics Providers. 3PL firms‟ provider distribution network: The global network of the 3PL firms has a large geographical coverage and plays a very important role in providing the services to the final consumer both national and international. 3PL firm's utilizes better resources and opportunity to attract business in shipper's industry. Outsourcing to 3PL firms enables core firms to have access to resources not available in their firms (Sowinski, 2005). According to Wilding (2004), consumer goods companies choose to outsource mainly in order to benefit from the competencies of 3PLs. Flexibility is also very important reason for outsourcing. Related to this, Harrisson (1994) also point that outsourcing provides firm with greater capacity for flexibility, especially in the purchase of rapidly developing new technologies, fashion goods, and or the myriad components of complex systems. 2.2 Circumstances for Outsourcing to TPL for A Specific Firm and Product Taking an example of a consumer electronic firm Panasonic Corporation of North America and a specific product Television, sets the basic reasons for the outsourcing of logistics activities due to increase in globalisation and international competition. Internationalization is one of the driving forces for the customers and customers‟ customer to outsource to TPL firms with aim to cover specific region like America, Europe, Asian, Pacific, Africa and other parts of the world according to (Alfredsson & Hertz, 2003). The help of globalization has become a benchmark for Panasonic logistics which in turn reduces cost for customer or customers‟ customer in the supply chain. However, other reasons for outsourcing to 3PL firm also include; reduced profit margins, top heavy administration, and increased logistics cost. 2.1 Merits and Demerits of Outsourcing to 3PL Farris (2004) point that there are merits and demerits of contracting with a third party in order to outsource portions of the supply chain function. The obvious downside results to loss of control when entrusting critical segments of a business to other firms. According to the author, a company may benefit from the knowledge and expertise of specialized firms with assets and contacts unavailable otherwise. Some of the advantages and disadvantages of 3PL providers are summarized in table as; Advantages Disadvantages Cost reduction Loss of control logistics function Improved efficiency, service and flexibility Impact on workforce Focus on competence More distance from clients- loss of personal touch core 2.2.1 One Stop Shopping LaLonde (1991) refers to one stop shopping as: the concept that allows the buyer of transportation services to buy multimodal requirements (e.g. ocean, surface and air) from one carrier. Multifunction services would also be available from the same carrier and might include warehousing, international information or other services. 2.2.2 Pre-requisites for Using One Stop Shopping over One of the pre-requisite for using one stop shopping is to establish mutual trust between partners in strategic alliance. Whipple and Frankel (2000) noted that trust should be established between partners to share critical information between each other and meeting its longterm needs. It is easier and safer to work with one supplier whom you have know well and trusted over time than to work with multiple suppliers that you do not know. in-house Freeing up resources Discontinuity of services of a third party provider Elimination of infrastructure resources Differences of opinion or perception of a service level of a 3PL providers Compatibility: Partner compatibility involves planning and working together in a productive, solution-oriented manner (Whipple & Frankel, 2000). Most firms carefully select their partners based on trust and previous relationship established over time in one stop services. Sequel to this, proper selection is a key to success factor and incompatibility among one stop partners often result to high failure rate, in Brouthers et al. (1995; Whipple and Frankel, 2000) due to most companies adopts a “seat of pants‟ style in their approach to joint management, and learn lessons the hard way”. This means that most firms only recognize business opportunities that exist out there but lack the Risk sharing Better cash flow Access to resources not available at one‟s own organization 2321-3264/Copyright©2014, IJRMST, December 2014 95 International Journal of Research in Management, Science & Technology (E-ISSN: 2321-3264) Vol. 2, No. 3, December 2014 Available at www.ijrmst.org most firms take a portfolio of services from a one stop shop (Kay, 1997). charisma to scrutinize and implementation agreement or rules made on paper as well as follow up processes without changing trust, culture, mindset of many suppliers involved in partnership. To ensure, effective one stop services, studies of Messinger and Narasimhan (1997) suggests the use of transportation and inventoryholding technologies for one stop shopping. 2.2.4 Types of Firms that Use One Stop Shopping Examples of firms that use one stop shopping are; physical product firms and service firms. Physical product firms are firms that provide physical product (e.g. retailer and supermarket); while service firms are those that could provide a series of various services (e.g. law firm, investment bank, and Telecommunication Company, TPL firms and among others) according to Kay (1997). 2.2.3 Reasons for Using One Stop Shopping There are several reasons for using one stop shopping. These include the following; convenience, stability, shared creativity, increased business, economies of scale and among others (Kay, 1997). III. RESEARCH METHODOLOGY Convenience: Dealing with a single vendor is simplicity and convenience rather than many. There are greatly simplified paper work requirements. This is because only one document is needed for the shipment, this results in relative ease for a shipper to transact his/her businesses. This section discusses research approach and strategy. Study focused mainly on secondary data sourced using; goggle engine, referred academic journals, books, archives among others. Therefore secondary data were used in place of primary data. Stability: The production schedule becomes more predictable when a single contract manufacturer handles an entire project in-house as compared to when manufacturers outsource parts of a job to different firms, therefore one-stop shop doesn‟t have to rely on anyone else, so they can fix more specific scheduled for product. IV. CONCLUSIONS This section provides conclude of study. Conclusion is made by reflecting on research objective and research questions. As mentioned earlier, study investigates impact of logistics outsourcing and coping strategy for 3PL providers. This study attempt to identify several reasons and pre-requisites for outsourcing logistics services to 3PLs. Recent research by Wilding (2004) argues that primary business focus for outsourcing is based on service, rather than cost. The author stresses that service considerations surpass or control over cost ones. This is due to outsourcing decisions in the consumer goods logistics tend to be less cost-driven than they are on average over all industries. This study has noted this as a major reason why third-party logistics outsource logistics services. Management and co-ordination are greatly facilitated: One-stop shops offer seamless transitions from one project phase to another with objective to reduce conflict and increase coordination. Increased business: This is another reason for using one stop shopping. There is an increase in business opportunities arising from one spot to another especially in situation when TPL consolidates loads and deliver to the customers door step. Shared creativity: The sharing of ideas across all stages of the logistic process observed from different vantage points could be another reason for using one stop shopping. To achieve successful outsourcing of logistics services to 3PL, studies of Bowman (1995) noted that decision to outsourcing should come from the top management level. The author further stress that communication between logistics users and providers is very important for effective coordination of internal corporate functions and outsourced logistics. Due to this reason, it is therefore important for firms to specify clearly to their clients what kind of services they provide, and limitations of their services. The same author further stress that internal communication is also equally important. In view of this, managers should communicate verbatim what they are outsourcing and reasons for outsourcing so that every department should carry them along. Richardson (1990) also points the importance of educating management of the benefits of Survival in the competitive international environment: This is very possible because one stop shop provides all logistics services from one place and this may reduce cost, increase profits and competitive advantage. Economies of scale/scope: This is also another reason for using one stop shopping to reduce cost structures as well as increasing higher profit. Better service: Obviously, this is also another reason for using one stop shopping to provide better services to attract more customers or firms. This is important since 2321-3264/Copyright©2014, IJRMST, December 2014 96 International Journal of Research in Management, Science & Technology (E-ISSN: 2321-3264) Vol. 2, No. 3, December 2014 Available at www.ijrmst.org [6] Green, B. F., Turner, W., Roberts, S., Nagendra, A., & Wininger, E., “Practitioner‟s Perspective on the Role of a Third-Party Logistics Provider”, Journal of Business & Economics Research, 2008, 6 (69). [7] Harrison, B. T., Lean and mean: the changing landscape of corporate power in the age of flexibility. New York, USA: Basic Books, 1994. [8] Kay. J., “Getting to the Truth Behind the One-stop shop” Retrieved on September 20, 2013 from http://www.johnkay.com/strategy/89, 1997. [9] Laarhoven, P. V., Berglund, M., & Peters, M., “Third-party logistics in Europe - five years later”, International Journal of Physical Distribution & Logistics Management, Vol. 30(5), 2000, 425, 2000. [10] LaLonde, B. J., “Whatever happened to one-stop transportation shopping?”, Transport Topics, Vol.13, 1991, 1-4. [11] Langley, C. J., The State of the Logistics Outsourcing, 2009 Third-Party Logistics, results and findings of the 14th annual study, 2009. [12] Lindner, J. C., Transformational outsourcing. Sloan Management Review, 45 (2), 2004, 52-58. [13] Maltz, A. B., Why you outsource dictates how. Transportation & Distribution, March, 1995, 73-80. [14] Messinger, R., & Narasimhan, “A Model of Retail Formats Based on Consumers' Economizing on Shopping Time”. Retrieved on September 20, 2013, from : http://mktsci.journal.informs.org/cgi/content/abstract/16/1/1, 1997. [15] Nemoto, T., & Koichiro, T., Advantage of Third Party Logistics in Supply Chain Management. Retrieved on September 26, 2013, from; http://www.cm.hit-u.ac.jp/katsudo/wp/WP_72.pdf, 2007. [16] Richardson, H. L., Explore outsourcing. Transportation & Distribution, July, 1999, 17-20. [17] Skjoett-Larsen, T., Third Party Logistics-From an Interorganizational Point of View. International Journal of Physical Distribution and Logistics Management, Vol. 30 No. 2, 1999, 112127. [18] Song, J., & Regan, A., Industries in Transition: Freight Transportation Intermediaries in the Information Age. Retrieved on September 26, 2013, from; http://www.metrans.org/outreach/confs/jiongmet01.ppt, 2001. [19] Sowinski, L., “Taking Advantage of Expanding 3PL Services”. Retrieved on September 20, 2013from:http://www.worldtrademag.com/Articles/3PL/ff6e07fc6aaf 7010VgnVCM100000f932a8c0, 2005. [20] Szymankiewicz, J., Contracting out or selling out? Logistics Management, 7 (1), 1994, 28-35. [21] Wilding, R. & Juriado, R., Customer perceptions on logistics outsourcing in the European consumer goods industry. International Journal of Physical Distribution & Logistics Management, 34 (8), 2004, 628-644. [22] Wimpple, J. M., & Frankel, R., “Strategic Alliance Success Factors”, the Journal of Supply Chain Management. A Global Review of Purchasing and Supply / summer 2000, 22-27. contract logistics and need to see it as a strategic activity. Apart from that, Richardson (1990) also highlights that other critical success factor for outsourcing should focus on the following; 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, like being aware that outsourcing may require a longer term of service than the firm is used to and building information systems that will allow the firm to make ongoing cost/value comparisons, are also critical. Finally, Maltz (1995) also conclude that the importance of the human factor in outsourcing cannot be underestimated. The firm should 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. Again, they must be given the chance to move with the function if outsourcing is implemented, proving how valuable they can be. Based on the above discussion, study conclude that the following factors such as; increase in globalization and international competition, use of information communication technology (ICT) have triggered most firms to outsource their none competence to third party logistics so that they can focus only on their core competence with the purpose of achieving cost reduction, economics of scale production, quality improvement, maintain flexibility. Others also include; top heavy administration and increased logistics cost; convenience, stability among others. Therefore these factors can serve as the coping strategy for 3PLs. Study recommends further study on outsourcing and ways of managing logistics complexities with 3PLs. Again, future researchers should look at these problems from different perspective to see if similar result will be replicated. Finally, alternative research approach should be adopted to replicate this research. REFERENCES 1. [1] Alfredsson, M., & Hertz, S, “Strategic Development of Third Party Logistics Providers”, Industrial Marketing Management, 2003, 32 (2), 2003, 139. [2] Bowman, R.J, A high-wire Act. Distribution, December, 1995, 936. [3] Brouthers, K.D., Brouthers, L. E & Wikinson, T. J, “Strategic Alliance: Choose Your Partners,” Long Range Planning, 1995, 18-25, In, Wimple, J. M., & Frankel, R, “Strategic Alliance Success Factors”, the Journal of Supply Chain Management. A Global Review of Purchasing and Supply/ summer 2000, 22-27. [4] Cross, J, Information Technology Outsourcing: British Petroleum‟s Competitive Approach. Harvard Business Review, March 1, 1995, 25-31. [5] Farris, B., Dedicated Contract Carriage. Presentation before the Food Marketing Institute. Retrieved, on September 26, 2013, from:http://www.fmi.org/events/2004_Distribution/Outsourcing_Tran sportation.pdf, 2004 2321-3264/Copyright©2014, IJRMST, December 2014 97