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
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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).
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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
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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
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Vol. 2, No. 3, December 2014
Available at www.ijrmst.org
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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.
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