Client-3PL Relationships: How expectations & asymmetry affect mutual satisfaction. Robert Wiedmer Doctoral Candidate

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1 Client-3PL Relationships: How expectations & asymmetry affect mutual satisfaction Robert Wiedmer Doctoral Candidate Dr. Yemisi Bolumole Assistant Professor Dr. Judith Whipple Professor Department of Supply Chain Management Michigan State University East Lansing, MI 48824

2 CLIENT-3PL RELATIONSHIPS: HOW EXPECTATIONS & ASYMMETRY AFFECT MUTUAL SATISFACTION Introduction Over the past several decades, firms have focused on identifying and maintaining their core competencies. As a result, many firms have increasingly engaged in outsourcing of activities that are not considered core. Much of the attention in the academic literature has focused on efforts to outsource materials, components and products however, firms outsourcing efforts are not limited to tangible products. In fact, significant outsourcing efforts have focused on service operations. In the supply chain arena, the demand for outsourced services has encouraged the development of logistics service providers also known as third party logistics providers (3PLs). The 3PL industry has been growing over the past two decades, as outsourcing offers firms a strategic option for improving their performance in the absence of specific capabilities. Manufacturers and retailers use 3PLs that provide services ranging from narrow standalone services to seamless, integrated management of the supply chain. While clients aim to fill capabilities they lack internally, 3PLs seek different outcomes from the relationship. Winning outsourcing bids and maintaining business relationships is difficult and requires significant effort. Therefore, logistics providers are pressured to constantly prove their value to a client and even seek ways to increase the scope of the outsourcing arrangement in order to increase economies of scale. On the other hand, client companies may be hesitant to outsource a greater degree of their operations to a 3PL given such decisions are difficult to reverse. This can be particularly true when the 3PL has assumed a leadership role and facilitates supply chain coordination on behalf of their clients across the supply chain. Zacharia et al. (2011) used the term 1

3 orchestrators to describe this role, which often creates a more strategic client-3pl relationship. Orchestration may be sought by the 3PL to increase the client s switching costs, and creates mutual dependency. Despite this recognized growth in third party logistics services, recent research has noted increasing concerns from buyers of 3PL services with respect to satisfaction and the ability for the 3PL to meet performance expectations (Lieb and Bentz, 2005). It is suggested that this concern may have less to do with 3PL performance and more to do with mounting pressures to control costs, greater contract complexity, increasing client expectations (Maloni and Carter, 2006) and proactive improvement (Wallenburg et al. 2010). In a recent industry survey, poor customer service, inefficient relationship management, and failed expectations were cited as the top three reasons for unsuccessful 3PL outsourcing contracts (Eyefortransport, 2012). In addition, the ability for a 3PL to perform to expectations is often influenced by factors outside the 3PL s control, leading to the potential for client and 3PL dissatisfaction. For example, as indicated by Bolumole (2001), a 3PLs performance can be impacted by the strategic orientation of the client and the nature of the client-3pl relationship. Unfortunately, little research exists to guide clients and 3PL providers with respect to understanding how to create a successful client- 3PL relationship that results in mutual satisfaction. Our current research addresses a variety of the gaps in the current literature (note: only a subset were discussed above due to space constraints). First, we seek to classify client-3pl relationships based on the scope of relationship and level of collaboration. Second, we examine the dyads within each classification type and consider how client- 3PL expectations may impact performance and satisfaction, respectively. We propose 2

4 that differing objectives may lead to different levels of engagement that, in turn, may result in asymmetries that influence the way the relationship is mutually perceived. Methodology The focus of the research was to enhance theoretical understanding of client-3pl relationships and their success. To gain a deeper understanding of the phenomenon of interest, we employed the case-study methodology (Yin, 2009). As we want to understand both the client and 3PL perspectives, we conducted dyadic research (Maloni and Carter, 2006). Six client-3pl relationships were examined through in-depth interviews with managers from the client and its corresponding 3PL provider. The unit of analysis was the client-3pl dyad. Interviews were conducted either face-to-face or via telephone. All interviews were recorded, and transcripts of the interviews served as the basis for data analysis. In addition, researcher observations and printed material or publications from each firm were collected and utilized as appropriate. The transcribed interviews were analyzed using a qualitative data analysis software package, Atlas Ti. Preliminary Results The case analysis identifies three specific types of dyads with respect to outsourcing and contract scope across the six client-3pl dyads. The first type represents functional relationships that are relatively narrowly focused on a particular sub-area of the 3PL s expertise. For example, one dyad, while illustrating a strong relationship using on-site 3PL representatives at the client, was focused solely on transportation volume. The second type illustrated involves a standard approach that adopts a medium-to-full service scope in terms of 3PL outsourcing. The third type of dyad exhibits full 3

5 orchestration. At this level, the 3PL operates as a platform integrator, connecting the client firm with other members of its supply chain (e.g., customers, suppliers, or other 3PL providers). In one of the dyads in our study that exhibited orchestration, the relationship was very collaborative to the point that the client even participated in the hiring of staff at the 3PL dedicated to the client s business arrangement. Based on our preliminary observations, we find that logistics providers are often challenged to highlight their potential value proposition to the client. In functional and standard arrangements, infrequent information exchange makes it difficult for the 3PL to effectively communicate the actual value added to the client. While the 3PL may be committed to the relationship in its willingness to invest resources that exceed the expectations set in the contract, the customer may not see the value of the contribution and/or takes the exceeding effort for granted. This expectation gap leads to a mission creep as the client s expectations of the role of the 3PL and the contractual agreement increasingly become mismatched. Although further evidence needs to be identified in the cross-case analysis, our initial findings illustrate the different roles that clients and 3PLs have in each outsourcing contract. Even when mutual dependencies exist, customers tend to appreciate immediate wins as means to justify outsourcing value. 3PLs, on the other hand, tend to emphasize more long-term objectives especially those that can sustain growth in business. Given these differing goals and asymmetries, we found mixed results on satisfaction and selfinterest seeking behavior, which may be contradictory to the predictions of agency theory (Jensen and Meckling, 1976; Eisenhardt, 1989). 4

6 From the data, we see that these role asymmetries and perception gaps often appear to lower the satisfaction quotient of both firms and ultimately performance of the outsourcing relationship. The 3PL is not able to gain expected operational efficiencies in expansion due to the clients inability to understand the value of such scope increases. We also find initial evidence that suggests orchestration may be a useful strategy to close this perception gap because the 3PL is better able to communicate its potential value, which, in turn, is more likely to be recognized by the client. Additionally, relational quality (e.g. trust, longevity, communication) was identified as an important means for closing the perception gap. 5

7 References Bolumole, Y.A The supply chain role of third-party logistics providers. The International Journal of Logistics Management 12 (2): Eisenhardt, K.M Agency Theory: An Assessment and Review. The Academy of Management Review 14 (1): Eyefortransport PL perspectives 2012: Shippers and 3PLs perfect together. Retrieved May 2014 from Logistics-Outsourcing-Strategy-Report-2012.pdf. Jensen, M.C., and Meckling, W.H Theory of the firm: Managerial behavior, agency cost and ownership structure. Journal of Financial Economics 3 (4): Lieb, R., and Bentz, B.A The Use of Third-Party Logistics Services by Large American Manufacturers: The 2004 Survey. Transportation Journal 44 (2): Maloni, M.J., and Carter, C.R Opportunities for Research in Third-Party Logistics. Transportation Journal 45 (2): Wallenburg, C.M., Knemeyer, A.M., Goldsby, T.J., and Cahill, D.L Developing a Scale for Proactive Improvement within Logistics Outsourcing Relationships. International Journal of Logistics Management 21 (1): Yin, R.K Case study research: Design and Methods. 4 th ed., Thousand Oaks, CA: Sage. Zacharia, Z.G., Sanders, N.R., and Nix, N.W "The Emerging Role of the Third- Party Logistics Provider (3PL) as an Orchestrator." Journal of Business Logistics 32 (1):

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