functions: a literature survey

Transcription

1 : a literature survey Mohammed Abdur Razzaque Department of Marketing, National University of Singapore, Singapore and Chang Chen Sheng YCH Group of Companies, Singapore Introduction Management of in modern organizations involves decision making for the complete distribution of goods and services in the marketing function (Watson and Pitt, 1989) with a view to maximize value and minimize cost. A growing awareness that competitive advantage comes from the delivery process as much as from the product (Muller, 1991a) has been instrumental in upgrading from its traditional back-room function to a strategic boardroom function (Foster, 1994). The following reasons have been proposed to explain this trend: There is a growing need to be more responsive to customer service and market demand (Horne, 1989). As an integrative concept that cuts across the traditional of the business (Christopher, 1993), can deliver better customer service. Logistics activities involve a large commitment of capital. The function can be the key facilitator in the cross-functional effort towards supply chain integration (Harrington, 1995a). Hence it is not surprising that concepts such as supply-chain management have now assumed strategic importance. In order to handle its activities effectively and efficiently, a company may consider the following options. (1) It can provide the function in-house by making the service. (2) It can own subsidiaries through setting up or buying a firm (Candler, 1994). (3) It can outsource the function and buy the service. Currently, a growing interest in the third option, i.e., outsourcing has been indicated by the volume of writings on the subject in scholarly journals, trade publications and popular magazines. Although its evolution is one of the most widely discussed contemporary topics in the field of business (Lieb, 1992, p. 29), efforts to organize them in an integrated broad-based body of knowledge have so far been rather limited. With the exception of a very recent 89 Received June 1997 Revised April 1998 International Journal of Physical Distribution & Logistics Management, Vol. 28 No. 2, 1998, pp MCB University Press,

2 IJPDLM 28,2 90 publication by Sink and Langley (1997), most other publications in the area either focus on specific aspects of third-party, or are narrow in their scope and objectives. This paper makes an attempt to bridge the gap and aims at developing a comprehensive literature on outsourcing. Outsourcing: definition and evaluation Outsourcing, third-party and contract generally mean the same thing (Lieb et al., 1993). Jon Africk of consultants A.T. Kearney has defined them as multiple services provided by a single vendor on a contractual basis. They offer at least two services that are bundled and combined, with a single point of accountability using distinct information systems that are dedicated to and integral to the process (Bradley, 1994c). It should, however, be noted that outsourcing may be narrow in scope and limited to one type of service (e.g., warehouse) only (Lieb et al., 1993). According to Bradley (1994a) there is no difference between outsourcing logistical and any other procurement process. He asserts that like a reliable supplier of materials and parts, contract logisticians should also provide a high level of customer satisfaction so that their clients can become a tougher competitor. Traditionally handled by the firms internally as support, activities such as transportation, distribution, warehousing, inventory management, order processing, and material handling have been given low priority compared with the other business. However, the need for developing sustainable competitive advantage, the growing emphasis on providing good customer service effectively and efficiently, and the strategic value of focusing on core businesses and re-engineering (Hill, 1994; Lieb, 1992; Sheffi, 1990) resulted in the evolution of contract which is very different from traditional (see Table I). Service considerations and outsourcing Quality of a system has often been equated with service quality (TM Staff, 1991). As part of its strategic positioning process, a company must choose its customer service strategy; and developing excellence is an important option through which customer satisfaction can be achieved (Kearney, 1994; Schary, 1992). Consistent service at the appropriate level is the natural output of a strategically focused, well-designed and well-run system. Such a system has extraordinary power in achieving goals such as high-quality service despite some cost constraints or low cost despite some service constraints. The system of the company can be differentiated to produce its target service level (Byrnes et al., 1987). The close relationship between and customer service, and its effects on a firm s competitiveness dictate that companies handle their function prudently so as to achieve its full potential as a source of competitive advantage. Outsourcing the function appears to be an important mechanism to realize that objective.

3 Traditional services Contract services Not tailored Tailored Usually one-dimensional trucking or Are multi-dimensional, linking transportation, warehousing for example warehousing, inventory management, systems and others Shippers aim to lower transportation cost Goal is to lower total cost while providing through a contract better service and more flexibility Contracts tend to run for a year or two Contracts are more likely to be of longer duration, multi-year arrangements negotiated at a higher management level Require expertise in, say, transportation of Requires broad and analytical skills packaged materials Contracts generally take less time to negotiate Contracts generally take more time to negotiate Simpler arrangement and relatively low Complexity of arrangements leads to higher switching costs switching costs Source: Adapted from Jon Africk of A.T. Kearney consultants, quoted in Bradley (1994c) 91 Table I. Differences between traditional and contract transport service Drivers of outsourcing Of the many factors that may act as driving forces behind outsourcing, globalization of business has been viewed by many (Byrne, 1993; Foster and Muller, 1990; Rao et al., 1993; Sheffi, 1990; Trunick, 1989) as the most prominent. The continued growth in global markets and foreign sourcing has placed increasing demands on the function (Bovet, 1991; Cooper, 1993; Fawcett et al., 1993; McCabe, 1990; Whybark, 1990). Consequently, it has led to more complex supply chains (Bradley, 1994a) and has involved more transportation and distribution managers in international. Lack of specific knowledge of customs and infrastructure of destination countries forces firms to acquire the expertise of third-party vendors. The increasing popularity of just-in-time (JIT) principles is another major factor promoting outsourcing (Goldberg, 1990; Sheffi, 1990; Trunick, 1989). With the shift to JIT delivery, inventory and control have become even more crucial to manufacturing and distribution operations. The complexities and costs of operating in a JIT environment are prompting many of its potential adopters to supplement their own resources and expertise by using sources outside their corporate structure. Trunick (1989) suggests emerging technology and versatility of third parties as two other important drivers of outsourcing. Since it would be time consuming and expensive to develop and implement new technologies in-house, firms can easily employ those of a third-party. On the other hand, versatility of the third parties enable them to provide an improvement in control, technology, and location, turning fixed costs into variable costs. They have the ability to reconfigure the distribution system to adjust to changing markets or technological advances. Small companies tend to be more interested in thirdparty use (Maltz, 1994) since they are in greater need for expertise and assistance in the area of technology (Harrington, 1995b). The KPMG Peat

4 IJPDLM 28,2 92 Marwick s third annual benchmarking study shows that cost control, followed by information technology and inventory management are the major concerns in respondent companies, and as such, have resulted in further emphasis in outsourcing (Bradley, 1995a). Many other logisticians have suggested various other reasons for outsourcing. A representative list of these reasons is presented in Table II. Drivers of outsourcing Identified by Table II. Some reasons for outsourcing Improved productivity measurements Increase in cost-efficient foreign competition Management demand for a financial contribution from all sectors of the company Mergers and acquisitions that require keeping assets off the books Need to move inventory faster Need for flexible production Retrenchment to core business Muller (1992) A company s need to assess present and future market prospects for its product Company restructuring Development of supply chain partnerships Increasing customer demands and Increasing environmental awareness To determine the products competitive advantage in the marketplace Byrne (1993) Change in management Existing facilities and/or systems Expanding into unfamiliar markets and Taking on new product lines Maltz (1995) The success of firms using contract Bradley (1994a) The focus on temporal aspects of management Cooke (1994b) Trend towards centralized distribution systems Bence (1995) Importance of outsourcing A recent survey by Lieb and Randall (1996) found that the CEOs of third-party companies perceived growing customer interest in outsourcing as the top industry dynamics. This awareness of contract role has been instrumental in compelling the logisticians to learn to adapt to this new intrusion into their territory (Gooley, 1994b). Since firms can often replicate or improve on a competitor s offering with relatively little difficulty, gaining sustainable advantage through product differentiation is rare. Also, it is harder to compete on manufacturing excellence alone. Outsourcing can contribute to profits by enabling users to gain competitive advantage, adding measurable value to products, enhancing customer service, assisting in opening new markets, and providing dedicated resources (Foster and Muller, 1990). Third party providers can enhance value creation for customers leading them to become more competitive and profitable through speedy and superior

5 customer service (Daugherty and Pittman, 1995). Value creation involves the understanding of the dynamic interaction within the customer s supply chain. One of the most important reasons for employing third-party providers is their ability to provide their clients with expertise and experience that otherwise would be difficult to acquire, or costly to have in-house (Byrne, 1993; Dillon, 1989; Goldberg, 1990; Richardson, 1990; 1992; 1993a; 1993b; Sheehan, 1989; Trunick, 1989). Their expertise gained from working with other clients allows users to benchmark against other companies and may lead to opportunities to lower costs and improve customer service. It is believed that a contract company with national and regional expertise can even provide a customer a local image even though that company may have no local presence in assets and employees (Bradley, 1994b; 1994c). With the contract firms as their advisors and innovators, companies can gain since the former add value that translates to profit (Wood, 1993). At the strategic or management level, companies lacking sophisticated information systems might look to outside sources for database management techniques used in forecasting or for handling the information flow loop (Richardson, 1990). Use of contract enables firms to spend more time to pursue strategic planning and management issues, and focus on their core business competency, rather than on (Africk and Markeset, 1996; Foster and Muller, 1990; Lynch et al., 1994; Richardson, 1992; Saw, 1995; Sheehan, 1989; Trunick, 1989). 93 Types of contract vendors According to Goldsmith (1989), public warehousing may be the oldest form of outsourcing in. Later, Richardson (1992) added marketing, packaging, transportation, distribution, import and export to this list. This is justifiable since third parties do have some role in determining where goods are stored, how they are packaged for shipment, and in choosing the best mode for transporting them to the customer (Hill, 1994). Since the third-party providers are also increasingly being utilized for value-added activities such as assembly and quality control (Fawcett et al., 1993) the list is, however, expanding. Some companies are not involved in moving goods at all: they sell software and consulting services that help their customers develop their own efficient transportation networks. Others handle chores such as paying bills and tracking costs of transportation for their customers. Many third-party companies have been found to offer services such as information systems, shipment consolidation, warehouse management/operation, carrier selection, rate negotiations, fleet management/operations, product returns, order fulfillment, customer spare parts, vendor selection and purchasing (Lieb and Randall, 1996). Muller (1993b) appears to be the first to propose two basic types of contract service providers, i.e., operations-based and information-based thirdparty vendors. Later, Muller (1993a) himself modified this classification scheme by suggesting the following four types of vendors:

6 IJPDLM 28,2 94 (1) Asset-based vendors. Companies which offer dedicated physical services primarily through the use of their own assets, typically a truck fleet or group of warehouses or both. (2) Management-based vendors. Involved in offering management services through systems databases and consulting services, often acting as a subcontracted traffic department, either for part, or all, of a client s business segments. These firms do not own transportation or warehouse assets. (3) Integrated vendors. These companies own assets, typically trucks, warehouses or a combination of both. They are not, however, limited to using those assets, and will contract with other vendors on an as-needed basis. (4) Administration-based vendors. Firms which mainly provide administrative management services such as freight payment. This classification scheme is similar to a more recent one proposed by Africk and Calkins (1994) endorsing that asset-based and non-asset-based providers are the two main types of third-party service providers along with a third type providing hybrid services. The asset-based providers could either be capacity-dedicated or assets-dedicated. In the capacity-dedicated situations, the provider commits to meeting certain volume and service levels specified by the buyer, but will use its assets to serve multiple customers. In the assets-dedicated situations, the equipment or facilities service only one customer. The buyer makes a trade-off between a lower price for the capacity-dedicated project, and greater assurance of meeting service requirements with assets-dedicated undertakings. In contrast, the non-asset-based providers generally do not own or lease physical assets but provide human resources and systems to manage the buyer s function. The hybrid services providers are subsidiaries of asset-based contract companies generally specializing in project-based services with some of the physical services offered by the parent company. In terms of their service offerings and relationships with buyers, the hybrids lie somewhere between the asset-based and non-asset-based competitors. There are many benefits of choosing asset-based service providers (Africk and Calkins, 1994). They: have the knowledge and experience in handling and maintaining equipment, facilities, and physical operations; can pass on savings to users; and help to reconfigure operations to improve efficiency, reduce costs and/or improve service. On the other hand, many of the management companies generally tend to focus on a niche, such as international or domestic in-bound. They are a logical alternative when value addition results from co-ordination and integration of flows rather than from a core service such as transportation or

7 warehousing (Bradley, 1994c). It should be noted that no one category of the vendors is inherently superior to another. Buyers should have knowledge about the various providers and make a selection based on their own goals and needs (Muller, 1993b; Sink and Langley, 1997). It has been advocated that instead of focusing on the service providers assets, firms should consider their skills, and see how those skills compliment what the firms have in-house (Minahan, 1995). 95 Advantages of outsourcing fers many advantages to those using it. It reduces capital investment in facilities (Foster and Muller, 1990; Richardson, 1992; 1995), equipment (Fantasia, 1993; Foster and Muller, 1990; Richardson, 1995), information technology (Fantasia, 1993; Goldberg, 1990; Lacity et al., 1995; Richardson, 1995; Sheffi, 1990; Trunick, 1992) and manpower (Foster and Muller, 1990; Richardson, 1992; 1995). This allows the using firm greater flexibility in adapting to changes in the market and access to leading edge technology (Lieb, 1992; Sheffi, 1990). Firms only need to contract for the necessary level of service to meet current demand. When demand surges beyond the capability of a firm to fulfill, a third-party may be called in to help the firm. Thus, the contract logisticians convert a fixed cost to a variable cost for users (Bradley, 1994b; 1994c; Richardson, 1993a). By coordinating production and shipping schedules, outsourcing reduces inventory and improves inventory turnover rate (Richardson, 1990; 1995) resulting in faster transit times, less damage, and less paper work. Contract also enables firms to respond quickly to marketing, manufacturing, and distribution changes (Byrne, 1993) and helps to improve on-time delivery (Richardson, 1995). Third-party users generally agree that it costs less to use such firms than to carry out the same in-house (Candler, 1994; Lieb, 1992). Logistics being their core business, these firms can lower costs by being more efficient than a manufacturer (Bradley, 1994c; Lieb, 1992). Since the use of an outside multiple service provider reduces the needed multiple service contacts for the firm to a single point of contact (Richardson, 1990), coordination costs are also reduced. In a recent Purchasing Magazine survey, more than 50 percent of the participating contract users cited cutting transportation/ distribution costs, freeing up or reducing staff, focusing on the core business and cutting internal administrative costs as major reasons for using third-party. Other reasons cited included acquiring outside expertise, consolidating services, improving service to the company, improving customer service and satisfaction, simplifying the process, avoiding capital expenditures, using provider s information systems, increasing productivity and reducing number of service suppliers (Bradley, 1995a). This study reveals that reasons for outsourcing have not varied much over the years.

8 IJPDLM 28,2 96 Obstacles and problems in outsourcing Just as there are many reasons that favor outsourcing, there are many others that discourage its use. Loss of control to third-party provider(s) appears to be the most commonly cited reservation that inhibits firms from using contract (Bardi and Tracey, 1991; Bowman, 1995; Byrne, 1993; Cooke, 1994b; Lynch et al., 1994; Richardson, 1993a). However, in reality firms do not totally relinquish their control as outsourcing does not absolve firms of the need to monitor their vendors (Bowman, 1994). The two sides need to meet frequently to map strategy and resolve problems as they arise. Byrne (1993) adds that the lack of advanced information technology linking manufacturer, carrier, warehouse, and customer operations has often caused hindrance to contract management. Besides losing control, losing touch with important information, failure to select or manage providers properly, unreliable promises of the providers, their inability to respond to changing requirements, their lack of understanding of the buyer s business goals and difficulty of changing providers have also been cited as potential problems by their users (Bradley, 1995a). A major obstacle to outsourcing is the difficulty of obtaining organizational support (Bowman, 1995). Management s lack of confidence in an outside company to deliver service at as high a level as the company employees is a major issue: the third party may be inadequate in its capabilities to meet users requirements (Cooke, 1994b; Maltz, 1995). Difficulty of assessing the savings to be gained through outsourcing creates additional problems. Also, the use of an outside firm may make the firm s people apprehensive about their jobsecurity: they may develop a fear of being retrenched (Cooke, 1988; Muller, 1991b). Companies planning to outsource their function must address each of these issues carefully, so that contract can be a catalyst for improvement, rather than another problem to handle. By considering various aspects of the outsourcing process cautiously, firms can expect to achieve greater success with third-party. Considerations in the outsourcing process The outsourcing decision is a variant of the classical make/buy decision (Maltz and Ellram, 1997): companies can either invest in building a organization, or they can contract this function out (Sheffi, 1990). Heinritz et al. (1991, pp ) consider factors related to quality, capacity, labor, scheduling and skill to be important in a make-or-buy decision. The firm also needs to determine the benefits of outsourcing according to some criteria, such as, return on assets (Trunick, 1989) and include the risk factor in the sourcing decision (Bradley, 1994c). Other considerations include fit with corporate objectives; strengths and strategy; social, political and environmental concerns; secrecy and market conditions (Leenders and Nollet, 1984). To make use of external logistical services to their greatest benefits, firms must first understand the various types of that may be

9 outsourced. The next step involves the evaluation of these to choose the specific ones for outsourcing (Dobler et al., 1984, p. 95). Decision-makers need to know how their product and the organization can be affected by outsourcing the function. They need to gain insight into key issues relating to the acquisition of these services (Sink and Langley, 1997). Goldsmith (1989) believes that the best way for a firm to begin to assess its current capabilities and needs is by posing a series of questions. Some of the key questions are: What are our company s most significant considerations: Competitive position? Bottom-line cost? Inventory control of finished goods? Do we have adequate manpower for these? Do we have a knowledgeable staff, enough support, and third-party help? Have we made a current cost-benefit analysis of internal staffing versus outsourcing to accomplish our goals? The answers, or even the process of reviewing these questions, should provide top management with an understanding of the strengths, weaknesses and future needs of its operations. Companies should choose third-party providers by matching up the needs of their companies with the essential competencies of the potential service providers (Buxbaum, 1994). Copacino (1994a; 1994b) presents a comprehensive framework to help managers in assessing how their decisions will affect their companies operations at the strategic, structural, functional, and implementational levels. It addresses customer service issues at the strategic level; channel design and network strategy issues at the structural level; warehouse design and operations, transportation management, and materials management issues at the functional level; information systems, policies and procedures, facilities and equipment, and organization and change management issues at the implementational level. Use of this framework helps companies to decide whether to make or buy services. It should, however, be noted that the factors critical to the design of a structure include: an accurate definition of customer service; some inside knowledge on competitors; and flexibility of the structure to incorporate a speedy response to future needs of the existing or new customers (Bingham, 1994). Modeling, a more objective and systematic method to determine make-or-buy, has also become an integral part of analysis and decision making. Optimization (Powers, 1989), heuristics (Ballou, 1989) and simulation models (Bowersox, 1989) may be instrumental at this juncture. A buy decision prompts the firm to determine, explicitly, its reason(s), measurable objective(s) and requirement(s) for outsourcing (Bowman, 1995; Maltz, 1995; Traffic 97

10 IJPDLM 28,2 98 Management, 1992; Trunick, 1989). It is essential to take into consideration whether the firm plans to be a service leader or compete on costs. The firm must ask whether it needs someone merely to take over discrete, such as warehousing or transportation, or to revamp a distribution operation. More specifically, a thorough evaluation of how the that have been selected to be outsourced have been performing in-house is a must. It is crucial to match a third-party s strength to the firm s weaknesses. The firm needs to determine how well these services can be integrated into its operations (Trunick, 1989). Achievement of a high level of customer service demands a match between a firm s requirements and the offerings of the providers. After choosing the function to be outsourced, the firm is required to select from among the prospective vendors. Following this would be the negotiation stage (Heinritz et al., 1991, pp ). Some key ingredients in a contract are competitive rates, equipment needs, service standards, extraordinary items, e.g. special handling for products, escape clause to terminate contract, provision for performance reviews, provision for reports, options to extend the length of the contract term or increased pricing and insurance requirements (Richardson, 1993d). Selection of third-party providers One of purchasing s paramount responsibilities is to select a capable group of suppliers (Dobler et al., 1984, pp ; Soukup, 1987). According to Maltz (1995), a proper supplier selection procedure is critical for two reasons: (1) Good procedures will maximize a firm s chances of picking the third party most suited to its needs. (2) Correct procedures will insure that all the stakeholders can contribute to the selection and as a result, accept the final choice. Hence, understanding the characteristics and capabilities of third-party providers, appears to be a logical first step in this selection process. An effective selection process uses cross-functional teams to evaluate and review third parties. There should be a constant effort in measuring the performance of the service providers and the firm s entire operations (Foster, 1994). Some important criteria that are commonly used in the evaluation of third parties include: Ability to provide highly detailed data preceding, during and following shipments (Bradley, 1994b; Cuthbertson, 1995; Maltz, 1995). Business arrangements, e.g. incentives for performance, replacement of equipment, etc. (Bradley, 1994a). Business development, e.g. accounts gained and lost (Bradley, 1994a). Business experience, e.g. how long in the third-party business, depth of management experience, the strength of operating management, the quality of the work force, etc. (Bradley, 1994a; Harrington, 1994).

11 Capabilities/competency, e.g. ability to meet the firm s need, provide a variety of services, wide geographic coverage and utilize specialized equipment (Bradley, 1994a; 1994b; Harrington, 1994; Maltz, 1995). Compatibility of third party s technology and the firm s requirements (Harrington, 1994). Financial stability/strength (Bradley, 1993a; 1994a; Cavinato, 1991; Maltz, 1995; Minahan, 1995). High and improving standards, e.g. having a formal quality process (Bradley, 1994a). Location, e.g. near manufacturing facilities (Bradley, 1994a). Management structure (Cavinato, 1991). Opportunities to develop long-term relationships (Maltz, 1995). Price (Bradley, 1994b; Maltz, 1995). Reliability (Bradley, 1994b). Reputation (Maltz, 1995). Service quality (Bradley, 1993a; Maltz, 1995). Speed (Bradley, 1994b; Cooke, 1994a). Supplier certification (Gibson et al., 1995). Support services, e.g. availability of assets and human resources, information and communications systems, etc. (Bradley, 1994a). Systems flexibility and capacity (Maltz, 1995). The unstructured nature of the decision problem makes the task of evaluation of suppliers difficult and requires a multi-criteria decision-making method to help solve the problem (Mohanty and Deshmukh, 1993). However, the use of quantitative analytical method (Weber and Ellram, 1993) and an expert system (Ozsomer et al., 1993) to aid in the evaluation of providers have also been suggested. 99 Caveat in outsourcing logistical services Firms must be mindful that certain should be kept in-house. Those advocating the use of outsourcing tend to assert that if a particular function is part of a firm s core competency, then it should be kept in-house (Lieb, 1992; Sheffi, 1990). Through its core-competencies a firm can gain both efficiency and stability (Quinn, 1993) and reduce costs by focusing its resources on what it does best. It has also been suggested that primary responsibilities such as, customer service, materials replenishment, and inventory control, on which managers are measured, should be kept in-house: outsourcing them tantamount to abrogating firms management responsibility (Bradley, 1994a). David G. Waller of Andersen Consulting has been reported to have

12 IJPDLM 28,2 100 advised firms not to underestimate the value of their own operations (Bradley, 1995b). Since quality logistical support is crucial to meeting the challenge of distributing products and services in a timely and cost-effective manner, customer service has gradually become one of the commonly outsourced activities (Daugherty et al., 1996). Indeed, the range of third-party services seems to be expanding to encompass activities generally associated with customer service (Cooke, 1995). Small firms must be more careful in outsourcing. They must first adopt a more strategic view of that looks at outsourcing as a potential source for competitive advantage. They must view as a profit center, not a cost center (Foster, 1994). Critical success factors of outsourcing In order to ensure the success of using contract, certain additional factors are to be considered during and after the implementation of the outsourcing process. The first and foremost is that decision to outsource must come from the top. Communication between users and providers (Andel, 1994; Bowman, 1995; McKeon, 1991; Trunick, 1989), which is essential for the coordination of internal corporate and outsourced, is also a very important factor in this respect. Firms need to specify clearly to service providers their role and responsibilities as well as their expectations and requirements. Internal communication is also equally important. It has been asserted that managers must communicate exactly what they are outsourcing and why then get the support of every department (Bowman, 1995). Richardson (1990) and Maltz (1995) also emphasize the importance in educating management of the benefits of contract. Management needs to be convinced to try outsourcing and view it as a strategic activity. Success of outsourcing depends on a user-provider relationship based on mutual trust and faith (Bradley, 1994c; Sheehan, 1989). This does not imply that control measures are redundant, firms should mandate periodic reporting by the service providers (Distribution, 1995; Richardson, 1990). The need to select third parties wisely and maintaining control while building trust is very important (Richardson, 1994). Any deal must be tied to internal controls that link all payments to invoices, bills of lading, or purchase orders (Bradley, 1994a). A crucial aspect of successful outsourcing linking to trust is that users ought to be willing to part with proprietary information, which can help a capable third party to reduce total costs (Bowman, 1995). On the other hand, service providers have the responsibility and obligation to protect users sensitive data on products, shipments and customers (Distribution, 1995). According to Richardson (1990), there are several other critical factors that make outsourcing work. They include focus on the customer; establishing operating standards and monitoring performance against those standards; knowing the payback period, benefits expected by the firm, and the means to

13 achieve those benefits. Factors such as 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. However, for McKeon (1991) understanding each other s cultures and organizational structure to ensure a good match, and knowing strategy, i.e., understanding the function s role in meeting the business objectives of the firm (e.g. differentiation or low cost) are the most important factors for successful outsourcing. The business objectives of the firm may dictate the extent to which it will use partners: outsource a single function or outsource all key. The importance of the human factor in outsourcing also cannot be undermined. The firm must involve the people currently providing the service since their expertise enables them to facilitate the transition from inhouse to third-party. Furthermore, they must be given an opportunity to move with the function if outsourcing is implemented, proving how valuable they can be. However, there is the risk that the fear of getting retrenched due to outsourcing of a function may prompt current employees to sabotage the process (Maltz, 1995). The success criteria needed to establish sustainable partnerships in the area of contract are the various relationships between the people involved. Open and honest environment, key management, coherent and effective internal measurement systems, mutual respect and empathy, commitment to investment, and financial and commercial arrangements are of particular importance in this aspect. Mark Bedeman of Excel Logistics maintains that a successful contract program requires cross-functional management commitment to as a process involving purchasing, operations and physical distribution, and it must interact with sales and marketing (Byrne, 1993). Trunick (1989) reports that according to Joseph Nicosia, vice-president sales and marketing for Customized Transportation Inc., success in contract also depends on repeatability (to perform consistently every day), and discipline (to maintain low margin for error). It is evident that, to make contract work, a high level of commitment and resolution is needed on the part of the buying firms. Management must examine critically each of these success factors to determine how they can be put into practice. Only then firms can truly harness the benefits of outsourcing and to develop long-term partnerships that manifest the many advantages that are possible with the use of third-party. 101 Outsourcing: toward partnership Robert V. Delaney of Cass Logistics has suggested that the objective of both the service user and the service provider is to achieve an open, long-term business relationship that applies the learning curve in order to continually improve the business process (Bradley, 1994c). Fully contractual relationships range in scope from outsourcing to strategic alliances, with increasing complexity at each level of the relationship (Transportation and Distribution, 1988).

14 IJPDLM 28,2 102 Outsourcing is a specifically defined contractual relationship that is dependent on the supplier meeting the buyer s defined performance goals. A strategic alliance, on the other hand, is a planned ongoing relationship where both parties have needs that the other can fulfill, and both firms share values, goals and corporate strategies for mutual benefits. This includes sharing of information (Bowersox, 1990; Sheehan, 1989) along with the risks and rewards of the relationship (Gentry, 1993) thus highlighting the importance of winning together (Buxbaum, 1995). In addition, the benefit of synergy (Bowersox, 1990), strong communication and commitment (TM Staff, 1993), organizational, cultural and managerial compatibility (Ellram, 1990); and a high level of interdependence have also been emphasized as integral to the strategic alliance. can have major consequences for a company s customer relationships. The full benefits of outsourcing is manifested in partnerships and these partnerships require commitment of third parties on a continuing long-term basis, not just on a short-term, contractual basis (Heinritz et al., 1991, p. 174). Scholars (e.g. Matz and Ellram, 1997) have recognized the importance of such relationships in making outsourcing decisions. However, the transition from transactional purchasing arrangements to something approaching true partnerships in a third-party relationship proves more an ideal than a reality. Bernard La Londe is on record to have said that most of the problems derive from causes such as management s lack of trust on third parties, reluctance of buyers to share information with the supplier, and third-party providers unwillingness to make the commitment necessary to form real partnerships they turn away quickly when they think they cannot meet the buyer s requirements (Bradley, 1993b). Successful partnerships tend to fall into two categories: those in which both sides have made substantial financial investments, and those where the relationship has developed and expanded over a long time (Bradley, 1993b). According to Gooley (1994a), successful partnerships generally follow the following five principles: (1) Concentrate business with relatively few partners. By doing so, the buyer gets better pricing and better service. (2) Carry out joint improvement efforts with partners identify operational and service areas that need improvement. (3) Institute a formal system for measuring partners performance help to verify provider s compliance with the service contract s terms, and to help identify trouble spots. (4) Employ a two-way feedback system. Partnerships thrive on communication that allows both parties to discuss problems and decide on plans of action. (5) Let partner performance determine routing choices and rate level. Gentry (1993) argues that although every partnership is unique, increased partnering efforts typically share the same common goals of attaining superior

15 quality conformance, cooperating on cost reduction programs with a minimization of risks, and sharing expertise, and new technology. In a strategic alliance, there is a commitment between the buying and selling firms to jointly improve quality and productivity to reduce overall costs. Buyers and suppliers in strategic partnerships utilize joint problem-solving efforts to develop mutual responses to changes in the marketplace. Partnership between firms demand high level of understanding (Richardson, 1993c) by firms of their own business as well as the business of their counterparts. Buying firms are able to achieve superior customer service by working closely with their partners to improve the process. Together, they could offer faster deliveries and more accurate information. It is through such long-term relationships that contract draws its strength as a powerful and effective source of strategic advantage. 103 References Africk, J.M. and Calkins, C.S. (1994), Does asset ownership mean better service?, Transportation & Distribution, May, pp Africk, J.M. and Markeset, E. (1996), Making contract work, Transportation & Distribution, January, pp Andel, T. (1994), Seal your victory through communication, Transportation & Distribution, May, pp Ballou, R.H. (1989), Heuristics: rules of thumb for decision making, Journal of Business Logistics, Vol. 10 No. 1, pp Bardi, E.J. and Tracey, M. (1991), Transportation outsourcing: a survey of US practices, International Journal of Physical Distribution & Logistics Management, Vol. 21 No. 3, pp Bence, V. (1995), The changing marketplace for distribution: an operator s perspective, European Management Journal, Vol. 13 No. 2, pp Bingham, D. (1994), Take a fresh look at your strategies, Transportation & Distribution, March, pp Bovet, D. (1991), Logistics strategies for Europe in the nineties, Planning Review, July/August, pp ; Bowersox, D.J. (1989), Simulation in : a review of present practice and a look to the future, Journal of Business Logistics, Vol. 10 No. 1, pp Bowersox, D.J. (1990), The strategic benefits of alliances, Harvard Business Review, July-August, pp Bowman, R.J. (1994), Three s a crowd?, Distribution, August, pp Bowman, R.J. (1995), A high-wire act, Distribution, December, pp Bradley, P. (1993a), Third party : DuPont takes the plunge, Purchasing, 3 June, pp Bradley, P. (1993b), Third party : it s a slow courtship, Purchasing, 16 December, pp Bradley, P. (1994a), Cozy up, but stay tough, Purchasing, 17 March, pp Bradley, P. (1994b), What really matters, Purchasing, 14 July, pp Bradley, P. (1994c), Contract : it s all about costs, Purchasing, 20 October, pp. 56A3-A14. Bradley, P. (1995a), Third parties gain slow, cautious buyer support, Purchasing, 18 May, pp Bradley, P. (1995b), Buying third-party services? Beware the bells and whistles, Traffic Management, December, p. 24.

16 IJPDLM 28,2 104 Buxbaum, P. (1994), Ambiguity surrounds companies, Distribution, July, pp Buxbaum, P. (1995), Winning together, Transportation & Distribution, April, pp Byrne, P.M. (1993), A new road map for contract, Transportation & Distribution, April, pp Byrnes, J.L.S., Copacino, W.C. and Metz, P. (1987), Forge service into a weapon with, Transportation & Distribution, September, pp Candler, J. (1994), You make it, they distribute it, Nation s Business, March, pp Cavinato, J. (1991), Learning to read a crystal ball, Distribution, September, pp Christopher, M. (1993), Logistics and competitive strategy, European Management Journal, Vol. 11 No. 2, pp Cooke, J.A. (1988), Outsourcing: who ll do your job?, Traffic Management, May, pp Cooke, J.A. (1994a), Beyond quality speed, Traffic Management, June, pp Cooke, J.A. (1994b), Third-party : has its time come?, Traffic Management, October, pp Cooke, J.A. (1995), Look who s discovered 3PL!, Traffic Management, November, pp Cooper, J.C. (1993), Logistics strategies for global businesses, International Journal of Physical Distribution & Logistics Management, Vol. 23 No. 4, pp Copacino, W.C. (1994a), Pyramid power, Traffic Management, September, pp Copacino, W.C. (1994b), A rediscovered opportunity, Traffic Management, October, pp Cuthbertson, T. (1995), Fill the technology gap, Transportation & Distribution, November, pp Daugherty, P.J. and Pittman, P.H. (1995), Utilization of time-based strategies: creating distribution flexibility/responsiveness, International Journal of Operations & Production Management, Vol. 15 No. 2, pp Daugherty, P.J., Stank, T.P. and Rogers, D.S. (1996) Third-party service providers: purchasers perceptions, International Journal of Purchasing and Materials Management, Spring, pp Dillon, T.F. (1989), Third-party services new route to transportation savings, Purchasing World, June, pp Distribution (1995), Divorce: third-party style, November, p. 4. Dobler, D.W., Lee, L. Jr and Burt, D.N., Purchasing and Materials Management: Text and Cases, 4th ed., McGraw-Hill, New York, NY, pp Ellram, L.M. (1990), The supplier selection decision in strategic partnerships, Journal of Purchasing and Materials Management, Fall, pp Fantasia, J.J. (1993), Are you a candidate for third party?, Transportation & Distribution, January, p. 30. Fawcett, S.E., Birou, L. and Taylor, B.C. (1993), Supporting global operations through and purchasing, International Journal of Physical Distribution & Logistics Management, Vol. 23 No. 4, pp Foster T.A. (1994), What to tell your boss about, Distribution, April, p. 4. Foster, T.A. and Muller, E.J. (1990), Third parties: your passport to profits, Distribution, October, pp Gentry, J.J. (1993), Strategic alliances in purchasing: transportation is the vital link, International Journal of Purchasing and Materials Management, Summer, pp Gibson, B.J., Mundy, R.A. and Sink, H.L. (1995), Supplier certification: application to the purchase of industrial transportation services, Logistics and Transportation Review, Vol. 31 No. 1, pp

17 Goldberg, D. (1990), JIT s next step: moves cargo and data, Transportation & Distribution, December, pp Goldsmith, M. (1989), Outsourcing plays a role in corporate strategies, Transportation & Distribution, October, pp Gooley, T.B. (1994a), Partnerships can make the customer-service difference, Traffic Management, May, pp Gooley, T.B. (1994b), How to meet the Big 8 challenges, Traffic Management, November, pp Harrington, L. (1994), Van Lines change their stripes, Transportation & Distribution, December, p. 29. Harrington, L. (1995a), Logistics, agent for change: shaping the integrated supply chain, Transportation & Distribution, January, pp Harrington, L. (1995b), Small companies: find tools, Transportation & Distribution, March, pp Heinritz, S., Farrell, P.V., Giunipero, L. and Kolchin, M. (1991), Purchasing: Principles and Applications, 8th ed., Prentice-Hall, Englewood Cliffs, NJ, pp Hill, S. (1994), Logistics takes new road, Manufacturing Systems, November, pp Horne, R. (1989), Charting a course for integrated, Transportation & Distribution, October, pp Kearney, A.T. (1994), Achieving customer satisfaction through excellence, Managing Service Quality, Vol. 4 No. 2, pp Lacity, M.C., Wilcoks, L.P. and Feeny, D.F. (1995), IT outsourcing: maximize flexibility and control, Harvard Business Review, May-June, pp Leenders, M. and Nollet, J. (1984), The gray zone in make or buy, Journal of Purchasing and Materials Management, Fall, pp Lieb, R.C. (1992), The use of third-party services by large American manufacturers, Journal of Business Logistics, Vol. 13 No. 2, pp Lieb, R.C. and Randall, H.L. (1996), A comparison of the use of third-party service by large American manufacturers, 1991, 1994, and 1995, Journal of Business Logistics, Vol. 17 No. 1, pp Lieb, R.C., Millen, R.A. and Van Wassenhove, L.N. (1993), Third party services: a comparison of experienced American and European manufacturers, International Journal of Physical Distribution & Logistics Management, Vol. 23 No. 6, pp Lynch, M.E., Imada, S.J. and Bookbinder, J.H. (1994), The future of in Canada: a Delphidased forecast, Logistics and Transportation Review, Vol. 30 No. 1, pp McCabe, J.V. (1990), Outside managers offer packaged export expertise, The Journal of Business Strategy, March/April, pp McKeon, J.E. (1991), Outsourcing begins in-house, Transportation & Distribution, September, pp Maltz, A.B. (1994), Outsourcing the warehousing function: economic and strategic considerations, Logistics and Transportation Review, Vol. 30 No. 3, pp Maltz, A.B. (1995), Why you outsource dictates how, Transportation & Distribution, March, pp Maltz, A.B. and Ellram, L.M. (1997), Total cost of relationship: an analytical framework for the outsourcing decisions, Journal of Business Logistics, Vol. 18 No. 1, pp Minahan, T. (1995), Transportation: can t get a handle on freight costs? Give up trying!, Purchasing, 23 November, pp

18 IJPDLM 28,2 106 Mohanty, R.P. and Deshmukh, S.G. (1993), Use of analytic hierarchic process for evaluating sources of supply, International Journal of Physical Distribution & Logistics Management, Vol. 23 No. 3, pp Muller, E.J. (1991a), Selling the process, not just the product, Distribution, January, pp Muller, E.J. (1991b), How to profit using third parties, Distribution, May, pp Muller, E.J. (1992), Third party catches on, Distribution, July, pp Muller, E.J. (1993a), The top guns of third-party, Distribution, March, pp Muller, E.J. (1993b), More top guns of third-party, Distribution, May, pp Ozsomer, A., Mitri, M. and Cavusgil, S.T. (1993), Selecting international freight forwarders: an expert systems application, International Journal of Physical Distribution & Logistics Management, Vol. 23 No. 3, pp Powers, R.F. (1989), Optimization models for decisions, Journal of Business Logistics, Vol. 10 No. 1, pp Quinn, J.B. (1993), Leveraging intellect, Executive Excellence, October, pp Rao, K., Young, R.R. and Novick, J.A., (1993), Third party services in the of global firms, Logistics and Transportation Review, Vol. 29 No. 4, pp Richardson, H.L. (1990), Explore outsourcing, Transportation & Distribution, July, pp Richardson, H.L. (1992), Outsourcing: the power worksource, Transportation & Distribution, July, pp Richardson, H.L. (1993a), Why use third parties?, Transportation & Distribution, January, pp Richardson, H.L. (1993b), Economy spurs growth in outsourcing, Transportation & Distribution, March, pp Richardson, H.L. (1993c), Push the service level higher, Transportation & Distribution, July, pp Richardson, H.L. (1993d), Contracts build relationships, Transportation & Distribution, November, pp Richardson, H.L. (1994), Build trust, but audit too, Transportation & Distribution, March, pp Richardson, H.L. (1995), Logistics help for the challenged, Transportation & Distribution, January, pp Saw, P. (1995), Freight forwarding: In a constant state of flux, Shipping Times, Special Supplement, 30 November, p. 5. Schary, P.B. (1992), A concept of customer service, Logistics and Transportation Review, Vol. 28 No. 4, pp Sheehan, W.G. (1989), Contract warehousing: the evolution of an industry, Journal of Business Logistics, Vol. 10 No. 1, pp Sheffi, Y. (1990), Third party : present and future prospects, Journal of Business Logistics, Vol. 11 No. 2, pp Sink, H.L. and Langley, C.J. Jr (1997), A managerial framework for the acquisition of third-party services, Journal of Business Logistics, Vol. 18 No. 2, pp Soukup, W.R. (1987), Supplier selection strategies, Journal of Purchasing and Materials Management, Summer, pp TM Staff (1991), You can make the customer-service difference, Traffic Management, June, pp TM Staff, (1993), What makes a quality partnership?,traffic Management, May, pp Traffic Management (1992), How to choose a third-party company, July, pp Transportation & Distribution (1988), Strike up alliances, November, pp

19 Trunick, P.A. (1989), Outsourcing: a single source for many talents, Transportation & Distribution, July, pp Trunick, P.A. (1992), Carving a niche in global, Transportation & Distribution, February, pp Watson, R. and Pitt, L. (1989), Remarrying marketing and with information systems technology, Industrial Management & Data Systems, No. 1, pp Weber, C.A., and Ellram, L.M. (1993), Supplier selection using multi-objective programming: a decision support system approach, International Journal of Physical Distribution & Logistics Management, Vol. 23 No. 2, pp Whybark, D.C. (1990), Education and global, Logistics and Transportation Review, Vol. 26 No. 3, pp Wood, A.L. (1993), Develop an agile approach to change, Transportation & Distribution, November, p