TABLE OF CONTENTS. INTRODUCTION TO LOGISTICS OUTSOURCING Page

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1 TABLE OF CONTENTS CHAPTER 4: INTRODUCTION TO LOGISTICS OUTSOURCING Page 4.1 INTRODUCTION Background and methodology of the chapter Logistics outsourcing defined Third-party logistics (3PL) defined The development of logistics outsourcing Conclusion SUPPLY-SIDE TRENDS IN 3PL LOGISTICS Introduction Growth and development of the 3PL industry Trend toward comprehensive solutions The growing importance of information technology Critical success factors for a 3PL Conclusion DEMAND-SIDE LOGISTICS OUTSOURCING TRENDS Industry sectors and outsourcing Position in the supply chain and outsourcing Size of company and outsourcing Current use of outsourcing Reasons not to outsource Projected use of outsourcing in the 21 st century Activities and services outsourced Number of providers used Reasons to outsource Page Chapter 4-1

2 4.3 DEMAND-SIDE LOGISTICS OUTSOURCING TRENDS (cont.) Managerial involvement in outsourcing decisions Type of outsourcing agreement and relationship Steps in outsourcing and potential problems areas Criteria when selecting providers Areas of concern in current relationships Cancelling/replacing outsourcing providers General trends and opinions Conclusion CONCLUSION SOURCES OF REFERENCE Chapter 4-2

3 CHAPTER 4: INTRODUCTION TO LOGISTICS OUTSOURCING 4.1 INTRODUCTION Background and methodology of the chapter As outlined in Chapter 1, the main purpose of this thesis has been to investigate general logistics outsourcing practices and trends, with particular reference to the US, a developed economy, and to establish practices, trends and issues in logistics outsourcing in the manufacturing sector in South Africa and make recommendations regarding logistics outsourcing practices. In Chapters 2 and 3 therefore, current business environments and challenges facing management world-wide, have been discussed, with an emphasis on the important role that both logistics and outsourcing play in this scenario. The increasing pressure that companies are under to maintain and increase their profitability, while at the same time increasing customer service and market share in a global economy, has been discussed in some detail. Chapter 2 focused on the role that logistics can play in providing a company with a competitive advantage over other companies. The concept itself, as well as the impact that it has on shareholder value, other company functions, and indeed the economy, was discussed in some detail. Chapter 3 on the other hand focused on how the concept of outsourcing can be a powerful tool for achieving competitive advantage, however that when unsuccessful, it can lead to sub-optimal performance, lack of morale, and lost business opportunities. It outlined how many problems result from outsourcing, due to companies searching for short cuts to deal with incompetence, financial pressures or technological weakness, and their failure to consider the long-term implications of outsourcing. In order to ensure success, outsourcing must be a strategic decision and a well-planned and executed initiative. These aspects were dealt with in some detail as a basis for the logistics outsourcing discussions presented in this chapter. Chapter 4 introduces the concept of logistics outsourcing in more detail. It develops the previous discussions of outsourcing options and arrangements, advantages and Chapter 4-3

4 opportunities, pitfalls, impacts and implications, but specifically with respect to the outsourcing of logistics activities. Therefore while logistics was discussed in general terms in Chapter 2 and outsourcing in Chapter 3, Chapter 4 will specifically discuss practices, trends and issues with respect to logistics outsourcing in developed countries generally and with particular reference to the US. These discussions, as with Chapters 2 and 3, have been compiled from a number of sources, continuing to provide a background to the material that will follow in the rest of the thesis, particularly the survey of logistics outsourcing in the manufacturing sector in South Africa, thereby contributing to the purpose of the thesis. Further concepts and definitions necessary for the discussion of logistics outsourcing will also be introduced in this chapter. The main focus however will be further development of a background to logistics outsourcing and related practices, trends and issues. This more globally-focused chapter will lay the foundation for Chapters 5 and 6 which will focus more on South Africa, the survey undertaken of logistics outsourcing trends, practices and issues among South African manufacturers, and a comparison with the US. The survey was undertaken to ascertain current trends, practices and issues with regard to logistics outsourcing in South Africa. The aim of the survey therefore included ascertaining whether manufacturing companies outsource logistics activities, and if they do not, the reasons for this, while if they do the reasons for that. The survey also undertook to ascertain what activities are most frequently outsourced and the levels of satisfaction of problems experienced, and practices with regard to companies with outsourcing initiatives. Further details with regard to the undertaking of the survey are provided in Chapter 5 and Annexures B and C to this thesis. The results are tabled and compared to those of similar surveys in the US, in Chapters 5 and 6. This provides the background necessary to draw conclusions on trends and issues related to logistics outsourcing, compared to those identified in this chapter, Chapter 4, and to highlight possible areas of consideration and action necessary to the success of a logistics outsourcing initiative. This will be provided in Chapter 7. Chapter 4-4

5 4.1.2 Logistics outsourcing defined Logistics management has been defined in this thesis as that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of raw materials, in-process inventory, finished goods, services and related information from the point-of-origin to the point-of-consumption (including inbound, outbound, internal and external flows) in such a way as to meet customers' requirements cost-effectively and ensure that current and future profitability are maximised. (Council for Logistics Management, various). Outsourcing has also been defined as the act of transferring some of a company s recurring internal activities and accompanying decision rights and factors of production, to outside providers, as set forth in a contract establishing a long-term relationship between supplier and beneficiary, with a high degree of risk-sharing. (Adapted from Greaver, 1999; and Bendor-Samuel, 2000). With respect to logistics outsourcing specifically, Lynch (2000) provides the following summary: Logistics outsourcing is an arrangement whereby a logistics service provider performs services for a company that could be, or have been, provided in-house. Logistics outsourcing is about subcontracting logistics activities to companies that are equipped to provide the services. According to Rabinovich, Windle, Dresner and Corsi (1999), logistics outsourcing can be defined as long and short-term contracts or alliances between manufacturing and service companies and third-party logistics providers (3PLs). They go on to state that the development thereof, which will also be discussed in further detail in Sections and 4.2.2, has been largely based on the needs that companies have to obtain cost savings and to concentrate on their core competencies, with market and company characteristics influencing the decision to contract multiple combinations of 3PL services. They add that these services range from single transport activities to integrated warehousing, distribution, and information management activities. Chapter 4-5

6 Similarly Ravi (2001) points out that the outsourcing of logistics functions is a business dynamic of great importance for many shippers and that it involves the use of external companies (i.e. third parties) to perform logistics functions that have traditionally been performed within an organisation. Chow and Gritta (2002) add that there are many companies providing logistics services including transportation and warehousing companies, consultants, forwarders and third party logistics businesses, and that all of these logistics service providers (LSPs) are external suppliers that perform all or part of a company s logistics functions. They state however that these vary in their service provision from traditional transportation, warehousing and freight forwarding, limited to one primary logistical process and executing decisions in these areas for the shipper; to those that add a high degree of management service whereby they assist in planning and controlling a specific logistic process; to those that provide a high degree of management service across multiple logistics processes. Contract logistics, relationship marketing, integrated logistics management (ILM), fourth party logistics (4PL), supply chain integration, (SCI), third party supply chain management (3PSCM), and lead logistics provision or management (LLP or LLM) have all been used to describe the latter companies. (Stock & Lambert, 2001; Ravi, 2001; Burns, 1999; as quoted by Chow & Gritta, 2002; Langley, et al. 2002). These companies provide value to shippers or users by planning and controlling logistics activities and execution. (Chow & Gritta, 2002). For example, lead logistics providers or managers (LLPs or LLMs) design, build, and manage supply chain assets, processes, people and technology for users. (Langley, Allen & Tyndall, 2002). They can, theoretically, provide everything in the product cycle from design and development to manufacture, transaction processing and after-sales support, in addition to actually delivering the goods to the customer. (Manchester, 2001). Although Langley, et al. (2002) do indicate that LLMs are more advanced in their service offering than LLPs, the distinction is not always that clear in other literature reviewed and these terms have thus been used interchangeably in this thesis. Chapter 4-6

7 The key is that these providers fulfil the need for a super manager to supervise all aspects of the supply chain of a manufacturer or distributor, and provide a sole point of contact between that company and its range of logistics and information service providers. (Heroux, 2001). In addition to the above-mentioned forms of LSP, Ravi (2001) states his opinion that logistics outsourcing includes three types of arrangements, i.e. logistics transaction and processing services (LTPS), logistics business process outsourcing (LBPO), and other asset-based services, such as truck rental and leasing; where: LTPS involves business activity outsourcing with performance metrics for accuracy, timeliness and efficiency of information flow and high-volume service capabilities. Clients retain control over key decisions and the provider has a lower level of strategic involvement at contract level. LBPO involves managing logistics, warehousing-related functional services, or both, to move products physically. Moreover LBPO is an IT-enhanced and integrated function that stretches from the provider to end customer, thus going beyond the mere physical flow of products to encompass the process and information necessary to optimise a client s logistics activities and involving the outsourcing of logistics process or functions. Performance metrics ties to the strategic business value of services provided and to customer satisfaction. Providers also participate in decisionmaking regarding the outsourced process or function and have high levels of strategic involvement. (Ravi, 2001). Stock and Lambert (2001) highlight yet another concept that goes beyond traditional outsourcing, namely relationship marketing which is a form of partnering and involves the establishment of close, long-term working relationships with suppliers of goods or services aimed at creating efficiency between the user company and the provider, resulting in improved communications, better service, and shared cost savings. Chapter 4-7

8 They add that the use of outsourcing and the number of alliances or partnerships is increasing each year as more companies recognise the benefits that can arise from working in partnership with their LSPs rather than independently. They state that all indications point toward the continuation of this trend in the foreseeable future. It is also necessary to outline the meaning of 3PL, so often referred to in logistics outsourcing, in greater detail, which will be done in a section dedicated solely to the definition thereof due to the growing use of this term. Chapter 4-8

9 4.1.3 Third-party logistics defined In addition to his definition of logistics outsourcing, given in the preceding section, Lynch (2000) states that the term third party, as well as that of fourth party, while commonly used, can be quite confusing and he prefers to refer to the outsourcing of logistics activities to companies that are equipped to provide the services, rather than to third-party or fourth-party logistics providers (3PLs and 4PLs respectively). However, the use of the term third-party logistics (3PL or TPL) is growing at a significant pace and therefore warrants further discussion and includes the following definitions. A 3PL is an independent company that performs all or a portion of a client s supply chain logistics activities for a profit. The range of services offered by 3PLs is large. It can be as simple as arranging the transportation of a single shipment or as complex as designing, implementing, and/or operating and managing a client s supply chain logistics needs. (Konezny & Beskow, 1999). A 3PL is a relationship between a shipper and third party which, compared with basic services, has more customised offerings, encompasses a broader number of service functions and is characterised by a longer-term, more mutually beneficial relationship. (Murphy & Poist, 2000). A 3PL is a logistics service provider, usually asset-based, which focuses on specific elements of the supply chain in order to optimise the physical movement of goods from the point-of-origin to the end-user. (Stock & Lambert, 2001). According to Berglund, van Laarhoven, Sharman and Wandel (n.d.), the size of the 3PL industry and the different requirements placed on logistics as opposed to basic services, such as transportation or public warehousing, justify the need to treat 3PLs as a separate industry. Konezny and Beskow (1999) add that the 3PL provider specialises in a range of logistics services with the aim to sell these services to organisations that are typically involved in manufacturing and distribution activities. Third-party logistics has also been referred to as contract logistics, third-party supply Chapter 4-9

10 chain management, and many other terms. The key differentiating factor between a 3PL and a typical transportation or other supply chain service provider, however, is that a 3PL s primary value-add is based on information and knowledge versus providing a non-differentiated service at the lowest cost. For example, pure trucking companies are not considered to be 3PLs, however, some 3PLs own transportation and other assets to execute logistics needs while others do not. Murphy and Poist (2000) concur and state, in addition to their above-mentioned definition, that while many definitions suggest that 3PL involves the provision of multiple distribution activities, they often do not include the concept of longer term, mutually beneficial relationships between the parties. Therefore, while logistics activities, in particular transportation and warehousing, have been outsourced to third parties for many years, generally on a transaction-by-transaction basis, the distinguishing characteristic of the contemporary 3PL is that it, by contrast, is focused on a formal, contractual, long-term relationship between the provider and the user. Similarly, Chow and Gritta (2002) state that a 3PL company is distinguished from other logistics service providers by the broader scope of physical services or processes and the broader scope of managerial services that it provides. Therefore while traditional transportation, warehousing and freight forwarding companies are limited to one primary logistical process and executing decisions in these areas for the shipper, the newer form of provider adds a high degree of management service whereby they assist in planning and controlling a specific logistic process. Examples of this latter form include dedicated/contract transportation or dedicated/contract warehousing and value added warehouse/distribution. The newest form of provider supplies a high degree of management services across multiple logistics processes. In the past, a company might have outsourced planning by using a consultant or their own in-house professional to plan, a for-hire transportation company to execute, and their-in-house systems to control. A 3PL will provide all three aspects of managing logistics activity under a single service. Therefore 3PL services inherently involve long-term, interdependent relationships, which are oriented towards solving problems for customers, sharing risks and benefits and recognising mutual interdependency. In a 3PL arrangement, users may negotiate with a single provider that supplies a Chapter 4-10

11 broader set of order fulfilment activities, ranging from storage to order picking to transportation. (Chow & Gritta, 2002). Langley, et al. (2002) point out that in their 2001 survey of the use of 3PLs, respondents identified the following three characteristics as best describing 3PLs:- multiple activities, integration of activities, and provision of solutions to logistics and supply chain problems. The 2002 survey, in addition to 3PL provision, identifies and characterises the LLM or 4PL as including more project/programme management of sub-contractor 3PL operations. They also state that since the inception of the annual 3PL study in 1996, the joint evolution of 3PL service providers and their customers has been tracked from a relatively simple resource-driven relationship to what is now one of the most significant strategic partnerships a company can establish. Many companies that have realised the financial and operational improvements made possible through outsourcing are searching for new opportunities to leverage these partnerships. Consequently these companies are pulling service providers deeper into their supply chains and pushing them to increase the breadth and complexity of their capabilities. This is leading to next-generation 3PLs, for example LLMs, as mentioned previously. Section will discuss logistics outsourcing and 3PL development in more detail. Chapter 4-11

12 4.1.4 The development of logistics outsourcing Although the outsourcing of transportation and warehousing has been common in most countries since the 1950s, relationships were mostly transaction-based and short-term. For example warehousing transactions were standard thirty-day public warehouse agreements. (Lynch, 2000). Furthermore, as recently as the 1960s, most third-party transport and distribution services on offer to clients were still based on some form of general haulage. (Buck, 1990). During the 1970s manufacturers focused on cost reductions and improved productivity, and longer-term relationships became more common, particularly in the warehousing area. Single tenant facilities were built and operated by warehouse companies in major markets. Consolidation of facilities into larger operations became increasingly frequent. In the early 1980s the services offered by most outside companies expanded rapidly. So-called value-added services included packaging, blending, systems support, inventory management, customised handling and other offerings which had not been available previously. (Lynch, 2000). However, at this point, difficulties began to surface as some providers defined valueadded services as whatever the client wanted them to be. They quickly found themselves unable to provide services they had agreed to, either because they did not have the resources or knowledge. With increased competition in the road transport industry however, innovative, long-term relationships between carriers and customers began to develop and true logistics partnerships were established. These alliances quickly brought about major improvements in both customer service and logistics economies. The 1980s also brought with them many mergers and acquisitions and in many cases companies found themselves with more warehouses and distribution centres than were necessary, which led to consolidation and outsourcing of facilities. (Lynch, 2000). The growth of logistics outsourcing in the US, in particular, was also promoted by the increasing demands placed on manufacturers and distributors following deregulation of the transportation industry and the effects of an economic downturn in the 1980s. (Trunick, 2002). Konezny and Beskow (1999) state that while 3PLs, for example Chapter 4-12

13 freight forwarders, have existed for decades, this deregulation of the transportation markets as well as the increasing recognition of logistics and supply chain management and the important role thereof in companies, has resulted in the more recent substantial growth in the third party logistics industry. In Europe earlier deregulation of many transportation and distribution markets resulted has in a more developed 3PL industry. Delaney (2002) asserts that in North America 3PLs are still developing in comparison to the United Kingdom (UK), Europe and Asia where 3PLs have been long established and are very mature. Dereli (1998) states that, in the UK, since the early 1990s there has been an increase in the development of highly specialised logistics contractors that are ready to take over most of a company s logistics activities; and that well-known companies in the UK have been contracting out their logistics service provision to these outside specialists. It has also furthermore been asserted that the logistics sector in the UK is more developed in that manufacturers have traditionally looked for added value within their logistics services. (Anon., 1996). Major trends, therefore, such as deregulation in US and inter-european transportation markets, further globalisation of economies, and growth of emerging markets have all supported the increased global use of 3PLs. These factors combined with the increased focus of companies on logistics costs and operations, have driven the growth of the 3PL industry. As outlined in Chapter 3, outsourcing received particular momentum in the 1990s in the service sector (Kakabadse & Kakabadse, 2000), due to growing pressure on companies to save costs and increase customer service. The concept of focusing on core competencies was increasingly dominant and companies were re-evaluating vertical integration and self-sufficiency. (Lonsdale & Cox, 2000). The significance of outsourcing as a strategic tool was identified (Bendor-Samuel, 2000; Lankford & Parsa, 1999), and technological developments added further fuel to outsourcing opportunities and service provision. (Embleton & Wright, 1998). The 1990s also saw an increasing interest in outsourcing any function not directly related to a company s core business. (Lynch, 2000). Chapter 4-13

14 The dynamic and competitive market environment facing companies in the 21 st century will continue to add impetus to the growth of outsourcing. For example, the dynamic technological environment of today requires substantial systems investment, support and expertise, leading to increasing levels of outsourcing in this area. Companies are reluctant to invest in and maintain cutting-edge technology and technical specialists internally, when similar assets exist externally, and were developed with the investment of and risk by another company. (Greaver, 1999). This is increasingly the case with logistics activities, and together with the fact that companies are recognising that their core competencies are not in logistics, is leading companies to outsource their logistics to 3PLs to help them manage their logistics more efficiently and effectively. As was also mentioned in Chapter 3, companies seek various benefits in outsourcing. According to Lynch (2000) there are almost as many reasons for outsourcing supply chain operations as there are companies that do it, but most of those companies have the same basic motives, namely to improve return on assets and reduce costs. Companies that outsource are able to reduce their investments in expensive technology, warehouses and equipment, and can significantly enhance their returns. Furthermore, surveys that ask companies why they outsource, in fact, almost always find cost and pricing to be among the top three determinants. Similarly the majority of companies that do not outsource feel that outsourcing would not reduce their costs. This may be correct if a company has an efficient, well-managed distribution system, as outsourcing that system may not reduce operating costs. However, another important consideration is that outsourcing can add value to a company s operations. Actual outsource operating costs may be higher than the cost of inhouse operations, but the value received from outsourcing may more than offset the cost. (Lynch, 2000). Similarly Wilson (2001b) states that many large companies are outsourcing their transportation and logistics functions, driven by pressure to cut costs combined with the challenges of increasingly complex logistics technology. Although many companies are reluctant to hand over critical supply chain functions to an outside company, they are discovering that logistics service providers are better at integrating Chapter 4-14

15 logistics functions into their supply chain management environments and can obtain lower prices. In search of immediate savings, many companies may turn to logistics service providers simply to get lower prices, by benefiting from the economies of scale and leverage of the provider. Companies are therefore finding that outsourcing logistics can be a source of saving, and over the long-term they need logistics as part of their overall supply chain strategy, but most companies find that it is not a core competency for them. Once on board, many manufacturing companies are discovering that the logistics service provider can help them co-ordinate disparate logistics applications and services, and that outsourcing can provide improvements in the efficiency and effectiveness with which activities such as transportation are executed. There are many ways outsourcing can add value to an efficient, cost-effective logistics network. Lynch (2002) goes on to quote the following practical examples: The automotive industry often relies on outside providers to perform functions associated with JIT operations, for example making use of a 3PL to collect parts from suppliers and deliver them to a cross-dock where shipments can be consolidated and shipped to different assembly plants. The parts are therefore never warehoused or inventoried at the plants. In the grocery industry, collaborative planning, forecasting and replenishment (CPFR) links customer demand with replenishment scheduling to reduce inventory in the system. This results in smaller, more frequent shipments. Contract logistics companies are able to combine these smaller shipments into truckloads, reducing freight and handling costs and enhancing the distribution process. Information technology management is perhaps the most important valueadded offering that third parties have provided in recent years. For many companies, increasing demands for new information systems, resources and realtime visibility into production and order status can often be met most efficiently through outsourcing. Today there are also contract logistics companies that can assist clients in identifying logistics problems while providing integrated, end-to-end supply chain technology solutions. A major benefit is providing clients with technological capabilities that they could not acquire on their own. Chapter 4-15

16 The benefits of and reasons to outsource will also be discussed further in Section Outsourcing therefore does add value through cost reductions; however informed logistics managers will look beyond that to the total gains in customer service, information technology and state-of-the-art supply chain management techniques that logistics outsourcing can help them achieve. (Sopher, Lareau & Crum, 2002). As was also discussed in Chapter 1 and covered in greater detail in Chapter 2, the globalisation of businesses and the competitive pressures of the business arena have led to the growing strategic importance of the logistics function within the company. In fact, the logistics function has often been referred to as the last frontier for the development of strategic competitive advantages. Increasingly therefore, many organisations are looking to their logistics operations, and seeking to manage them strategically, so that significant competitive advantages may be made available for the business as a whole. (Hum, 2000). Together, therefore, with the increasingly evident benefits of outsourcing, the opportunities for improving competitive advantage by means of logistics outsourcing are being investigated on a growing scale. Greaver (1999) states that although outsourcing of entire processes has not occurred at significant levels in the past, more recently inbound and outbound logistics are increasingly being outsourced, and the outsourcing of entire processes is particularly becoming a trend in larger organisations. Trucking companies in particular are aggressively marketing their logistics services and are assuming responsibility for many internal logistics processes. However the outsourcing of entire key company processes such as logistics, should involve significant strategic partnering between providers and users. These relationships need to be strategic in nature, and include the transfer of significant decision rights by the user, and the provision of large sophisticated operations by the provider, thus enabling value-added services at a level incomprehensible even a decade ago. (Sopher, et al. 2002). Chapter 4-16

17 Therefore, where outsourcing relationships historically were based on routine functions, such as warehousing operations and freight payment, today they are based on logistics activities that require more strategic knowledge and expertise, for example, information systems, inventory management, and customer order fulfilment. Furthermore, internal logistics experts are increasingly needed to maintain organisational control of the outsourcing process where the outsourcing of multiple logistics functions has been implemented to increase cost savings. (Rabinovich, et al. 1999; as quoted by Murphy & Poist, 2000). According to Stock and Lambert (2001), it was during the 1980s that many companies began to outsource various logistics activities to third parties and examining the viability of developing partnerships and strategic alliances with them. They go on to point out that, historically, relationships between shippers and logistics service providers have been arm s-length transactions, with each entity attempting to maximise its own interests with little regard for how the relationship might benefit or penalise the other party. However logistics service providers and users are increasingly recognising the benefits that can result from outsourcing partnerships. The industry is thus moving from one where third party operators were regarded as adversaries to one that now considers the providers to be corporate collaborators. (Bowersox, n.d.; as quoted by Thuermer, 2000). As companies continue to seek to identify and focus on their core competencies, it is also important that they identify the areas of their supply chain which are currently weakest and may most benefit from being outsourced. Burns, Warren and Cook (2001), for example, showed in their research that almost 25% of the shippers surveyed indicated that planning and scheduling was the weakest area of their supply chain, followed by manufacturing responsiveness. Other areas needing improvement apparently were vendor supplier management, warehousing, transportation pricing, supply chain visibility, optimisation software, and transportation management, and virtually all the remaining areas identified are directly within the core competency of a logistics service provider. Providers should therefore increasingly develop their strength in inbound traffic management; optimisation Chapter 4-17

18 capabilities; warehouse management capabilities; and their overall ability to improve clients supply chain visibility. With regard to future developments, research shows that companies will tend to increase the frequency of their shipments suggesting a strategy of investing in transportation and reducing investment in inventory and warehousing. On the other hand, shippers will also tend to reduce less-than-truckload (LTL) shipments and combine volumes to larger shipments to realise transport savings, but will want to reduce shipment sizes to improve visibility and realise inventory savings. Data on modal changes also suggests that LTL carriers will continue to operate in a declining market while truckload (TL) carriers will gain market share. Freight forwarders that can consolidate and convert LTL shipments into lower cost TL shipments should benefit from increasing demand. Another important trend will be the long-term plans of shippers to expand globally and increase international expenditure as a percentage of their total supply chain. (Burns, et al. 2001) Conclusion As has already been noted, logistics has a key role and impact in the company, extending to company performance, sustainability, competitiveness, and profitability. As companies find themselves under growing pressure from both customers and shareholders to seek ways in which to decrease their costs while at the same time increasing performance, they are being forced to seek ways in which they can improve the efficiency and effectiveness of their operations. These pressures are increasingly impacting the way in which companies, and their customers, view logistics activities. Logistics is thus playing a more important role in the performance of companies, and in particular in companies seeking to increase their competitive advantage and corporate profitability. In line with these developments, and the increasing recognition of the strategic nature of outsourcing as a corporate tool to enhance performance, the trend toward logistics outsourcing is growing. (Lynch, 2000). Furthermore, the services offered by 3PLs are continuing to consume a significant portion of overall logistics and Chapter 4-18

19 supply chain budgets. The use of 3PL services is also increasingly prevalent throughout the world particularly in areas such as North America, Western Europe, and Asia-Pacific. (Langley, et al. 2002). Logistics service providers, such as the 3PLs and LLMs, are also continuing to grow in sophistication and service. In whatever form, logistics outsourcing and 3PL services are an important trend in logistics management. Lynch (2000) furthermore asserts that there is plenty of room for growth in logistics outsourcing and that even with the increased emphasis on outsourcing, less than ten per cent of the relevant logistics services in the US are outsourced, while in Europe, where outsourcing has a longer history, the percentage is slightly under 25%. He states that as intense competitive pressures in the marketplace persist, streamlining and downsizing will also continue, no doubt resulting in increasing interest in outsourcing arrangements. At the same time, as 3PLs increase in their efficiency, sophistication and service offering, this interest will manifest itself in new and more creative relationships. Estimates of growth in the logistics outsourcing sector however vary, which may be due partly to the number of different definitions of the 3PL concept, as well as the fact that the 3PL industry is not always clearly delineated and shippers, for example, are understandably wary of the many companies that are merely adding the word logistics to their names without providing the necessary services in this regard. (Murphy & Poist, 2000). Nevertheless, there is little doubt that opportunities for 3PL services will continue to grow, and a brief description will be given in a later section, providing an indication of the growth experienced and expected in the 3PL industry, in particular in the recent past, at present, and the near future. From a supply chain point of view, Ravi (2001) classifies these logistics outsourcing trends into supply-side and demand-side trends, providing a useful platform for the discussions that follow in Sections 4.2 and 4.3. Chapter 4-19

20 4.2 SUPPLY-SIDE TRENDS IN THIRD-PARTY LOGISTICS Introduction One of the interesting business phenomena of the 1990s has been the continued emergence and evolution of the third-party logistics profession. Some observers refer to third-party logistics as an industry. Yet a closer look reveals a higher order of calling, one that might justify the term profession. Providers of third-party services have steadily expanded their offerings across the breadth of the supply chain. They are developing innovative services that are pushing the bounds of conventional practice. And they are forging close, mutually productive alliances with their customer partners. Despite these advances, the profession still has much progress to make. (Langley, Newton & Tyndall, 1999). In Section 4.2 various practices, trends and issues will be discussed with regard to this development of the supply of logistics services, by various types of logistics service providers, mainly referred to in these discussions as 3PLs. Due to the limited availability of literature regarding logistics outsourcing in general (Hum, 2000 & Lynch, 2002) and the fact that the context and focus of this thesis is logistics outsourcing, although mainly from a user perspective, the supply-side discussions in Section 4.2 are included to provide information for the South African 3PL industry. It is important for 3PLs to be aware of and understand the various practices, trends and issues involved in the industry if they are to win the trust and confidence of companies considering the outsourcing of their logistics activities. They need to understand why companies outsource their logistics, as well as their requirements, issues, as well as the criteria and process used to select a provider. This is critical if they are to retain satisfied customers and obtain new ones. Understandably companies are often nervous about turning over their business to a third party. The best way for a 3PL to overcome this anxiety is to demonstrate that it has the necessary capabilities and has been successful with other clients. (Sopher, et al. 2002). Logistics service providers must be informed of the major concerns that clients have with logistics outsourcing as well as the problems Chapter 4-20

21 and pitfalls associated with outsourcing in general and logistics outsourcing specifically. The 3PL market is also in development and transition. While in earlier years 3PLs may have been viewed as vendors for whom the key issues were cost, control and service, now more meaningful relationships are emerging with increasing emphasis on value, innovation, and performance in a global context. However, although many 3PLs have significantly improved their operating practices and range of capabilities over the years, there generally remains a gap between what users require and what they feel has been achieved to date. (Langley, Allen & Newton, 2000). Therefore, 3PLs should position and market themselves to assist outsourcing companies in strategically managing their logistics functions. This means that the 3PL must build and possess logistics capabilities which will enhance the strategic effectiveness of the logistics function for their customers and enable them to capitalise upon their competitive advantage in the marketplace. (Hum, 2000). The following sections provide various discussions with regard to these supply-side trends as well as insight into important issues connected thereto Growth and development of the 3PL industry Although 3PL services are playing a significant role in the increasingly popular trend of logistics outsourcing, the term 3PL did not even exist before Nevertheless, according to statistics quoted in the US, 3PL services proceeded to grow at a 15% to 20% pace per year during the 1990s. Between 1991 and 1995, the proportion of Fortune 500 manufacturing companies making use of 3PL services increased from 37% to 60% (Lieb, 2002), and the market for 3PLs that offers expertise in providing the most reliable and cost-efficient freight services and, through economies of scale, can negotiate the most favourable rates, continues to grow (Wilson, 2001a). In 1999, Sankaran and Charman stated that, in keeping with the trend towards outsourcing and the focus of companies on their core competencies, the 3PL industry Chapter 4-21

22 appeared to be on the growth phase of its lifecycle in the US, Europe, and elsewhere. Also in 1999, Konezny and Beskow predicted annual 3PL growth of about 20%. By 2000, total annual revenues of these companies were expected to be in the range of $40 to 50 billion. (Armstrong, 2000; as quoted by Langley, et al. 2000). Figures later quoted showed an increase in revenue generated by 3PLs in the US from $46 billion in 1999 to $56.4 billion in (Armstrong & Associates, 2001; as quoted by Sopher, et al. 2002). By 2001 estimated total contract logistics market revenues were $60.8 billion. (Armstrong & Associates, 2002; as quoted by Langley, et al. 2002) These third-party revenues come mainly from the following services, ranked in order of largest revenue share of the total contract logistics market to smallest:- valueadded warehousing; distribution services; international operations; domestic transportation management; dedicated contract carriage; and IT. (Sopher, et al. 2002). The services supplied by 3PLs consume a significant portion of overall logistics and supply chain budgets in the US, and the figures being spent on logistics are on the increase. (Delaney, 2000; as quoted by Langley, et al. 2000). With regard to other countries, research has found that the US 3PL industry is broadening its international focus with particular emphasis on opportunities in Europe and Asia. (Lieb & Randall, 1997; as quoted by Murphy & Poist, 2000). Furthermore, Asia-Pacific has been rated as the fastest growing region, followed by Latin America, Eastern Europe and Africa-Middle East, for 3PL opportunities. (Burns, et al. 2001). In 2001, it was forecast that the outsourcing of business processes to logistics service providers in the Greater China region would become a US$21 billion a year industry by (Anon., 2001). The percentage of supply chain outsourced is expected to remain stable over the next five years (Burns, et al. 2001), however long-term growth for 3PLs is expected to come from significantly more market penetration and continued globalisation. (Armstrong, 2001). Analysis of 3PL customers in the US indicates that there is significant opportunity to expand. Furthermore, the area with the most potential is value-added warehousing and distribution services. (Armstrong, 2001). However, future growth for 3PL providers also depends on their success in attracting new Chapter 4-22

23 customers. Research shows that there is a growing market, and major sources of revenue, for US-based 3PLs in Western Europe, and significant projected growth in Eastern Europe, Mexico and Asia. Providers are also aggressively expanding their service offerings to include purchasing capabilities, inventory management and financial services. (Accenture, 2001). The main reason for these growth patterns in logistics outsourcing, and specifically the 3PL market, is that these contract providers can achieve supply chain management services cheaper and better than outsourcing companies themselves. Furthermore with the increasing focus by companies on their core competencies, manufacturing and retail companies are outsourcing transport, warehousing and inventory management as these are not their areas of expertise or primary concern. Developing and selling their products is the core focus; however at the same time they are dependent on the efficient and effective functioning of their supply chain, and logistics improvements usually result in significant savings and increased customer service. However such improvements require specialised knowledge, advanced technology applications and significant process improvements. (Armstrong, 2001). According to Gottschalk (2001) 3PLs are increasingly having to concentrate on value-added services, such as consulting; accumulating expertise and experience; the application of IT to supply chain management; tailor-making logistics solutions for customers; and addressing customers logistics needs. The provider must therefore leverage their abilities and be prepared for constant changes in the industry driven by technology, innovation, outsourcing trends and phenomena, and globalisation. Logistics service providers also increasingly need to manage themselves strategically in order to gain a growing share of the outsourcing market. (Hum, 2000). They will need to provide significant quality process improvements and cost savings including staff flexibility; better asset deployment; innovative IT capability; pre-built efficient and adaptable processes; and specialised skills. These capabilities will allow 3PLs to efficiently execute a number of activities, which are often integrated to obtain major savings from less inventory and shortened supply chains. (Armstrong, 2001). Chapter 4-23

24 Providers also need to take cognizance of the shifting competitive landscape. For example, according to Sopher, et al. (2002), there are four key emerging trends that will shape the 3PL industry s future and of which 3PLs must be aware, namely: There is an increasing focus on security and safety. Supply chain visibility and access to real-time information on inventory, shipments, order status and so on, is important to logistics efficiencies such as reduced inventory levels and improved customer service, and for managing unexpected events or problems. It is also critical to maintaining the integrity and security of products while they are being transported, handled, and stored. Providers will increasingly be expected to take the lead in identifying and implementing improved security processes and contingency planning throughout the supply chain. There are more 3PLs emerging from the ranks of shippers, and large shippers in particular are looking to leverage their logistics assets and resources and generate new revenue streams. These shippers often have the capability to offer a full range of logistics services, including warehousing, inventory management, information systems, order fulfilment, call centres, demand forecasting and planning, and transportation. They are also well-positioned to integrate supply chains in which they participate. There are global 3PL companies being formed via mergers. The consolidation of the 3PL industry is ongoing and a number of major providers have made acquisitions to expand or strengthen their international scope. Mergers and acquisitions create 3PLs that can provide one-stop shopping for logistics services, and that can manage global supply chains for their clients. There is increasing sophistication and co-ordination in logistics service provision, such as the growth of LLMs, providing an alternative to the fully integrated logistics service provider. Few individual 3PLs are able to provide all the logistics requirements of a company, and the company must thus employ more than one 3PL to meet its needs while designating one of the 3PLs or a consulting company to serve as a LLM, managing and co-ordinating the different providers employed. The LLM must provide strategic leadership and utilise the comparative advantages of each of the 3PLs to achieve the supply chain objectives of the company. One result of this emerging trend is that 3PLs are Chapter 4-24

25 finding themselves in the position of co-operating and partnering with companies that they compete with in other markets. The partnering 3PLs must also be able to integrate their systems with one another and with those of the client. In the US, many 3PLs are also developing strategies to pursue more medium-sized opportunities. According to Armstrong (2001) there are two main trends in this regard. The first is the founding of web-based companies where transportation managers operate primarily through the Internet, affording small-medium markets the opportunity, often on a transactional basis, to have sophisticated solutions. The second is for distributors and shippers to form their own 3PLs. Companies who have built integrated warehousing and transportation infrastructures are joining the 3PL market. These new 3PLs are often found in the retail sector, where the lack of supply chain management visibility and control is leading to a host of new Internet options. Web solutions will be necessary to remain competitive. In summary, the ever-changing and increasing demands of customers, along with the natural maturation of the industry are creating both opportunities and challenges that 3PLs must consider in their strategic planning. (Sopher, Lareau & Crum, 2002). Although, outsourcing is potentially difficult, experience gained by 3PLs over the last few years along with advancements in the flexibility of information technology, has reduced the complexity of logistics outsourcing. Furthermore 3PLs are increasingly developing methods to assist companies in their supply chain management. As additional data is released on the positive implications of logistics outsourcing with a 3PL, scepticism in this regard should also diminish. (Konezny & Beskow, 1999) Trend toward comprehensive solutions As more companies, for example manufacturers, outsource their logistics to enable them to focus more on their core business and become more efficient, logistics companies will focus more on providing efficient 3PL services, in the process improving the entire supply chain. (Wolfe, 2000; as quoted by Christie, 2000). Chapter 4-25

26 As was suggested in Sections and 4.2.2, regarding logistics outsourcing definition and 3PL development, logistics service provision is increasingly progressing beyond the historical realm of outsourcing. Companies have traditionally thought of logistics outsourcing services as a solution to a single logistics activity or process. For example, companies could outsource warehousing and distribution to one service provider, freight payments to another, and transportation to yet another. However companies are increasingly looking for increasing integration of their different business processes so that they can have operational visibility across the organisation. Companies are also looking to streamline the number of service providers that they use so that they can better manage their provider relations. Therefore, companies have started seeking service providers that offer more comprehensive logistics outsourcing solutions, and logistics outsourcing service providers are adding new technologies and service options to expand the value of their offerings. As was mentioned previously, many service providers are therefore also looking toward strategic partnerships with complementary service providers as a competitive tool in building integrated value-adding logistics and supply chain services. While some of these partnerships have been formed between service providers with different core competencies along the logistics value chain, partnerships are also being formed with systems integrators and consulting companies. (Konezny & Beskow, 1999.) Increasingly, service providers will therefore need to actively seek strategic partnerships as a competitive tool. Partnerships and alliances give service providers access to the skills and capabilities they need to deliver quality services while allowing them to remain focused on their own specific core competencies. Partnerships also allow the parties to share the costs of development and distribution, which provide cost efficiencies for both partners and their customers. In addition, partnerships will allow service providers to quickly consolidate a full range of services, expand geographic coverage, and reach a larger customer base. Chapter 4-26

27 Logistics service providers are similarly, systematically and progressively building up their in-house logistics process expertise, particularly with respect to management levels. This is particularly important considering that as companies look to outsource more of their logistics processes as a system and as the technical demands of logistics outsourcing increase, the demands on logistics outsourcing service providers will grow increasingly complex. Managers of 3PLs can no longer rely on traditional skill sets but must embrace and champion change, be a good negotiator, have excellent communication skills, excel at building and maintaining relationships, and manage operations rather than be involved in the physical execution thereof. (Corbett, 1998; as quoted by Harps, 1998). Furthermore, as providers of logistics outsourcing services increasingly require access to a number of different and critical skills, this is adding impetus to the significant value to be found in partnering with complementary service providers, as was also pointed out in a previous paragraph. The skills are illustrated in Figure 4.1. Figure 4.1 Required skills for logistics outsourcing service providers Project management expertise Content expertise Satisfied clients Logistics process expertise Transaction processing & reporting Hosting/infrastructure expertise Customer service excellence Application development expertise Source: IDC, 2001; as quoted by Ravi, Chapter 4-27

28 The markets for 3PL services will continue to change with both users and providers becoming more capable and their expectations of each other rising. (Langley, et al. 2002). Customer demands for performance and sophistication are accelerating. (Langley, et al. 2000). Figure 4.2 and Table 4.1 illustrate the differences between a logistics activity provider and a sophisticated 3PL provider of logistics and supply chain solutions. Figure 4.2 Evolution of a 3PL relationship Lead logistics manager Full SC management: sourcing - consumption Consulting Re-engineering Execution/operation Customer ROI/Shareholder value Optimised/integrated SC solutions: APS/decision-support/IT execution Modelling Integration of: supplier/customer/logistics provider Shared databases, production scheduling, inventory levels Optimised postponement Multi-client network solutions & IT Shared crossdock/merge-in-transit Shared transportation Shared IT Physical distribution service solutions & IT Carrier brokering Dedicated closed loop transportation JIT/crossdock management Warehouse management/order fulfilment Traffic optimisation & tracking Integration optimisation Source: Ryder System, Inc. as quoted by Konezny & Beskow, Chapter 4-28

29 Also useful as a description of the differing and more integrated role of a LLM as opposed to a transaction-based and/or single logistics activity provider, are the comparisons provided in Table 4.1. Table 4.1 Comparing logistics activity providers and more sophisticated LLMs Characteristics Logistics activity provider LLM Description of services Contract is viewed as a discrete activity; service providers offer IT platform and services through which transactions take place Metrics Decision-maker Volume of shipments handled, efficiency, accuracy, price, number of transactions, and order completion The client identifies and pursues strategy Contract encompasses comprehensive logistics process and is IT enabled Reduced inventory, lower logistics costs, tighter delivery schedules, and optimised supply chain management processes Logistics strategy is developed through a partnership between the service provider and client Outsourcing contracts Based on standard objectives Based on long-term strategic objectives, such as gainsharing Functional responsibilities Execution at the IT level Execution in both logistics services and other valueadded services Source: IDC, 2001; as quoted by Ravi, In summary, a company s decision to outsource logistics activities is based on the desire to improve performance while reducing costs. The belief is that logistics service providers, whose core competency is the management of logistics operations, will add great value through their expertise and scale economies, and increasing levels of sophistication and comprehensive management of logistics processes. Chapter 4-29

30 4.2.4 The growing importance of information technology According to Ravi (2001), as companies re-evaluate their logistics functions, they are seeking to streamline their logistics processes, and apart from consolidating the number of outsourcers they use, to leverage information technology to improve logistics functions. The demands vary to some extent by company size. Larger companies are looking to link new technologies with their existing relationships and systems, while small to medium-sized companies are looking to access bestof-breed processes, technology, and trading partner networks, at minimum financial risk. However, in the final analysis, irrespective of company size, any evaluation of outsourcing as an option, must take into consideration the effect that this would have on the information systems of the company as well as on its ability to capitalise on supply chain opportunities. (Hunter, 2002). Furthermore, with today s leaner, flatter organisations, decision-making is being pushed further down in the organisation and companies seek to keep costs down by having those closest to implementing decisions, enabled to make those decisions. In order to be effective therefore, companies require efficient and reliable access to and control over information and demand systems that allow the convergence of central information control with decentralised decision-making. Advances in Internet technology, for example, have given logistics outsourcing service providers the ability to support the needs of these leaner organisations. Many new applications appearing in the market address this specific need for access to information through a common platform, enabling companies to make faster and better-informed decisions. (Ravi, 2001). Supply chain planning software suites offer some logistics capabilities, but most companies find that transportation decisions can be difficult to automate. (Wilson, 2001b). Nevertheless, the use of information technology is a key component to creating a world-class supply chain logistics operation. Just as the efficient movement of physical goods between members of the supply chain provides value creation opportunities, proper management of the parallel information chain that channels the flow of product in the supply chain is equally important. Sharing Chapter 4-30

31 information along the chain allows for optimal planning of production, lower inventory requirements, and better co-ordination of goods movement throughout the supply chain, all of which lead to a lower delivered-product cost. The value proposition of the use of supply chain software is thus as follows: Information technology can link members of the supply chain and create pipelines for efficient communication. (Konezny & Beskow, 1999). Electronic links connecting suppliers, transportation providers, manufacturers, distributors, and customers allows for efficient exchange of information that can be used to co-ordinate the activities of supply chain members. Supply chain software can also provide real-time data to supply chain members, enabling them to react quickly to changes in the dynamic environment of the supply chain. For example, if a piece of inventory has not arrived in time to meet a JIT manufacturing sequence, the information system can automatically share that information with other supply chain members so they can make appropriate adjustments. Finally, analytical software processes real-time data to aid companies in making decisions regarding supply chain operation. For example, a transportation planning analytical software programme can process data regarding transportation routes, volumes, carrier schedules, and other factors to determine the most efficient structure for a transportation network. (Konezny & Beskow, 1999). Systems such as enterprise resource planning (ERP), electronic data interchange (EDI), the Internet, and various means of quickly and efficiently processing large amounts of digitised data are thus playing an increasingly important role in integrated supply chain management, of which outsourcing is an important part. Providers are increasingly embracing the Web to provide technical support and linkages to clients even if they are not heavily involved in supporting ecommerce activities for their clients. They are using the Web for specific applications to expand the range of services offered to their clients. However where e-commerce was identified as the most significant opportunity available to the 3PL industry in surveys in 1999 and 2000, in PLs indicated that their greatest opportunities were in globalisation, in which IT also has a key role to play. (Accenture, 2001). Chapter 4-31

32 There is therefore a definite trend towards a new breed of logistics provider. Building on their experience with web-based logistics applications as well as logistics processes, they are differentiating themselves from traditional logistics service providers by emphasising the integration of technology with their services. In addition they are complementing their technology offerings with business process knowledge, through either partnerships or associations with asset-based players, 3PLs, and carriers. Some have built their services directly for the intermediary, seeking to web-enable the 3PL. Furthermore, to increase their expertise in logistics processes, many of the newer technology-based service providers are also aggressively developing their in-house logistics process expertise. Most of these new service providers boast seasoned logistics experience in their senior management teams. In addition, some technology-based service providers work closely with logistics practitioners to have direct access to best-practice process information, which they can use in process reengineering or embed in their technology offerings. (Ravi, 2001). Therefore, progressive motor carriers and logistics providers will need to increasingly invest in web-based services to enable their customers to better serve their own customers, manage transportation more effectively, and make informed decisions. (Harps, 1999). In summary, 3PLs will increasingly need to provide an integrated, end-to-end solution with significant financial and operational performance improvements, and the cost of entering into the 3PL market now includes technology and implementation capabilities for warehouse management, transportation management, and webenabled communications. The focused efforts of 3PLs to continually upgrade and expand IT capabilities have reduced many of the once differentiating high-value technologies to what are now minimum requirements. (Langley, et al. 2002) Critical success factors for a 3PL Chapter 4-32

33 Within the future growth of the 3PL industry, there will be winners and losers. (Konezny & Beskow, 1999). As was alluded to previously, the future success of 3PLs will depend on their ability to deliver the requirements of the users better than another provider. (i) Criteria for growth Characteristics that drive the growth of 3PLs include breadth and depth of service, strength of core competencies, economies of scale, IT capability, human resource talent, and the provision of global service. Furthermore, the ultimate winners in the 3PL market will be those companies that use their resources to drive continuous improvement, and add value and service to their customers year after year. (Konezny & Beskow, 1999). Increasingly 3PL customers are requiring assistance to lower logistics costs; shorten cycle time; improve service level; reduce inventory levels; and enhance reliability. Demonstrated strong core competency/economies of scale; information technology; breadth of services; geographical presence; and flexible/performance-driven culture, for example are therefore critical factors in determining the level of value that a 3PL can provide. (Huang & Kadar, 2001; Konezny & Beskow, 1999). (ii) Criteria for effective logistics service provision Quoting the Hayes-Wheelwright framework approach for strategic management of 3PL services, Hum (2000) suggests that the effectiveness and level of logistics service provision should be evaluated according to the following criteria:- The amount of ongoing, in-house innovation, continuous improvement and total quality management (TQM). Providers need to invest in logistics process/delivery improvements continual enhancements in process procedures and technologies, including the active and strategic management of all intellectual assets available to the 3PL service provider. The 3PL must seek to optimise the intellectual base of its entire workforce to continually improve its logistics capabilities. Chapter 4-33

34 The extent to which it develops its own logistics systems and technologies. Providers need to continually consult their suppliers seeking to understand and adapt to master their systems, technologies and internal resources. The attention paid to logistics structure and infrastructure. Logistics effectiveness integrates measurement systems, planning and control procedures and staff policies with structural decisions on capacity, location and technology. It considers structural and infrastructural elements as important, complementary, sources of competitive strength. This means equal emphasis on facility size, technology type, and employee training, motivation, and incentive-schemes. The link between product design and logistics service delivery design. There should be emphasis on parallel and interactive development of both products and logistics processes, i.e. concurrent engineering and logistics system work. Therefore product design should consider logistics requirements from the outset. Chapter 4-34

35 Hum (2000) adds that premier logistics service providers must specialise in a variety of high quality logistics processes and practices, as well as logistics management consultancy services. A determination to be the best, offer complete professionalism, and keep growing to truly be the customer s partner in total logistics is critical. A further critical factor, which has also been mentioned previously, is the building of expertise and skills for the logistics outsourcing service provider. The provider must recognise the critical need to develop its in-house human resource capabilities, thus maintaining a strong focus on training and development. This must be a combined effort between management, the unions, and the employees to ensure training excellence and the development of each employee to their fullest potential. The provider must build a track record of hiring, training, and retaining quality people, at the same time building a culture that will help align its people and efforts for strategic competitiveness. There must also be ongoing focus on logistics research and development, and constant identification of new logistics problems and application of a conscious problem-solving approach to these problems leading to state-of-the-art logistics solutions. (Gonzales, 2003; Hum, 2000). Human resource issues will dominate logistics for the foreseeable future, particularly with respect to growth and development. Training and developing employees pays dividends in terms of logistics performance, employee retention, motivation and morale. The best logistics companies invest significant amounts of time, effort, and money in training. Management should view training as an investment, not a cost. (Keller ed. 1999). In summary, 3PLs must be strategic in their management and building of logistics capability for the benefit of their clients, and they must be managed effectively and strategically. (Hum, 2000). (iii) Criteria for successful relationships The creation of good relationships with customers is critical. Chapter 4-35

36 Logistics is a critical component of the client s customer service, and clients naturally have some concerns about outsourcing such a key area. Trust is critical and is created when the client has confidence in both the performance capabilities and commitment of the 3PL. Providers must be able to supply value-added services and show improvement in service and cost on a continual basis. The 3PL must have the ability to grow with the client. Client requirements also continually change and the 3PL must thus be flexible. The client wants to know that it can always rely on its partner, even when the situation or action is not specifically covered in the contract. It is critical for providers to be willing to adapt and change for the client s best interests. As such the provider needs to be building logistics physical infrastructure comprising facilities, equipment, hardware and software designed specifically to fit the needs and requirements of their customers. This is in line with a strong logistics partnership philosophy. (Hum, 2000; Garschagen & Martin, 2001; Sopher, et al. 2002). Based on their experiences in working with both providers and users of logistics services Sopher, et al. (2002) offer the following advice to 3PLs: Include operations and sales staff when meeting prospective clients as the operations staff will have most of the day-to-day interaction with the client. Do not over-promise in the bid process as client expectations will not be met. Look at the client s business as a long-term relationship as many clients want a partnership relationship and also much 3PL growth is from existing clients. Do not rely on generic presentations; be client-focused, customise the presentation to show how value can be added to that specific client. Include bottom-line figures and plans for systems integration or development, and include the client s financial and IT functions. Identify how performance will be assessed as good performance metrics are essential to demonstrating that service provision is good and cost effective. Have a strategic plan for the client, presented to senior management quarterly, and submit monthly or quarterly reports to operations managers. Chapter 4-36

37 Continually educate and inform the client as good communication is the foundation upon which trust is built and trust is key to a successful relationship. Creating relationships based on trust, continual improvement, collaboration, and mutual risk and reward are critical to ongoing success. (Langley, et al, 2002). (iv) Overcoming negative perceptions of users and non-users Sopher, et al. are furthermore of the view that many companies do not undertake outsourcing mainly because of concerns that they have with regard to service providers. For example it has been found that historically 3PLs have oversold their services, and that their capabilities, such as with respect to IT, are average at best, particularly regarding data quality and timeliness, and their ability to integrate with other partners and systems. (Gonzales, 2003). Other concerns and negative perceptions include (Sopher, et al. 2002): The transition process: Clients worry about customer service being adversely affected during the transition. Therefore 3PLs should include a transition strategy as part of their implementation plan; however most do not. The depth of the 3PL s management team: The 3PL should have quality back-up should something happen to the primary individuals assigned to the client. Security and safety concerns: This is more relevant in some countries. Chapter 4-37

38 Trust: 3PLs need to create a sense of trust with clients. The client needs to have confidence that the 3PL has strong exceptions-based management skills in order to deal with occurrences outside of management s control. Price: A 3PL must be price competitive and providers must beware of cost creep and price increases after the relationship has started. Logistics service providers therefore need to ensure that they address these various issues, concerns or negative perceptions in order to overcome these barriers to outsourcing and to expand their market among both users and non-users. Growth in the 3PL market thus comes from the expansion of services to existing customers and from new customers (Chow & Gritta, 2002) that perhaps do not currently outsource due to the above-mentioned and other reasons. Providers must thus make themselves known to potential customers and, according to Sopher, et al. (2002), aggressively market their service performance and technology capabilities, at the same time addressing barriers to outsourcing, in order to successfully attract clients. This is particularly important in an environment where 3PLs have different types of expertise and the marketplace is changing constantly. One source of potential customers is the supply chain partners of existing clients. By serving many supply chain partners, a 3PL can better co-ordinate interorganisational logistics processes and attain even greater cost and service improvements throughout the supply chain. Another approach to attracting new clients is to target companies or industries with the same logistics operations and value-added services as existing clients. Using a 3PL that is successful in companies with similar logistics requirements engenders confidence and trust. Chapter 4-38

39 A 3PL can also promote its name in the marketplace by (Sopher, et al. 2002): Advertising or publishing articles in trade magazines Participating in industry conferences and trade shows Teaming up with providers of services that the 3PL does not offer (such as software providers, and other 3PLs with different logistics service focus). In summary, a 3PL like any quality service provider must continually add value to existing clients, and since many companies look to the 3PL for leadership in logistics systems development, strong information technology capabilities are also critical. There is tremendous scope for providers to improve their capabilities around the availability of advanced services. These improved capabilities should have a direct correlation to the success of 3PL providers customer relationships. As the 3PL industry continues to evolve, the challenges in developing and sustaining successful relationships will intensify. Greater pressure to improve relationship management skills and services can also be attributed to increasing customer expectations, the rapid pace of technological changes, expansion into advanced service offerings, and globalisation. (Langley, et al, 2002). The ability to adapt quickly and seize opportunities will determine the level of success of companies in the logistics industry. (Nell, 2001b) Conclusion The use of 3PLs will continue to grow, driven mainly by the continued display of cost savings and service improvements and the increasing awareness of logistics as a driver of competitive advantage for a company. As customers build confidence in the use of 3PLs, more services will be outsourced and 3PLs will become more integrated with their customers and be able to add further value by leveraging physical and intellectual logistics systems between customers. (Ravi, 2001) However to date, expansion of services to existing customers has accounted for much of 3PL growth, and future growth will also depend much more on the success of 3PLs in attracting new clients. (Sopher, et al. 2002). 4.3 DEMAND-SIDE LOGISTICS OUTSOURCING TRENDS Chapter 4-39

40 In Section 4.2 practices, trends and issues were discussed regarding the supply of logistics services, by logistics service providers for example 3PLs. In Section 4.3 practices, trends and issues of logistics service users, demand-side logistics outsourcing, are discussed Industry sectors and outsourcing According to Embleton and Wright (1998), it has been shown that the biggest users of outsourcing services by industry are manufacturers, wholesalers and the retail trade, which supports the fact that managers in more competitive industries are forced to investigate all avenues to maintain profit margins. More specifically, according to Langley, et al. (2000), it is the automotive, chemical, computers and peripherals, consumer products, medical supplies and devices, and retail industries in the US that view logistics as strategically important and are making purposeful moves toward integrated supply chain management. The electronics and telecommunications industries have also been added to this list. (Langley, et al. 2001). With respect to the percentage of company revenue spent on supply chain activities, research conducted by Konezny and Beskow (1999) ranks the following sectors from biggest spenders to smallest:- telecommunications; appliances; computers; chemicals; packaged goods; semi-conductors; pharmaceuticals; and automotive. Furthermore, 3PL usage in the US appears to occur to the greatest extent in the consumer product, and computer and peripheral industries. Although somewhat lower, also significant is the use by the automotive, chemical, and retail industries. Much lower incidence of involvement with 3PLs occurred in the medical industry, for example. (Langley, et al & 2002). However, many surveys directly target the manufacturing and merchandising sectors as they believe they are the most likely users of 3PL service (Murphy & Poist, 2000) and others find that the greater number of survey respondents are from the manufacturing sector (Langley, et al. 2001). Chapter 4-40

41 4.3.2 Position in the supply chain and outsourcing With respect to the position in the supply chain and its impact on outsourcing, some surveys inquire of the respondents whether they manufacture finished products or components and/or ingredients, with the majority indicating that they manufacture finished products. (Langley, et al. 2001) The figure below illustrates this graphically. Figure 4.3 Supply chain members Supplier of raw materials Manufacturer: components/ ingredients Manufacturer: finished products Wholesaler Retailer Source: Compiled for this thesis, In their 2000 survey Langley, et al. (2000) found that 64% of the manufacturing respondents manufactured finished products and 16% components or ingredients. In their 2001 survey Langley, et al. (2000) found that 59% of the manufacturing respondents manufactured finished products and 15% components or ingredients, while other respondents included retailers, wholesalers and raw materials suppliers. Position in the supply chain can influence the number and nature of inbound and outbound logistics activities in which the company is involved and thus its outsourcing practices and trends. Companies also tend to jointly outsource logistics areas that share an active flow of goods and information thus tending, for example with respect to finished products, to integrate the services of 3PLs across a welldefined sequence of activities that share information from the reception of customer orders and from the execution of shipping orders between the company s warehouses. Therefore companies jointly outsource functions across areas in which data exchanges are frequent and where there can be the development of synergies based on a more effective co-ordination of transactions and the avoidance of extensive investments of capital. (Rabinovich, et al. 1999). Chapter 4-41

42 4.3.3 Size of company and outsourcing No company is too large or too small to consider outsourcing. (Boyson, Corsi, Dresner & Harrington, 1999). Companies of all sizes are being forced by current competitive conditions to review their priorities, focusing their resources on a few key activities. However, Ravi (2001) states that a company s size does affect the reasons it outsources logistics functions. It also affects the choice of services and outsourcing arrangements. Large companies, such as those in the Fortune 500 in the US, have been outsourcing logistics functions for decades. (Accenture, 2001). Conversely, according to Armstrong (2001), as company size diminishes, the probability of 3PL use also diminishes. Research has also shown that more than 70% of the Fortune 500 companies have outsourced at least one major logistics function and are planning to spend increasing amounts in this regard. Furthermore, 74% of the largest manufacturing companies in the US currently use 3PL provider services. This is more than double the percentage a decade ago. (Accenture, 2001; as quoted by Wilson, 2001b). Furthermore, those same manufacturers, surveyed by Accenture in 2001, expected to increase the portion of their logistics operating budget dedicated to 3PL outsourcing from 25% to 34% in the next 3years. (Anon., 2001). An increasing number of large companies are finding a strong case for logistics outsourcing, given the complexity of logistics operations and needs, legacy IT systems, demand for speed to market, bottom-line challenges, and the need to resolve these aspects across many countries and through mergers and acquisitions. While large companies are more readily undertaking logistics outsourcing, they are also looking to reduce the number of providers that they employ so that they can maintain control and closely monitor their outsourcing. As logistics processes become increasingly intertwined with strategic business decisions, larger companies are also looking for providers that can offer more comprehensive services spanning the supply chain, not just function-specific solutions. Furthermore, in evaluating new web-based logistics services that have been launched, large companies look for Chapter 4-42

43 continuity with existing relationships and processes. Extremely important to large companies are relationships with 3PLs assisting in their logistics management. In some cases, these relationships have taken decades to establish, and companies usually have some influence with providers, an advantage they are not willing to relinquish. When they look for new services they therefore want to see how these build on their existing relationships and processes. (Ravi, 2001). Medium-sized companies, rated in the US as those with 100 to 1000 employees, are primarily seeking to reduce costs, through outsourcing. For many of these companies, the major motivation for outsourcing is to leverage the size and expertise of the third-party provider. The most common activities outsourced are warehousing and distribution; freight payment; and transportation management. These companies look for the outsourcer s ability to treat a collection of small and medium-sized companies as one large company, perhaps by aggregating the demand for a service such as negotiating rates with carriers or by possessing access to state-of-the-art technology. The resulting economies of scale create cost efficiencies for both the client company and the service provider. Recently, service providers have begun to leverage their experience with large companies to create standard offerings for medium-sized companies, wherein they offer the power and functionality of an inhouse logistics system in a pre-configured set-up that can be quickly implemented. (Ravi, 2001). With respect to small and emerging companies, many, especially rapidly growing ones, are choosing to outsource more of their logistics processes. Outsourcing allows small companies access to systems and best-of-breed processes to which they would not otherwise have access. Outsourcing also allows them to focus on the day-to-day management and growth of their business without the distraction of noncore activities. Furthermore, it allows scalability, so that the logistics functions and systems grow with the company, instead of constraining its growth. (Ravi, 2001). Refer also to Figure 4.4 in Section which shows expected outsourcing levels for the period to 2006, as related to small, medium and large sized companies. However, it is also relevant to note, with respect to the surveys quoted in the thesis, Chapter 4-43

44 and with regard to expected outsourcing levels for different size companies, that 65% of the North American respondents to the Langley, et al. survey in 2002 were companies with a turnover of in excess of $1billion, while 52% of the respondents to the Burns, et al. survey in 2001 were companies with a turnover of $100million or less Current use of outsourcing By 1999 it was estimated that less than ten per cent of logistics services in the US were outsourced. (Delaney, 1999; as quoted by Lynch 2000). In Europe, where outsourcing has a longer history, the percentage is estimated at slightly under 25%. (Lynch, 2000). In 2001 the percentage of supply chain activities outsourced in the US was estimated at 20%. (Burns, et al. 2001). Chapter 4-44

45 With regard to the percentage of companies using outsourcing, in 2002 it was estimated that 78% of companies in North America made use of 3PLs, up from 73% in 2000; with the same study estimating that the percentage of 3PL users from Western Europe was 94% and from Asia-Pacific, 92%. Although the latter sample size was limited, the data suggested that the 3PL usage rate among Western European companies that use 3PLs is significantly greater than that among North American companies. Respondents in Western Europe also currently spend a larger percentage of their logistics budget (51%) on 3PL services than do those in North America (43%). (Langley, et al. 2002) Reasons not to outsource Given the apparently compelling advantages of working with a 3PL, the question is raised as to why more supply chain logistics functions have not already been outsourced. Furthermore, research indicates that of those companies not currently using 3PL services, 91% of companies surveyed from North America indicated that they have no future plans to do so. (Langley, et al. 2002). The reasons listed in Table 4.2, and based on various surveys of the 3PL market in the US, provide an explanation as to why the use of 3PLs is not more prevalent. Langley, et al. (2002) for example, list various negatives of using a 3PL and point out that these are the reasons why many companies choose not to outsource logistics activities: The primary negatives of using a third-party provider listed in the Burns, et al. (2001) survey were reported by respondents who had previously used the services of a 3PL. Chapter 4-45

46 Table 4.2 Problems with outsourcing/reasons for not outsourcing Langley, et al. (2002) Costs would not be reduced Logistics is too important to outsource The company has more logistics expertise Control would be diminished Time/effort spent on logistics would not decrease Service levels would not be realised Customer complaints would increase Burns, et al. (2001) Ravi (2001) Konezny & Beskow (1999) Outsourcing is too Management Resistance to change expensive philosophy, tradition and resistance to Providers do not understand the company s business Providers overpromise on service capabilities Providers supply poor information/have poor data collection ability Providers lack the necessary service capabilities Providers lack global scope change Lack of outsourcing education Lack of confidence in providers Fear of losing control and confidentiality Low awareness of the capabilities and successes of 3PLs Outsourcing is potentially complex Loss of control Benchmarking is difficult There is a limited history (the 3PL market is relatively new) Source: Compiled for this thesis, In their PL Study, Langley, et al. found that 63% of companies that did not outsource refrained from doing so because they believed that outsourcing would not reduce their costs; however surveys that ask companies why they outsource almost always find cost and pricing to be among the top three determinants for outsourcing, as well as being among the leading criteria in their choice of a service provider. Similarly, loss of management control was a key reason given for not outsourcing, in a survey quoted by Bardi and Tracey (1991); however, interestingly loss of control was not identified as a major problem area for companies that do outsource. Also important to note is the fact that, according to Langley, et al. (2002) many users that have been satisfied with their 3PL relationships have been so because it has helped them to improve, rather than diminish, control over certain outsourced activities. Chapter 4-46

47 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 company s business goals; and difficulty of changing providers have also been cited as potential problems by outsourcing companies. (Bradley, 1995; as quoted by Razzaque & Sheng, 1998). Another major obstacle to outsourcing is the difficulty of obtaining organisational support. (Bowman, 1995; as quoted by Razzaque & Sheng, 1998). Looking objectively at the range of reasons why non-users choose not to outsource, it is important to respect the judgment and perceptions of these respondents. Regarding issues relating to expertise and results, it would not make sense for a company to outsource an activity when doing so may likely produce an inferior result. In cases such as this, the choice of not outsourcing is understandable. However, when deciding whether or not to outsource, it is important to consider whether conducting logistics activities on an internal basis represents a strategic fit with the company s core competencies, and whether it will produce an acceptable financial return. (Langley, et al. 2002). Companies planning to outsource their logistics must also address each of the problem areas and potential negatives of outsourcing carefully, so that the outsourcing can be a catalyst for improvement, rather than another problem to handle. By considering various aspects of the outsourcing process cautiously, companies can expect to achieve greater success with logistics outsourcing. (Razzaque & Sheng, 1998). Chapter 4-47

48 Chapter 3 and Annexure A of this thesis also outline various problems and pitfalls of outsourcing, and conclude that these often arise due to poor outsourcing decisions and management, and include concerns with respect to outsourcing initiatives in the following areas:- cost, control, service, irreversibility, inflexibility, multiple clients, employee morale, public image, technology change, outsourcer profit, being leveraged by suppliers, interruptions to supply, poor quality of supply confidentiality leaks, lost opportunities, loss of core activities, loss of internal coherence, loss of intellectual property rights, uncertainty, conflict, and financial problems. Loss of control was identified as the major barrier to outsourcing, despite its sound financial appeal, and it was found that companies are against the idea of supplier dependency. (Lonsdale & Cox, 1998; Greaver, 1999; Lynch, 2000; Langley et al. 2002). In summary, regardless of the various concerns and negatives of outsourcing, good logistics management suggests that non-users should investigate the 3PL alternative. Although there is room for improvement, historically users have been satisfied with 3PLs, from a cost and a service point of view. (Langley, et al. 2002). Furthermore, the reasons respondents do not use 3PL services are often the very same used by other respondents to justify using those services. However, of the North American companies surveyed by Langley, et al. (2002), 91% of the respondents currently not using 3PL services, indicated that they had no future plans to do so Projected use of outsourcing in the 21 st century The 2001 survey conducted by Accenture and Northeastern University showed that despite a difficult economy, Fortune 500 companies were planning to spend more on 3PL services over the three years following the survey than they did in the previous three. However, another study, by Burns, et al. in 2001 showed that the percentage of supply chain activities outsourced, estimated at 20%, was expected to remain stable over the next five years, suggesting that a period of slower growth may lie ahead for 3PLs. They stated that in spite of the rapid growth of the outsourcing concept, and in contrast to the historical trends, which have generally shown a greater willingness to outsource transportation functions, several larger shippers in Chapter 4-48

49 the US have indicated that they plan to reduce the percentage of their supply chain that they outsource in future years. Thus the companies planning to reduce their amount of outsourcing offset the companies planning to increase their use of outsourcing, resulting in little net gain. With respect to the use of outsourcing and expected growth in the US for the period to 2006, relative to company size, Burns, et al. (2001) provide the following indications as reflected in Figure 4.4. It is interesting to note, as was also mentioned in Section 4.3.3, that the majority of the respondents to the Burns, et al. survey in 2001 were from small companies (turnover of $100million or less) while the majority of the North American respondents to the Langley, et al. survey in 2002 were large companies (turnover of in excess of $1billion). Figure 4.4 Use of third-party outsourcing in the first part of the 21 st century 25% 20% 15% 10% % 0% Small Medium Large Source: Burns, et al Chapter 4-49

50 In their 3PL surveys, Langley, et al. found that in 2000, 71% of the respondents outsourced and 29% did not; in 2001, 73% did and 27% did not; and in 2002, 78% of the North American respondents indicated that they did use 3PLs while 22% did not. Over the six years of the surveys there was an increase in the usage of 3PLs of 15% (from 68 to 73%). Furthermore, both North American and Western European respondents to the 2002 survey, projected increases in their spending on 3PL services over the next three to five years. However, with respect to the non-users, Langley et al. found that in 2000, 59% of the non-users reported that they had no future intentions of using 3PL services; while in 2001, 66% of the non-user respondents continued to report that they had no future intentions of using 3PL services; and in 2002, 91% of the respondents currently not using 3PL services, indicated that they had no future plans to do so. In terms of longevity of use of those that do outsource, results suggest that approximately 60% of those companies using 3PL services have been doing so for three years or more; approximately 30% indicated between one and three years experience; while 10% indicated one year or less. Overall, the results suggested that companies that indicated current use of 3PL services generally had at least several years of experience, and that current customers are expanding their use of 3PL services. (Langley, et al. 2000) Activities and services outsourced (i) Extent of activities and services outsourced Pressurised by current economic circumstances, manufacturers are looking to outsource major business processes, namely logistics, for both domestic and crossborder operations, with the logistics activities thus outsourced traditionally covering warehousing, transportation and freight-forwarding. (Kaneshige, 2001). According to Wilson (2001b), many, particularly large, companies are outsourcing their transportation and logistics functions, driven by a need to cut costs and the growing complexity of logistics technology. Although many companies are reluctant Chapter 4-50

51 to hand over critical supply chain functions to an outside company, they are discovering that 3PL providers are better at integrating logistics functions into supply chains and can obtain lower transportation prices. Companies are also increasingly using logistics outsourcing as a strategic tool, however most are still in the operational realm in this regard. For example, services used by large manufacturing companies have generally been limited to the following key areas:- warehouse management, shipment consolidation, information systems, fleet management, rate negotiation and carrier selection. Increasingly however, key supply chain activities such as customer spare parts and inventory supply and replenishment are being outsourced to 3PLs. In a survey conducted by Accenture and Northeastern University (2001), more than 70% of the US Fortune 500 companies indicated that they have outsourced at least one major logistics function such as transportation management, freight payment, warehouse management, shipment tracking or other transportation-related functions. Of those surveyed, 60% relied on 3PLs for warehouse management and nearly 40% outsource some portion of their order fulfilment services. It was also showed that many users rely on their 3PLs for IT support, mainly due to the fact that 3PLs have aggressively embraced supply chain management and Web technologies to expand the range of services they offer to their clients. Of the IT applications, the most popular was freight payment services, being used by 46% of the 3PL users surveyed; then transportation planning and optimisation. Nearly half of the respondents also indicated that they were interested in the possibility of outsourcing some aspects of the company s purchasing function. Freight payment services are receiving particular attention in the US as this presents a promising strategy whereby companies can reduce their transport costs by contracting the monitoring and management of freight bills to outside experts, improving overall transportation intelligence and strategy. (Reichard & Morgan, 1998). Companies also increasingly understand the strategic nature of the outsourcing decision, particularly with regard to the outsourcing of certain functions as opposed to others. Table 4.3 shows typical strategic and operational decisions by logistics management with regard to the outsourcing of certain activities. Chapter 4-51

52 Table 4.3 Typical strategic and operational decisions by logistics function Decision type Strategic Customer service Setting customer service levels Transportation Warehousing Order processing Selecting Determination Extent of transportation of number of mechanisation modes warehouses and location Inventory Replenishment systems Freight consolidation programmes Extent of warehouse automation Centralised or decentralised Safety stock levels Operational Service level measurements Public versus private carriers Rate freight bills Public versus private warehousing Picking Packing Order tracking Forecasting Freight bill auditing Stores measurement Order validation Inventory tracking Claims administration Warehouse stock transfer Credit checking Carrying-cost measurements Vehicle scheduling Rate negotiation Selection of materialshandling equipment Invoice reconciliation Inventory turns Shipment planning Fleet management Warehouse layout and design Performance measurements Shipment routing and scheduling Staffing Carrier selection Performance measurements Performance measurements Source: Stock & Lambert, Table 4.4 shows the logistics services most used or most outsourced as identified and ranked, from most used to least, by the various US surveys named in the table. Table 4.4 Logistics activities and services most frequently outsourced Langley, et al. (2002) Konezny & Beskow (1999) Accenture (2001) (For North America) Outbound transportation Outbound transportation Direct transportation Warehousing Warehousing Warehousing Inbound transportation Freight bill auditing/ Freight payment Chapter 4-52

53 payment Freight bill auditing/ Cross-docking Shipment consolidation Payment Customs brokerage Inbound transportation Freight forwarding Freight forwarding Shipment consolidation/distribution Carrier selection Customs clearance Product marking/labelling Customs brokerage Cross-docking Fleet management Rate negotiation Shipment Information technology Tracking/tracing consolidation/distribution Selected manufacturing activities Product returns & repair Order fulfilment Product marking/labelling Product assembly/installation Consulting services Selected manufacturing activities Order fulfilment Customer service Product returns & repair Inventory management Information technology Order entry/order processing Procurement of logistics Carrier selection Rate negotiation Inventory management Product assembly/installation Fleet management Distribution control Supply chain manager/integrator Customer service Order entry/order processing Factoring (trade financing) Lead logistics provider Source: Compiled for this thesis, In Table 4.5 Ravi (2001) and Armstrong (2001) indicate the percentage of services used by respondents, and Konezny and Beskow indicate the most dollars consumed in terms of total supply chain costs. Table 4.5 Logistics activities and services outsourced Armstrong (2001): % of total outsourcing per activity Ravi (2001): % of total outsourcing per activity Konezny & Beskow (1999): % of total supply chain costs per activity Warehousing 21% Distribution & 46% Transportation 58% warehousing Transportation 21% Transportation 22% Inventory carrying costs 30% Value-added 18% Freight bill auditing/ 17% Warehousing 8% Payment International logistics 10% Packaging & fulfillment 7% Logistics administration 4% Integrated solutions 9% International logistics 5% Dedicated contract 8% Freight forwarding 3% carriage Intermodal 5% Chapter 4-53

54 Lead logistics 4% provider efulfilment 1% Other 3% Total 100 Total 100 Total 100 Source: Compiled for this thesis, Based on their survey of the 3PL market in China, Huang and Kadar (2002) rank the following services from most outsourced to least:- direct transport services; domestic transportation management; freight forwarding; warehouse management; logistics information services; value-added services; and integrated supply chain management. In the US, logistics IT was ranked as the service least bought in the 2002 Inbound Logistics 3PL Excellence Awards, with global logistics services and consulting also ranked low on the services bought chart. Burns, et al. (2001) rank their list of logistics activities and services in terms of what they consider to be the most suitable for outsourcing, from most suitable to least as follows: Customer processing; warehousing; information systems; inbound transportation; packaging/material handling; outbound transportation; mode selection; carrier selection; raw material inventory deployment; traffic management; inventory management; finished goods inventory deployment; order processing; and sourcing and purchasing. The opinion that customs processing is the best function to outsource should benefit forwarders, as they are traditionally strong in this area. This may also explain the high ranking of forwarders in their suitability to manage a client s total supply chain. In terms of suitability of being outsourced, there is a large drop after customs processing with warehousing, information systems, inbound transportation, material handling, outbound transportation, and mode selection all viewed as better outsourced than kept in-house. The asset intensity of warehousing makes this function suitable for outsourcing, while the complexity of inbound transportation, as compared with outbound transportation, contributes to the inclination of shippers to outsource this transportation function. With respect to information systems, the market is beginning to recognise the value-added by information systems to overall supply chain management, and it is expected that IT capability is likely to become Chapter 4-54

55 increasingly important as a user-requirement of logistics service providers. Toward the bottom of the scale, order processing and sourcing and purchasing are viewed as core competencies least suitable for outsourcing. (Burns, et al. 2001). According to Langley, et al. (2002) among the most prevalent activities outsourced are outbound and inbound transportation, warehousing, freight bill auditing/payment, and international services such as customs brokerage, freight forwarding, and customs clearance. It is also interesting to note that there appears to be a greater use of outsourcing in Western Europe for activities relating to outbound and inbound transportation and warehousing. This may be because European companies have been more involved historically in the use of outsourced logistics services than their counterparts in North America. There also appears to be significantly less usage of freight bill auditing/payment services by Western European 3PL users than for those from North America. Apparently, the use of financially related logistics services is less well developed in Western Europe than in North America. In contrast, a number of activities appear to be outsourced less frequently in North America as well as in Western Europe. These activities include those directly related to customers (for example order fulfilment, customer service, and order entry/order processing), and strategic services (for example consulting and supply chain integrators). There does appear to be modest use of certain operationally focused activities, such as cross-docking, shipment consolidation/distribution, selected manufacturing activities, and product marking/labelling. (Langley, et al. 2002). It is furthermore important to note that LLPs supply 17 distinct services more frequently than non-lead logistics providers, including four types of IT: Electronic Data Interchange (EDI), satellite communications, web enablement and electronic supply chain management (e-scm). The success of these services is critical for excellent communications which are needed to effectively coordinate the many partners in the supply chain. Other services are logistics services: JIT, global trade services, inbound logistics, process re-engineering, payment audit processing, vendor management, and product life cycle management. Special services are Chapter 4-55

56 reverse logistics; while transportation services are with respect to small package, intermodal, and dedicated contract carriage; and warehousing services include location services and vendor management inventory. (ii) Level of satisfaction with activities and services outsourced From the results of their survey, Langley, et al. (2002) indicate that generally customers report high levels of success with their 3PLs. Lieb and Schwartz (2002a) reported that 82% of respondents in their survey reported a positive or very positive impact on logistics costs, 79% a positive or very positive impact on logistics service levels, and 69% a positive or very positive impact on customer satisfaction. However, despite the apparent attractiveness of the 3PL solution, the expected benefits are not always fully realised, and many companies feel that their initial expectations of 3PL providers are not being met. In their survey, Murphy and Poist (2000) listed 10 most commonly provided services and 10 mostly frequently used services and based on the results of their research, they suggest a mismatch between the two lists in that only five services overlap: EDI capability, freight consolidation, warehousing, consulting, and freight bill payment. They also found a lack of overlap between the top services provided and used, and that even in the overlap cases there appeared to be some large discrepancies. They concluded that it appears that many providers are offering services that are not very important to many customers and that at a minimum, the mismatching may affect general customer satisfaction with 3PL companies. In their research, Burns, et al. indicated that 20% of their survey respondents cited consulting companies as best able to manage their supply chain, 15% cited freight forwarders, 13% parcel carriers, 10% warehouse operators, and also 10% less-thantruckload (LTL) carriers. At the bottom of the scale, only 2% cited truckload (TL) carriers suggesting that shippers perceive these carriers as less able to provide impartial services across modes. The relatively strong performance of freight forwarders suggests that they are either improving their in-house consulting Chapter 4-56

57 expertise or developing a greater appreciation among the shipper community for forwarder services. The impressive ranking of the consulting companies reflects the strong push by many of them to build their logistics practice, and also could reflect the market perception that consultants are completely neutral when selecting carriers, recommending shipment modes and designing the overall supply chain. Carriers (TL and LTL), however, will need to improve their supply chain management expertise, or risk losing control of their customer base to consulting companies, freight forwarders, and other supply chain management companies. In summary, there is generally no single 3PL that is able to satisfy a company s total logistics requirements. While many can deliver warehousing, transportation and fleet management services, few are able to cover the full range of supply chain requirements that include logistics IT development and management, provision of pre- and post-sales customer service, and order processing. This shortfall in service capabilities means that the customers need to assemble and manage a combination of in-house and outsourced service components, resulting sometimes in the employment of a number of different service providers Number of providers used As has been mentioned earlier, companies generally desire to ultimately outsource major portions of their supply chain management to as few providers as possible, preferably making use of 3PLs that can provide end-to-end solutions for their logistics service and global supply chain needs. The more providers a company employs, for example, the more time it must spend selecting them and monitoring their performance. Concentrating on a smaller number of more reliable providers simplifies these tasks and can also win a greater commitment from these providers to maintain or improve the quality of service. (McKinnon, 1999.) Customers prefer one-stop shopping and in this regard will continue to reduce their supplier base. (Chow & Gritta, 2002). In their first Fortune 500 survey conducted in 1991, Lieb and Schwarz (2002) found that 78% of respondents used more than one 3PL provider. The percentage steadily Chapter 4-57

58 declined for the next seven years, reaching 40% in They state that this development reflected the expressed desire of many users for one-stop shopping, and the expansion of the service offerings of individual providers. However, in their 1999 survey the percentage of users reporting the use of more than one 3PL provider reversed direction and in that year s survey 63% reported using more than one provider and 73% in One possible explanation for this reversal is the current scale of many 3PL contracts. As potential buyers have increased in size through sales growth, mergers and acquisitions and international expansion, the scope of service offerings and geographical coverage involved in many recent 3PL contracts has made it increasingly difficult for one provider to meet those requirements. Providers have also responded to this issue with mergers, acquisitions and alliances, but it is clear that as users increase the scale of their 3PL requirements, many are unable to satisfy their requirements with a single provider. (Lieb & Schwarz, 2002). Therefore many companies are still using a good deal more than five providers. and Table 4.6 provides examples of shippers in the US that fall into this category, according to Armstrong & Associates (2001): Table 4.6 Number of 3PLs currently used by examples of shippers in the US US Shipper No. of 3PLs currently used General Motors 20 Daimler Chrysler,Hewlett Packard 18 Ford, Procter & Gamble 15 Wal-Mart, Sears 13 IBM, Toyota 12 E.I. Dupont 11 Kmart, Compaq 10 Kimberly-Clark, General Electric, Kraft Foods, Glaxo Smith Kline, Volkswagen 9 Nestlé 8 Goodyear, Nortel, Pepsi, Philips Consumer Electronics, Kroger, Xerox, 7 Quaker Oats, 3M, Honeywell International, Home Depot, Georgia-Pacific Chapter 4-58

59 Abbott Labs, BMW, Coca-Cola, Microsoft, Anheuser Busch, International Paper, John Deere, Honda, Nabisco, Nissan 6 Source: Armstrong & Associates, In the UK companies purchasing logistical services on a contractual basis have also preferred to employ relatively few service providers, according to McKinnon (1999). He states that survey work in the UK in 1996 revealed that around 39% of the respondents single-sourced these services while a further 47% employed between two and five contractors. The same survey enquired about critical factors causing companies to use more than one 3PL, and ascertained that they did so to ensure competition and countrywide capability, and for different business needs and the different strengths of the providers, as well as to ensure optimal flexibility, cost and service. Service and cost considerations dominated the decision. The majority of companies distributing throughout Europe outsource their logistics to several contracts, usually on a country-by-country basis. (Mercer Management Consulting, 1998; as quoted by McKinnon, 1999). However, many of the companies using more than one distribution contractor are not multiple-sourcing in the conventional sense. When applied to the supply of material goods, the term multiple-sourcing generally means obtaining identical products from different supplies. Where a company employs several distribution contractors, however, they seldom provide parallel services. A dominant motive for using several contractors is to subdivide distribution operations geographically and purchasing contract distribution on a regional basis which can yield important benefits by reducing the risk of the entire system being disrupted by, for example, industrial disputes or company failure, and permitting intercompany comparisons of rates and service standards. (McKinnon, 1999). Garschagen and Martin (2001) also state that there is an indication that 3PL customers are becoming more comfortable using local providers in foreign markets. They further state that the trend toward consolidation to one 3PL provider which has reversed in recent years may suggest that 3PLs have not met the challenge of integration or that this has not been managed well. Chapter 4-59

60 In summary, despite the fact that a single logistics service provider cannot physically provide all services across all geographic markets one-stop shopping and the reduction of the number of providers used does simplify logistics and outsourcing management for a company, and is therefore desirable. The new trend with regard to the number of providers used, that is thus emerging, is the concept of the LLP which will be, for an outsourcing company, the master integrator of their supply chain, overseeing other providers and acting as a single point of contact. (Thomas, 1998; as quoted by Chow & Gritta, 2002) Reasons to outsource The process of strategically engineering the movement and management of materials, products and related information from manufacturing to the end customer can be intimidating, and increasingly companies are considering the delegation of these responsibilities to a third-party provider. However if a company identifies such a need for logistics outsourcing it must find the right provider, and before the search begins it must answer some basic questions and take some important steps that could spell the difference between success and failure. One of the most frequent complaints from providers is that potential customers often do not know the reasons why they are outsourcing logistics or do not fully understand their own in-house logistics, or logistics requirements. Before approaching a provider, therefore, a company needs to clearly define the goals and objectives that they expect to achieve by outsourcing, and therefore the reasons why they are outsourcing. (Weiskott, 1999). In Chapter 3, the following reasons to outsource or benefits of outsourcing were identified:- cost saving; improvement of services; the ability to access outside expertise; strategic re-positioning; strategic sourcing; greater service integration and/or higher value creation; a search for greater efficiency and increased specialisation; faster, cheaper, better support functions; solutions to problems Chapter 4-60

61 created by business reorganisation and restructuring; global supply and deintegration; global competition and the need to have less suppliers and higher levels of service and quality from them; and contracts with fewer suppliers and closer, longterm relationships with those few. Literature shows however, that companies still tend to seek most importantly scale economies and cost reductions. As was also outlined in Section 4.1.4, Konezny and Beskow (1999) also assert that in order to achieve further improvement in logistics efficiency companies need to consider outsourcing. A logistics service provider can, for example, add value to a company at a number of different levels depending on the extent to which it is utilised and integrated into a company s supply chain. Therefore a 3PL can add value at the most basic execution level of the supply chain by determining and arranging for the most appropriate method of transporting a single shipment of goods, while at the most sophisticated level, a provider can be fully integrated into a company s supply chain. In this case, a 3PL designs, co-ordinates and executes a supply chain strategy while providing the company with value-added information to better manage core competencies. Konezny and Beskow (1999) go on to list ways in which a 3PL can add value through cost savings and/or service improvements and this may be found in Annexure A to this thesis, together with various lists of reasons for outsourcing by various authors. It is important that companies identify and understand the reasons why they are outsourcing, for example their logistics activities, in order for them to have realistic expectations of the outcome of the outsourcing initiative as well as to scope these expectations and service requirements for the potential provider thereof. It is also important that providers understand the reasons why companies outsource their logistics activities in order for them to capitalise on these reasons as well as to ensure that they comply with these requirements and goals in their service provision. Other research undertaken in the US identifies and ranks the following reasons to outsource from most important to least: Table 4.7 Reasons for outsourcing and benefits of using a 3PL Chapter 4-61

62 Langley, et al. (2002) Burns, et al. (2001) Langley, et al. (2000) Pressures to reduce cost Reduced transportation/ distribution costs (pressure to cut costs) Reduced transportation/ distribution costs (pressure to cut costs) Consolidations, mergers & Freed-up capital in non-core Emphasis on improved acquisitions areas supply chain management Emphasis on improved supply Reduced need for staff Consolidation, mergers, chain management acquisitions, etc. Globalisation Improved cycle time Implementation of new IT Rapidly accelerating new Improved customer service product introductions capability (pressure to enhance Pressure to significantly enhance logistics customer service Security issues Source: Compiled for this thesis, logistics customer service) Increased revenue opportunities Improved customer service capability (pressure to enhance logistics customer service) In their 2002 study, Langley, et al. found that the order of importance of the outsourcing reasons, and factors identified by users as impacting the industries in which they compete, had changed slightly. Furthermore, security was now more of an issue, which is interesting to note as this reason was added to their list since 11 September 2001 (refer also to the survey dates in Table 4.7). In summary, companies undertake outsourcing for reasons including the following:- the need to reduce and control operating costs; improve company focus; improve quality; reduce cycle time; make capital funds available; obtain cash infusion; reduce risk; gain flexibility; turn fixed costs into variable costs; stabilise an unstable situation; and engage an outside agent of change. (Bendor-Samuel, 2000; as quoted by Ittmann, 2002). However, while the basic reason a company outsources its logistics is the inability to manage logistics operations effectively in-house (Sopher, et al. 2002), the most frequent reason for outsourcing remains reducing operating costs. Lower distribution costs and reduced capital investment are thus the primary benefits of outsourcing for 3PL users. In the US economic pressures are moving 3PL clients to increase their focus on cost reduction, which entails a reduction in distribution costs, reduced capital investment, and reduced need for staff. (Burns, et al. 2001) Managerial involvement in outsourcing decisions Chapter 4-62

63 Outsourcing is potentially complex, particularly due to the fact that logistics is integrated into other company functions such as finance, marketing and manufacturing. (Konezny & Beskow, 1999). The strategic nature of the outsourcing decision is also increasingly being recognised by companies. There are many factors resulting in this awareness as well as that of top management with regard to the importance of logistics management, for example, in achieving shareholder value. In addition, the globalisation of supply sources, production, demand, and competition have led to growing interest in logistics on the part of top management. Increasingly, logistics managers are also participating in the formulation of competitive strategy of the company. Companies need good logistics systems, coupled with the inclusion of logistics in the strategic planning process, if they are to attain high levels of excellence and competitive advantage domestically and globally. (Stock & Lambert, 2001). Logistics issues such as the decision to outsource or not to outsource are also receiving increasing attention from top management and becoming increasingly strategic in their nature. (Lynch, 2000). Increasingly, the final decision on outsourcing is made at the corporate level, for example chief executive officer (CEO) and chief financial officer (CFO), with the transportation department, for example, playing an advisory role. (Burns, et al. 2001). Franzetta (1999) states that it is critical that no outsourcing attempt be made without the committed participation of all senior executives, in particular the CEO, CFO, the chief of operations, chief information officer, and especially the chief marketing officer. According to Armstrong (2001), the decision to outsource is usually the result of a CEO, CFO or logistics buyer questioning the current approach. He also asserts that a consultant will often be retained and charged with the responsibility of facilitating the decision. Simultaneously, teams involving the process owners and buyers should be formed. Working together, the team and consultant will recommend whether any logistics activities should be outsourced. If so, the team will guide the process and the selection. Chapter 4-63

64 Furthermore, as companies increasingly identify and acknowledge the role and importance of logistics and supply chain management to their businesses, there is a need for a logistics manager to be appointed to the company and included at the executive level. Finally, it is critical to keep in mind that the decision to outsource any logistics function is a strategic initiative that requires thorough pre-planning and analysis by all functional areas within an organisation. While logistics executives at customer companies are usually intensively involved in all stages of 3PL buying and management processes, there is an increasing need to leverage the expertise of executives in areas such as IT, finance, marketing and manufacturing. (Langley, et al. 2000). In summary, the real benefits of logistics outsourcing will be mitigated unless the broad spectrum of managers, who will ultimately be impacted by the outsourcing decision, are given the chance to express their interests and concerns, and have an input in the decision-making and outsourcing process. (Franzetta, 1999). In addition to the level and type of managerial involvement in the logistics outsourcing decision-making process, the type of agreement with the logistics provider; the time and steps spent when undertaking logistics outsourcing; and the criteria used when selecting logistics service providers, are considered to be key aspects linking to the success, or otherwise, of the outsourcing initiative. The following three sections, Sections , and , summarise further important trends, in addition to those mentioned in the preceding paragraph, to indicate how much time and effort is, and should be, spent on decision-making and implementation with respect to logistics outsourcing Type of outsourcing agreement and relationship According to Bender (1997), the development of an optimum world-wide supply chain strategy relies on symbiotic relationships among the partners in that process. Fostering a unique third-party relationship can streamline the supply, replacing costs with information. (Buxbaum, 1998). Chapter 4-64

65 As was discussed in Chapter 3, outsourcing options come in many forms. (i) Outsourcing options Outsourcing agreements can include limited outsourcing, for example, partial and collaborative relationships which can take several forms with respect to acquisition and sharing arrangements. Collaborative outsourcing relationships are often structured as joint ventures and partnerships, characterised by flexibility, risk and knowledge-sharing. They generally imply a strategic relationship and collaborative management with each trading partner needing to understand how the relationship and management can add value to their unique relationship. (Bishop, 2002). Today the concept of partnership is widely praised. (Metz, 2002). It is believed that many benefits exist for companies that collaborate, particularly with respect to the efficiencies possible for the supply chain. Logistics partnerships have a positive effect on the following aspects of the shipper s business:- cost, service, restructuring of supply chains, and control. However the success achieved in these areas will, according to shippers, be positively influenced by well-defined requirements and procedures, as well as communication on all levels. (Andersson, 1997). The buyer, seller, and third party should communicate directly at executive level and at operational level regarding quality assurance, forecasting and IT. (LaLonde, 1998). From an operational point of view, the success of logistics partnerships can be positively influenced by a low level of uncertainty and/or a high dedication of resources used. (Andersson, 1997). A variety of pressures including shareholder demands and technological developments are also propelling organisations to pursue value-focused collaborative ventures. Internal and external expectations of companies are growing and new business models are redefining the relationships between shippers, their service providers, and trading partners. As a result supply chain collaboration is intensifying to enhance company and customer value. The benefits of engaging in collaboration, and therefore improvement relationships, are cost savings, and productivity and Chapter 4-65

66 efficiency improvements. However, in order to successfully collaborate, companies must have the appropriate people, processes and technology in place. (Patterson, 2002). However, limited outsourcing decisions or partial relationships also have advantages and are generally more analytical than emotional in nature, primarily because few people are impacted on by the decision process or its outcome. (Gavin & Matherly, 1997). In markets where logistics outsourcing is still an emerging trend, discussion of partnering is widespread, but few providers are actually committing themselves to specific alliances. Nevertheless, in both developed and developing markets, logistics providers will find partnering absolutely necessary to succeed in this very challenging and rapidly changing market. Chinese companies, for example in particular, seek partners who can provide overseas networks, financial support, management experience, and other complementary functions. Foreign companies are looking for partners who can provide customer relationships in China, strategic assets such as vehicles and warehouses, local operational skills, and domestic network coverage. (Huang & Kadar, 2002). The form of outsourcing arrangement decided upon depends on several aspects and the different relationships are characterised by the following elements (Eckert, Handfield, Rinehart & Zaversnik, 1999): The degree of trust between the parties The level of interaction between the parties The commitment of the parties to the relationship Trust is a concept that is critical to the foundation of provider-user relationships. On a personal level, trust can be assessed by the interpretation of the level of character of the other party. On an organisational level, trust addresses the capability of the provider to meet the needs of the outsourcing company through the relationship, and vice versa. Success in a provider-user relationship is also based on how frequently the individuals interact concerning business activities. The personal level interaction includes the amount of face-to-face interaction as well as the amount and type of information exchanged. At the organisational level, the success of the relationship is Chapter 4-66

67 assessed through the amount of business that the parties conduct. In many cases, large providers or outsourcing companies are viewed as adding greater value to a relationship than smaller organisations. The added value can cause more frequent communication between the parties and result in greater volumes transacted. Provider-user relationships are also influenced by the level of commitment by the parties. Commitment involves the perception of dependence of one party on the other, and the amount of investment that they make in the relationship with respect to time and resources. (Eckert, et al. 1999). Companies will also be impacted in their choice of outsourcing agreement or relationship type by the nature of the purchased capabilities required; the nature of the product/service exchanged and related technology; the competitive conditions; and the capabilities of the providers available to meet the user s needs. (Kakabadse & Kakabadse, 2000). However more recently, close business relationships have become more common. Leading-edge companies in particular are considering outsourcing and forming strategic alliances with service providers to help them achieve, for example, preferred-provider status. Therefore, although many agreements remain transactionbased sub-contracting, the relationships involved in outsourcing implementation are becoming a matter of increasing strategic importance. (Greaver, 1999). According to Harps (1998), 3PLs and their customers are increasingly attracted to agreements whereby risks and rewards are shared, also known as gain-sharing and defined as a formal agreement in which a company and a supplier of services share certain financial gains linked to that vendor s performance. However this form of agreement is not yet widely used in relationships with 3PLs as trust has to be established first and this is often only possible after relationships have already existed for at least a year. A set of clear, jointly developed performance measures are also necessary to enable the company to identify improvements that have resulted from the provider s actions. The payment of incentives must support the goals and priorities of the company. Gain-sharing must therefore, while being based on treating the provider as a true business partner, be tied to the realisation of true economic benefit, as a means to drive performance. Chapter 4-67

68 Furthermore, the quality of the relationship will also depend on aspects such as the quality of information sharing. (Bensaou, 1999; as quoted by Kakabadse & Kakabadse, 2000). The strategic partner provider, for example, will want to approach the relationship as if it were a part owner of the business, aiming to perform not only the services requested, but also to participate in strategic planning meetings and share in the strategic decisions. Greaver (1999) states that such a company will want to enlist whatever resources are necessary to deliver those services, and will prefer a pricing model in which it is rewarded for outsourcing results, for example, gainsharing, pay-for-performance, or value-based fees. This type of provider is generally a better fit for functional or process outsourcing and for areas that are closer to core competencies, because of their generally more strategic impact at these levels. (Greaver, 1999). Should the relationship be successful and grow, the outsourcing company may even decide to outsource its logistics decision-making process, giving the provider authority to examine all supply chain processes that deal with inbound and outbound flow of materials to identify ways to reduce cost and improve service overall. The provider will identify problems and recommend a solution to the company, upon whose approval they must implement it. However, the number of providers able to operate as a strategic partner is limited. (Greaver, 1999). Single providers cannot be leaders in all areas and do not possess world-class capabilities in all aspects of business, and companies are increasingly embarking on selective outsourcing to multiple providers. Therefore companies are contracting with two and/or a network of providers who are expected to cooperate in order to deliver a seamless service on behalf of their clients. Such a multiple provider model can be structured so that one provider acts as the prime contractor, or lead-logistics provider or manager, while at other times all providers hold equal status. Often the central player serves as broker/co-ordinator. (Kakabadse & Kakabadse, 2000). The network of partners itself is seen as a sequence of value-adding activities in a value chain. (Porter 1985; as quoted by Kakabadse & Kakabadse, 2000). Therefore while some companies will only have Chapter 4-68

69 one outsourcing partner or provider, many will use two to five different service providers, and still others six or more. It is also important that the outsourcing company understand the type of provider or outsourcing relationship that it will be most comfortable with, for example transactionbased versus strategic, as this will affect aspects such as the types of providers that are asked to respond to the RFP and how the scope is described in the RFP. Traditionally, much of this process was governed by the bidding process and market forces; today however, companies must be diligent when entering new provider relationships. (Greaver, 1999). In summary, as companies are increasingly recognising the strategic nature and value of outsourcing, they are realising the value of strong, close relationships with a few high quality providers, and today s marketplace is seeing more productive and meaningful 3PL-customer relationships evolving. (Langley, et al. 2002). However, although provider-user relationships in the implementation of outsourcing are becoming increasingly strategic, many still remain transaction-based sub-contracting. Agreements or relationships commonly used or entered into between companies and their logistics providers can be summarised as follows: Transaction-by-transaction based agreement Formal contract of at least one year in length Partnership with benefit and risk sharing (gain-sharing) for an agreed period Partnership with sharing of facilities and/or human resources Partnership with formal sharing of relevant information (ii) Managing the different outsourcing agreement and relationship types Irrespective of the outsourcing relationship that exists, companies must understand the impact on the company and develop suitable negotiation and relationship management strategies. Furthermore, there is no single successful management approach that can be applied. Although the terms partnership and alliance are most Chapter 4-69

70 frequently applied to these relationships, there are often misunderstandings regarding the key factors and expected benefits of each relationship type. It is therefore important that companies identify the specific forms of relationship that exist between them and their suppliers and customers, and the different attributes that characterise these relationships. (Eckert, et al. 1999). In the same way that provider management requires certain skills, the managers in the outsourcing company, responsible for the relationship with the providers, must cultivate the same skills. However, traditional managers are often self-sufficient, believing in total hands-on control and therefore do not easily accept outsourcing. (Bowersox, Closs & Stank, 1999). Such resistance needs to be overcome and managers involved in outsourcing projects need to champion change, be good negotiators, have excellent communication skills, and excel at building and maintaining relationships. An outsourcing relationship where the customer tries to micromanage the service provider s activities, is destined to fail. The manager should achieve results by managing the relationship, rather than by managing the way the third-party provider does the work. (Corbett, 1998; as quoted by Harps, 1998). Managers must be collaborative problem-solvers who can address performance issues and results, and discuss corrective action and the need for improvement. As with the significant strategic component in outsourcing, this is also true with regard to the management of these relationships. The long-term benefits of outsourcing and its contribution to achieving the company objectives must thus be considered over and above a focus on the short-term. Harps (1998) points out that the relationship manager must understand and help articulate the company s outsourcing strategy, whether it involves outsourcing parts of the supply chain to single or multiple logistics providers, or outsourcing the entire supply chain to strategic partners. However, companies are increasingly partnering with their providers to achieve performance. The following aspects are also identified by Harps (1998) as critical to successful outsourcing relationships: A clear outsourcing strategy Established baselines of performance Chapter 4-70

71 Obtaining mutual agreement on the baselines The support and commitment of both user and provider Constant communication among partners A single point of contact for the relationship Dedicated implementation resources A shared incentive programme Realistic expectations Clearly defined roles and responsibilities for each partner Razzaque and Sheng (1998) add to the above by stating that successful partnerships tend to fall into two categories, namely those in which both parties have made substantial financial investments and those where the relationship has developed and expanded over a long time. In this regard, they quote Gooley (1994) who identifies the following five principles that successful partnerships generally follow: Concentrate on business with relatively few partners Carry out joint improvement efforts with partners Institute a formal system for measuring partners performance Establish a two-way feedback system allowing effective communication Let partner performance determine routing choices and rate level LaLonde (1998) also identifies five key aspects that characterise a strong supply chain relationship namely:- the sharing of information, sharing of benefits and burdens, multiple contacts between the economic entities, cross-functional management processes, and future-oriented collaborative processes. Furthermore, although all partnerships are unique, they typically share the same common goals of attaining superior quality conformance, co-operating on cost reduction programmes with a minimisation of risks, and sharing expertise, and new technology. In strategic partnerships there should be a commitment between the outsourcing company and the provider, to jointly improve quality and productivity to reduce overall costs, and therefore a joint problem-solving approach to develop mutual responses to changes in the marketplace. Partnership between companies Chapter 4-71

72 also demands a high level of understanding, by companies, of their own business as well as the business of their partners. It is through such long-term relationships that the outsourcing of logistics provides a powerful and effective source of competitive advantage. (Razzaque & Sheng, 1998). Murphy and Poist (2000), based on their research, identify customer orientation and dependability as the two most important factors in a successful third-party relationship. They also provide a list of key factors for successful 3PL relationships which is repeated in Annexure A of this thesis. Irrespective of the type, in order for outsourcing agreements and relationships to be successful, thorough planning and implementation are critical. In summary, due to the increasing recognition of the strategic nature and value of outsourcing, companies are increasingly realising the value of strong, close relationships with a few high quality providers. Once the relationship has been entered into, it must also be managed and monitored on an ongoing basis. Irrespective of the type of relationship, and due to the strategic nature of the outsource decision and the relationships involved, the management of these relationships is key. Companies, once having outsourced, may be tempted to overlook that aspect of their business. However ongoing management of the relationship with the service provider is crucial. This does not imply interfering with the operations of the provider but infers a monitoring and quality control role. The relationship should be nurtured if all involved are to receive maximum benefit. Outsourcing undertaken properly is a partnership that benefits all involved. The above-mentioned points and steps with regard to the implementation, particularly of a partnership-type arrangement, will also be discussed in further detail in the following section Steps in outsourcing and potential problems areas Chapter 4-72

73 As has been previously mentioned on numerous occasions, outsourcing has various potential benefits and problems, both from a generic and a logistics point of view. It is therefore important to consider it as a strategic decision and to ensure that the necessary steps are taken in the outsourcing initiative to ensure that the benefits are maximised and the potential problem areas minimised. Experiences of failed outsourcing initiatives would often have been avoided had the potential problems associated with a lack of qualified personnel, over-eagerness on the part of the provider to be awarded the contract, and the lack of a detailed scope of work document, been handled immediately. (Roeser, 2001). The process of implementing a third-party logistics service or agreement should therefore be rigorous and thorough and include at the very least the definition of the scope of the services to be outsourced, including development of the request for proposal (RFP) to be sent out to prospective providers; identification of candidate providers and evaluation based on set criteria; negotiation and finalisation of the contract in terms of expectations, time period and price; and managing and monitoring the outsourcing process and relationship. (Kasilingam, 1998). However, the implementation is often not given the proper emphasis or consideration, and with the numerous value-added services and technologies offered today by LSPs, it has become critically important to make sure that both users and providers have structured approaches for implementing the proposed services. (Boyd & Palmer, 2002). (i) Potential problem areas Apart from the various concerns that companies have with regard to outsourcing, often leading them to the decision not to outsource, outsourcing is also fraught with several significant potential problem areas such as the following:- inadequately scoped work; inadequate control systems over how certain services are delivered, which in turn may raise the company s liability exposures; hidden costs and risks; inadequate, or lack of, high level management support; poor organisational communication; cross-functional political problems; unclear expectations; Chapter 4-73

74 uncertainties associated with the stability of the service companies; and issues of confidentiality, security, timing, and lack of flexibility. Companies are also often understandably nervous about turning over their business to a third party. Other major concerns tend to include the transition process, the depth of the 3PL s management team, security and safety issues, trust and price. (Sopher, et al. 2002). Greaver (1999) summarises the various potential problems areas into the categories of people, processes and technology. The least positive impact of outsourcing however is often in the human resources area, in terms of impact on employee morale as well as a high turnover of 3PL employees. These can be significant problems in outsourcing of logistics functions. The human aspect is therefore a particularly critical area for logistics outsourcing decision makers, as corporate cultural changes and staff disruptions play an important part in the success or otherwise of a logistics outsourcing initiative. (Armstrong, 2001). In summary, outsourcing problem areas can have their root causes in either party, and addressing the problems is a shared responsibility between provider and user. (Greaver, 1999). Ensuring the success of an outsourcing project must therefore include the management of potential problems, and the more planning undertaken around the risk factors before implementation, the higher the probability of success. Developing a comprehensive plan outlining detailed expectations, requirements, and expected benefits is crucial. (Elmuti & Kathawala, 2000; Lonsdale & Cox, 2000). However, in many companies, the outsourcing process is characterised by poor management. (Artosky, 1998). Companies must approach the outsourcing process correctly. In order to avoid as many problems as possible, certain steps must be taken such as thorough business analysis; correctly identifying core competencies; having a clear understanding of what is to be achieved by outsourcing; developing comprehensive plans to ensure that outsourcing provides enhanced business performance; choosing the correct outsourcing providers and treating them as partners; ensuring communication and honesty throughout the process; and providing adequate training Chapter 4-74

75 and skills to facilitate the inevitable changes resulting from the process. There must also be complete support of the process by top management with the commitment of the necessary company infrastructure. Embleton and Wright (1998) concur with the importance of making the right outsourcing decisions and identify the following keys to success: Strategic analysis and planning Selecting the providers Managing the relationship (ii) Strategic analysis and planning From planning to execution, the outsourcing company often aims to re-engineer its supply chain activities, by leveraging the supply chain management skills of the provider, and at the same time aligning its business strategy with its supply chain strategy. This can involve significant changes to the basic structure and thinking of the organisation. (Heroux, 2001) The key to determining the viability of outsourcing lies in analysis of the organisation. According to Embleton and Wright (1998) this entails the following: Determine candidate functions for outsourcing Determine the cost of providing the service Determine the quality level of service Determine the impact on corporate culture Quantify the outsourcing goals Look at both the long- and short-term Determining candidate functions for outsourcing is critical to outsourcing success and should be central to outsourcing decisions. (Lankford & Parsa, 1999). Kuglin (1998) states that the test for a core competency is that it must provide the company with access to a wide variety of markets; make a significant contribution to perceived customer benefit; and be difficult to imitate. He proposes a process, reflected in Figure 4.5, for determining core competencies and managing supply chain changes which result, for example from outsourcing. Chapter 4-75

76 Figure 4.5 Process methodology - determining core competencies Perform a core competency assessment Internally identify the company s core competencies Perform the test for core competencies Isolate the internal core competencies that pass the test Survey customers & suppliers for what they believe are the company s core competencies Survey customers & suppliers on core competencies needed in the marketplace Compare, then isolate the company s true core competencies Analyse the gap between actual and needed core competencies If the company s core competencies do not match marketplace needs: Proceed to the next phase i.e. outsourcing (see also Figure 4.6) If the company s core competencies match marketplace needs: Stop & exit Source: Kuglin, The costs and benefits of providing logistics in-house versus outsourcing them must also be determined. According to Nell (2001a), one of the most basic and fundamental aspects of business is for a company to know its costs. Lankford and Parsa (2000) state that investigating the benefits of outsourcing is a lengthy but important evaluation process as outsourcing is a major event that a company would want to avoid repeating. Companies must take a long-term view of the move to outsourcing. The company must understand its vision, core competencies, structure, transformation tools, value chain and strategies. (Greaver, Chapter 4-76

77 1999). There are certain functions that a head office can best sustain and in downsizing, without due care for such functions, companies risk dismantling the very foundations of their success. (Stephenson & Russell, 1995; as quoted by Embleton & Wright, 1998). The company must, in their strategic analysis, determine which areas are not core and will provide the company with the best return on investment if outsourced. A function that is outsourced should be routine and well-delineated. Management must therefore understand the nature of their business and determine core competencies as well as analysing current costs and performance and exploring the strategic implications. This is key to the outsourcing decision. In line with Figure 4.5 which outlined the important step of assessing a company s core competencies, and the preceding paragraphs, Figure 4.6 which follows shows key steps in the process for activities which have been deemed not to match marketplace requirements of the company and which are thus suitable for outsourcing. Chapter 4-77

78 Figure 4.6 Process methodology - after determining core competencies Determine the advisability of outsourcing: the outsourcing strategic decision process Select a supply chain/ 3PL provider Review the competitive frame of reference & core culture, values Identify the core competencies needed in the marketplace Review the mission, vision & the core competencies Establish a short list of qualified companies Review the objectives, goals & operating strategies Conduct virtual-company team evaluations Perform a current assessment of internal capabilities Select the most qualified company Analyse the strategic options If needed, core competencies can be developed internally If needed, core competencies cannot be developed internally Develop & implement the transition plan Complete the outsourcing step Do nothing internally/ Upgrade capabilities Source: Kuglin, The aspects of selecting a provider and completing the outsourcing step are also discussed in the rest of this section as well as Section , key components of which are further illustrated in Figure 4.7. Chapter 4-78

79 In summary, guidelines for the logistics outsourcing assessment process, are provided by Artosky (1998), and are outlined in Annexure A to this thesis and represented graphically in Figure 4.7 which follows. The various steps in the outsourcing assessment can be summarised as follows: Figure 4.7 Third-party pre-assessment process Solicit input and compile factors from all business units in the organisation Evaluate alliances and partnerships as options Evaluate cultural factors associated with developing a third party relationship Perform a benchmarking study to determine potential areas to outsource Perform an analysis to determine the costs to perform the logistics activity in-house Assess logistics talent Survey major customers Develop a project plan Action Outsource Insource Source: Artosky, Chapter 4-79

80 When the strategic analysis, including exploring the strategic implications and analysing costs and performance, is complete and the decision to outsource made, the next important step in the outsourcing process can be taken, i.e. planning. All analyses and information should also be incorporated into a project plan. The scope of the project, business assumptions, expectations, tasks, services to be provided and service levels to be achieved should be clearly defined and detailed. Key business issues, guiding principles and assumptions, risks, and deliverables must be included. Such an internal assessment and plan will enable a company to make an informed decision with regard to outsourcing as opposed to insourcing. Sowinski (1999) states that companies must spend time performing a comprehensive needs assessment if they are to be successful finding the right 3PL provider and appropriate services. As with any significant new initiative, planning activities, including project management issues, are therefore important, and should include (Greaver, 1999): Assessing the risks Announcing the initiative Forming the project team Engaging advisers where necessary Training the team Acquiring other resources Managing resources, information and project Setting objectives Cross-functional teams should be formed to study, plan and implement outsourcing initiatives, and to assess the risks, resources, information, and management skills needed to mitigate those risks. Team objectives, deliverables and timetables should be set and management support achieved. (Greaver, 1999). Customers, suppliers, and third parties can also play important roles as team members. (LaLonde, 1998). Furthermore, as providers are experts in negotiating contracts, companies may involve outside advisers including: Outsource consultants to help the team work effectively in the shortest time Chapter 4-80

81 Lawyers experienced in negotiating and drawing up outsourcing contracts Accountants to analyse costs using tools such as activity-based costing Other specialists, depending on the situation How the organisation announces the outsourcing initiative to its employees must also be planned and well executed. It is best to make an announcement that outsourcing will be explored, otherwise employees will generally assume the worst without having the facts, and morale will be negatively impacted. Employees must also be kept informed about the initiative s progress. (Greaver, 1999). Clear definition of these issues also lays a good basis for meeting with provider(s). (iii) Selecting and contracting with the provider(s) In the strategic analysis, the company must also have developed a clear understanding and quantification of the type and the level of service currently being provided in-house, and that desired in the future, in order for the RFP to be compiled, the tender document issued and the provider selected. Without an accurate scoping of the required services, it is almost impossible to implement and manage a successful outsourcing relationship. (Potgieter, 2003; Bruwer, 2003). Roeser (2001) states that many outsourcing failures can be traced back to the scope of work document. The RFP must describe in detail, the outsourcing requirements, as well as general information about the company and the scope and the objectives of the outsourcing. The company may also decide to conduct a RFI before the RFP, circulating it to selected potential providers to determine the level of interest, capabilities, corporate culture and strategy of these providers. A scope of services document can also be used to ensure that expectations are documented and to ensure that adjustments in scope and their impact are well documented and communicated. The execution of an initial agreement or letter of intent (LOI) would also outline the scope definition and pricing considerations for the start-up, establishing a clear approach to ensure the complete definition of all functional requirements. (Boyd & Palmer, 2002). It is also important to define goals explicitly. Without measurable goals, it will be impossible to quantify current results, or to Chapter 4-81

82 define the level of service required in the future. Although, there are those that advocate the selection of a provider without an RFP, they nevertheless concur with the preceding opinions that it is critical that the outsourcing company articulate, very clearly, what they expect of the provider. (Lynch, 1999; as quoted by Seideman, 1999). The outsourcing company must therefore break down its planned outsourcing initiative in terms of the actual services required. Therefore establishing the scope of work by means of an adequate RFP, determining the desired and measurable SLA, and developing a thorough contractual agreement, all contribute to the success of an outsourcing initiative. In this regard, Bendor-Samuel (2000) states that few users take the time to adequately define what it is they are buying. What usually happens is that the process focuses on obtaining what is perceived as a good price, leaving the definition of the scope of service to the provider to establish after they have been employed. In these cases the provider determines during the course of the relationship what its scope of work is. A more prudent approach is for the user to establish the scope of the services, thus defining what will be required of the provider, before circulating an RFP or approaching a provider. The buyer must understand what is most important to them, for example low costs. Scope thus describes the boundaries of the outsourcing process and agreement so that both parties can see clearly where the responsibility of one ends and the other begins. It is important not to take short-cuts with the definition process. The significant time and effort required is difficult and expensive, but the discipline of breaking up the service into its components is worth it. It is also extremely helpful for the individuals who have to administer the relationship as it provides clear boundaries, enabling both parties to determine what services are in and out of scope. The different components are usually also cost drivers and influenced by various issues. (Bendor-Samuel, 2000; Lynch, 2000). In every outsourcing relationship, which should be preceded by a thorough RFP process, users and providers must specify exactly what services are being bought. Chapter 4-82

83 Often the outsourcing company has unwritten expectations of the provider to make other contributions to their business goals. Sometimes they expect continuous improvement where none is explicitly defined or measured, or they expect a provider to leverage its capabilities in other areas to assist them in their struggle to compete. If these benefits are anticipated, they should be defined and measured. When such aspirations defy definition and objective metrics, they are unlikely to be realised. It is also unrealistic for providers to have to agree on a price until they understand what they will be providing and how it will be measured. (Bendor-Samuel, 2000). Agreeing on a fair price is usually the focus of the RFP and negotiation processes. An outsourcing company must be careful to negotiate price only once it has adequately defined and agreed service and accountability levels with the provider that will supply those services. The parties must thus ensure that services and metrics are defined and agreed upon before negotiating price. Before embarking on an expensive RFP process, both users and providers need to bear in mind that in a free market, price is a function of competition and negotiating prowess. Furthermore, for a user who wants a competitive market price, it is imperative that there still be competition when price is negotiated at the end of the RFP process. (Greaver, 1999; Bendor-Samuel, 2000). Slater (1998) adds to the negotiation process, stating that buyers of third-party services should consult their lawyers before finalising any outsourcing agreement and contract. This should also include the establishment of exit level provisions and guidelines to resolve issues or disputes. (Greaver, 1999). Atkinson (2002) concurs, stating that when a company enters into a contract with a 3PL, it is always prudent to plan an exit strategy in case one or both parties wish to end the relationship. According to Garschagen and Martin (2001) the traditional approach to implementing logistics outsourcing has been to have extensive negotiations that eventually result in a detailed contract. Establishing clear performance levels and cost structures has been considered essential from the client side, with the legal protection of a contract being important to the provider to secure their investment in the analysis, pre-work and start-up processes of a large-scale implementation. However, a new trend in the Chapter 4-83

84 negotiation of an outsourcing arrangement is emerging whereby the shipper and provider postpone the drafting of a formal contract agreement until at least six months experience in the business has been amassed. This allows the consideration and integration of actual data in the negotiations as well as a review of cost structures, service levels and customer needs. In order to protect themselves in the initial phases therefore, the companies commence with a statement of expectations and LOI. Once the trial period is over, both parties can enter the agreement with equal levels of knowledge and long-term expectations, and legal obligations can be realistically agreed to. This trial period can also provide a baseline against which improvement can be measured. (Foster, 1998; as quoted by Garschagen & Martin, 2001). Adopting such a progressive approach to negotiation also eliminates potential areas of risk in terms of outsourcing failure, namely the propensity of providers to oversell their capabilities, and clients to withhold information if they think it will increase costs. (Garschagen & Martin, 2001). Another important trend is for provider-user relationships to begin with a more modest set of activities to be managed by the third party. Therefore, while certain third party relationships do involve a very comprehensive set of service offerings from the outset, most customers need to grow accustomed to using the services of a third party for certain activities such as transportation and warehousing, before they become candidates for a broader range of service offerings. (Coyle, Bardi & Langley, 1992; as quoted by van Hoek, 1999). (iv) Transitioning resources and managing the relationship The RFP, negotiation and contractual phases of outsourcing implementation are therefore critical to the success of an outsourcing initiative. Another step that is very important to the success of outsourcing implementation and which must take place not only at this stage, i.e. before provider selection but also during the remainder of the implementation process, and in particular with regard to the transitioning of resources, is communicating with and preparing staff members for the change. Communication, change management and training are thus also key Chapter 4-84

85 to success. According to Bailie (2001), companies desire better service but are reluctant to invest in the very resources that will allow them to improve service. As outsourcing can be a key component of the re-engineering process within a company, it has many human resource and structural implications that must be managed carefully if the implementation of an outsourcing strategy is to be successful. According to Harps (1998), if relationships with logistics providers are managed well, costs can be reduced while service and customer satisfaction are improved. Managing those relationships poorly, however, risks disaster. Outsourced relationships should be treated as the strategic assets that they are. Successfully outsourcing logistics requires investing sufficient resources in managing that asset. Outsourcing is not abdicating responsibility; it is leveraging the specialised expertise of another company. In order to be effective, outsourcing cannot be treated as business as usual. (Harps, 1998). It requires a shift in the ways companies manage. When companies outsource, they fundamentally change their structure and the way in which they create value. When an old set of management systems and skills is removed it also has to be replaced with a new set. This was also discussed in section In a best-practices study conducted for the Outsourcing Research Council, and quoted by Harps (1998), it was found that companies realising the greatest gains from outsourcing, focus in a balanced way on three dimensions: The structure of the relationship The management structure The leadership skills required of the relationship s managers. Lonsdale (1999) calls the continual management of supply the neglected principle. He states that while the service provider takes over the responsibilities of the operational tasks of the outsourced activity, the outsourcing company should continue Chapter 4-85

86 to monitor and seek to improve supplier performance on a continuous basis, to avoid post-contractual opportunism and complacency. If there is nobody responsible for managing a contract it is often quite easy for the supplier to add cost or reduce performance levels. Harps (1998) adds that failure to address these issues can significantly reduce outsourcing success. Furthermore, the outsourcing relationship should be structured for long-term success. An effective partnership with a LSP must, for example, be built on a relationship model rather than a transactional one. Value is created through a shared commitment to both organisations goals, and a balanced view of the parties relative risks and rewards. In order to qualify as a strategic asset, a relationship with a LSP must have the potential for long-term growth. If the relationship is based on the transactional model, and structured with a beginning, middle and end, the partners often will not make the necessary long-term commitment to the relationship. (Corbett, 1998; as quoted by Harps, 1998). Also key to outsourcing success are the following aspects (Harps, 1998): Manage expectations. This is particularly critical in the initial phases of the relationship as unrealistic expectations during start-up may lead to later problems. The outcomes expected from the relationship should thus be developed jointly and in writing. Develop clear measures of performance. These measures should also be developed jointly during contract negotiations. The manager of the relationship should then use the metrics and monitor performance on an ongoing basis. Use a pricing structure that is tied to results. The pricing structure must be tied to risk- and reward-sharing, incentives and penalties, for the achievement of the jointly developed outcomes and expectations. Expectations, performance measures, and cost-performance aspects should be developed jointly in the initial phases of the arrangement. In the development of effective metrics, for example, it is essential that all stakeholders are involved, from both the service provider and client perspective. On the shipper s side this means including sales and marketing, finance, operations, human resources and any other affected parties. (Cooke, 1998; as quoted by Garschagen & Martin, 2001). An Chapter 4-86

87 effective measurement process is a critical component of any business relationship and specific measures must be developed and tailored to the business requirements in each case. In order to achieve success in this aspect of managing the relationship, the critical aspects of cost, service and quality must be adequately addressed. (Garschagen & Martin, 2001). Chapter 4-87

88 In summary, the following are key to successful outsourcing (Greaver, 1999): Exploring strategic implications Analysing costs/performance Planning initiatives, then only: - Selecting providers - Negotiating terms, including exit level provisions - Transitioning resources, and - Managing relationships. Boyd and Palmer (2002) add four key requirements for successful outsourcing implementation, namely:- a clear scope definition including a scope change process; appropriate resource availability from both the shipper and the provider; high-level milestone and task management, while managing to a critical path; and top-to-bottom commitment and communication from both parties. Furthermore, while the strategic planning process aims to solve problems the first step is to define the problems (Bowersox, n.d.; as quoted by Metz, 2002), and this along with defining the reasons for outsourcing is an important step in the logistics outsourcing assessment process. Once the decision has been taken to outsource, the important tasks that remain include the selection of the appropriate service providers; the decision regarding the desired relationship with the provider; and the undertaking of the necessary contractual negotiations. Then, when the outsourcing relationship has been implemented it is critical that the necessary time be spent on managing it. In conclusion, it can be seen from Section (iv), that the discussions with regard to managerial involvement in the outsourcing decision, in Section , and outsourcing relationships, in Section , are critical aspects and an integral part of the important steps in the outsourcing process, necessary to avoid the potential problems of outsourcing and ensure success in the initiative. Finally, the preceding discussions regarding the critical steps in the outsourcing process, in order to negate potential problems and promote success, can be Chapter 4-88

89 concluded with the following basic rules for successful logistics outsourcing:- develop a strategy for outsourcing; establish a rigorous provider selection process; clearly define your expectations; develop a good contract; establish sound policies and procedures; identify and avoid potential friction points; communicate effectively with logistics partners; measure performance and communicate results; motivate and reward partners; and be a good partner. (Lynch, 2001) Criteria when selecting providers Outsourcing can save a company money provided that it enters the right relationship with the right provider. (Anon., 1997). According to McKinnon (1999), however, there have been many deficiencies in the selection procedures of the past. Many studies over the past 30 years have shown that companies have tended to select a particular transport mode or carrier, for example without fully appraising the available alternatives. (Bayliss, 1998; Bayliss & Edwards, 1970; Sharp, 1970; as quoted by McKinnon, 1999). This may have been due, in part, to the fact that many companies total expenditure on freight transport represented a small proportion of total cost, and that there were relatively small differences in rates and quality of service between different providers. (McKinnon, 1999). However, as providers offer an increasingly wide and complex range of logistics-related services, companies are also finding that logistics is figuring more prominently in their budgets and they are increasingly recognising the strategic importance of logistics. Increasing emphasis is being placed on service quality, reduction in the number of providers, and a shift to contractual relationships, making the choice of provider much more important and requiring a more thorough review of the market and more formal selection procedures. (McKinnon, 1999). (i) Advantages and disadvantages of in-house provision As was mentioned in the preceding section, Section , there are some steps that a company should follow to fully evaluate the option of in-house provision, including the analysis of the costs and performance of current in-house provision, performing, for example, a baseline analysis to determine the costs of performing a particular Chapter 4-89

90 logistics activity in-house (Artosky, 1998). The company must also identify and define the problems experienced with the in-house provision, as well as assessing their current in-house capabilities such as the flexibility of delivery to customers. This should equip the company to fully understand and be able to identify both the advantages and the disadvantages of providing a certain logistics activity in-house. The company must also develop and define realistic service level objectives and expectations, based on their internal analysis, particularly with respect to customer service level and cost, which they must be able to communicate to potential providers. Many of the advantages of retaining and performing logistics activities in-house are the flipside of the potential problems associated with the outsourcing thereof, as identified in Section However, cost advantages in particular can come from the combined use, for example, of a dedicated carrier and a third-party provider (Buxbaum, 1998) if the correct provider is chosen and the best possible arrangement negotiated. This step is expanded upon by Buxbaum (1998) and included as additional information in Annexure A to this thesis. The selection of the correct provider is thus key in ensuring that the many advantages of outsourcing are realised. Chapter 4-90

91 (ii) Provider selection Once companies have decided on the type of agreement and relationship they are striving towards or require, it becomes even more critical that they select the correct provider, particularly if the relationship is going to be one of partnership. As was discussed in Chapter 3, outsourcing is prone to failure, and this too is the case with logistics outsourcing. Considering the magnitude of this decision, companies must be systematic, thorough, and meticulous in identifying and evaluating prospective 3PL partners. This means including in the critical outsourcing steps, discussed in Section ; the development of a RFP, SLA, and the conducting of site visits. These will be discussed in further detail later on in this section. Research indicates that the criteria for selecting providers is affected by the company s competitive responsiveness and external environment and that service users consider perceived performance and perceived capability to be especially important when selecting providers and that these variables tend to increase in importance in a more competitive external environment. Furthermore, low rates or prices are viewed as important only once performance and capability requirements are satisfied. (Menon, McGinnis, & Ackerman, 1998; as quoted by Murphy & Poist, 2000). Further research identifies price, geographical scope, and business expertise as the most important factors in selecting a 3PL. The same research indicates that logistics providers must supply breadth of service, broad geographical reach and value-added service within a highly efficient cost structure. Global reach was a critical consideration in choosing logistics/transportation providers. (Burns, et al. 2001). Huang and Kadar (2002), based on their survey of the 3PL market in China, rank the following criteria for the selection of 3PL providers from most important to least:- industry/operational experience; reputation; lower price; network coverage; own strategic assets; integrated logistics capabilities; and good IT systems. According to Kasilingam (1998) selection of the service provider must cover firstly the identification of potential providers for the functions to be outsourced. A list of Chapter 4-91

92 potential service providers for a logistics function can be found in trade magazines, published surveys and web-sites. Thereafter one or a few providers must be selected which will include the evaluation of proposals, site visits, obtaining references and then combining all these analytically to short list the final candidates. (Sopher, et al. 2002). Site visits are a critical part of the data gathering process, as well as for understanding the operational methods of the provider. (Supply Chain Planning Ltd, n.d.) The analytical results may then be combined with experiential knowledge and judgment to select the actual providers. The selection process thus generally begins with an initial screening of provider candidates in which their experience, level of service and financial feasibility are assessed. (Sopher, et al. 2002). With regard to the process, Greaver (1999) states that the outsourcing project team should list the criteria for a qualified provider, based on the company s reasons to outsource. Potential providers are identified and preliminary investigations are made to determine their qualifications and confirm their interest in the transaction. Their qualifications are then compared to the criteria, and a decision is made on whether they should be invited to propose. RFPs are prepared and delivered to the targeted providers list. The RFP must be highly structured if the proposals are to be comparable and responsive. The RFP may therefore include: Reasons to outsource Outsourcing scope service specifications Provider qualifications Pricing models preferred Performance measures Requests for innovative ideas Notice of bidders communications/meetings Greaver (1999) goes on to recommend that when the proposals are returned, they must be carefully evaluated and compared to the other proposals and to the company s expectations, as outlined in the RFP. This must include evaluation of both qualifications and cost. Due diligence should be performed, such as reference Chapter 4-92

93 checking, output testing, and site visits. Further discussions should then be held with the providers on the short list, who then make formal presentations. Finally, a prime provider candidate will be selected and negotiations can then be planned. Table 4.8 provides a summary of some of the qualifications or criteria upon which the provider may be evaluated. Table 4.8 Provider qualifications/criteria Qualification/criteria Category Hard qualifications Provider Process Personnel Qualifications that are primarily historically based and reasonably verifiable by due diligence Demonstrated ability to delivery today Experience to deliver Provider strengths Superior performance Deserved positive reputation Proven customer satisfaction Strong capitalisation/financial stability Proven management capabilities Shared approach to problem solving Commitment to continuous improvement Strong transition experience Commitment of specific resources x x x x x x x x x x x x x x x x x x x x x x x x x x Soft qualifications Provider Process Personnel Qualifications that are attitudinal; changeable based on circumstances; may not be verifiable Trust/security/confidentiality Positive attitude Good chemistry Good cultural fit Flexibility to change Cost consciousness Willingness to share cutting-edge knowledge Clear vision of their market x x x x x x x x x x x x x Source: Greaver, Lynch (2000) concurs and states that whether the company is planning to engage in a simple transactional arrangement, work toward a partnership solution through a RFI or move directly to an RFP, it is important to first establish the selection criteria. He categorises these according to those strategic, tactical, and operational requirements that are critical to the company. Chapter 4-93

94 While specific standards will vary with the outsourcing company s unique needs, as well as the functions that are being outsourced, there are basic benchmarks that will be applicable to most arrangements i.e.: Financial stability Business experience Management depth and strength Reputation with other clients Strategic direction Physical facilities and equipment Operations Information technology Quality initiatives Growth potential Chemistry and compatibility Cost Evaluation criteria should be listed so that the provider will know by what benchmarks it will be evaluated. Any other special requirements that might influence the provider s response should be included. One example might be the inclusion of an equity partner. If there is such a requirement, the definitions should be clear to avoid misunderstanding. The financial profile of the candidate companies is an important consideration when looking for a long-term relationship. Working capital, profitability, and credit rating are good indicators of the logistics provider s past performance as well as its financial stability. (Sopher, et al. 2002). The company must also have a common and systematic approach to scoring the various criteria identified. Some guidelines in this regard are provided by Sopher, et al. (2002) and are listed in Annexure A to this thesis. Once responses have been received, should a RFI have been undertaken, they should be evaluated according to the established criteria. Chapter 4-94

95 The short-list of candidates should be visited. There is no substitute for an in-depth inspection of the physical facilities and operations of the finalist providers, regardless of the activity being outsourced. Visits should be conducted by qualified members of the selection team or internal/external experts included for that purpose. During inspections, facilities including buildings and equipment; operations including sanitation, safety, security, inventory control; information technology and data entry; management and administration; and other aspects of the business should be examined closely and the written responses compared to the visual conclusions. Some may argue this is too much detail or that some of the evaluations are unnecessary. However a company undertaking outsourcing should keep in mind that present attitudes about such things as housekeeping, maintenance, and employee relations are indicators of performance in other areas. The selection criteria should always be kept in mind. If on-site inspections contradict the written responses, differences should be resolved. If the two are in clear conflict, it may be necessary to eliminate the provider. (Lynch, 2000). After the finalist providers have been identified and notified, and have demonstrated active interest in forming a relationship, they should be provided with all necessary information to develop a process, plan, and cost structure. (Lynch, 2000). Chapter 4-95

96 (iii) Provider implementation The relationship begins to change the moment the contract is signed. The provider has to become an integral part of the user s daily, weekly, and monthly management systems, as integral a part of their management system as when the outsourced activity was managed in-house. The parties must carefully track performance and work together to solve problems. Neither party must be allowed to negatively affect performance levels. Incentives and penalties must be stated in the contract and used on an ongoing basis. These are important motivational tools that must be thoroughly developed, and clearly defined and stipulated during the contracting process. (Corbett, 1998; as quoted by Harps, 1998) Areas of concern in current relationships In addition to the reasons that companies have for not outsourcing, as well as the potential problem areas associated with the practice of outsourcing, there are also several areas of concern that users often identify in their current outsourcing relationships. Examples of these areas of concern include the following:- service level commitments, and cost, time and effort reductions are often not realised; technology capabilities are not delivered; control over the outsourced function is diminished; a lack of strategic management skills, continuous ongoing improvement in service, and consultative knowledge-based skills is encountered; and there are often cost creep or price increase and misunderstandings or disagreements with the provider after the relationship has started. Although the majority of users of logistics service provision feel that their outsourcing initiatives have been successful, overall, a gap still exists between what the customers receive and what they expect to receive. Operating performance, cost management, and service delivery, for example, are continuing concerns to 3PL customers. Further areas of specific need with regard to logistics outsourcing are ecommerce, international supply chain solutions, and supply chain integration solutions. Chapter 4-96

97 Continuous improvement is also cited as a priority by outsourcing companies. (Langley, et al. 2002). Overall, the responses to the 2002 Langley, et al. survey, from North American (NA) 3PL users were consistent with that of their Western European (WE) counterparts; however the following differences are cited: respondents from WE seemed to be concerned with issues relating to service quality and IT as areas for improvement, while NA users identified greater opportunities to structure effective relationships with their 3PLs. Generally, 3PL users felt that relevant objectives were being met with regard to supply chain improvement and geographical coverage. However, many felt that the time and effort spent on logistics had not decreased, and that their control over the outsourced function may have lessened. Areas needing improvement included solutions to ecommerce-related challenges, international supply chains, and supply chain integration. Overall there is a need for 3PLs to meet service levels and cost objectives, and to avoid unnecessary increases in pricing once the customer relationship has commenced. Also some providers need, in particular, to improve their strategic management, technology, and knowledge-based skills. (Langley, et al. 2002). According to Garschagen and Martin (2001), quoting a survey by the New Yorkbased Outsourcing Institute, the failure rate for third-party partnerships is similar to that of marriages. This survey found that 55% of third-party partnerships ended within five years, and of those that did stay together, 12% were unhappy with the partnership and regretted having ever entered the deal. (Foster, 1999; as quoted by Garschagen & Martin, 2001). Similarly, a 1994 Andersen Consulting survey in the UK found that, on average, two-thirds of respondents indicated that the expected benefits of outsourcing their logistics were not fully realised. Table 4.9 summarises the areas for improvement as indicated by NA and WE respondents to the PL study: Table 4.9 Areas for improvement with 3PLs Chapter 4-97

98 Areas for improvement NA (%) WE (%) Service level commitments not realised Cost creep/price increases once relationship commenced Lack of continuous ongoing improvement & achievement in offerings Lack of strategic management skills Cost reductions have not been realised Time/effort spend on logistics not reduced Unsatisfactory transition during the implementation stage Not keeping up with advances in IT Inability to form meaningful/trusting relationships Lack of global capabilities Technology capabilities available, but delivered to client Lack of consultative/knowledge-based skills No improvement opportunities within the last year Source: Langley, et al Generally, no single provider is able to satisfy a company s total corporate logistics requirements. This shortfall in service capabilities means that the customers need to assemble a combination of in-house and outsourced service components to manage its supply chain requirements effectively. At both operational and strategic levels, therefore, senior management is still required to spend a disproportionate amount of time managing the number or relationships and resources required to make logistics outsourcing work. (Garschagen & Martin, 2001). A lack of shared goals between providers and users also means that financial gains are usually only obtained at the time when the outsourcing arrangement is established. Thereafter, the benefits of many relationships begin to decrease. In the worst cases, customers feel that the providers are not passing on reductions in costs, and the providers feel that the customers are trying to cut margins irrationally. Furthermore, the capacity to identify and eliminate inefficiencies in all aspects of the customer s supply chain through process re-engineering has not been adequately delivered by traditional 3PLs. Without this capacity, despite initial productivity and cost savings obtained by outsourcing logistics functions, the performance of the Chapter 4-98

99 overall supply chain inevitably fails to keep pace with global best practice levels. (Garschagen & Martin, 2001). Lieb and Schwarz (2002) state that a significant problem is that specific performance metrics are often not incorporated into the outsourcing agreement. The result is that such agreements lack an effective control mechanism to guide future actions. Communication problems and ineffective communications links between user and provider can also lead to failure. Another area of concern, is the low percentage of companies that include provisions in the agreements for cross-training of personnel from both user and provider. Lieb and Schwarz (2002) state that they believe this to be a very significant problem for both users and providers, and that cross-training would substantially increase the likelihood of outsourcing contract success. They also found that few contracts contain gain-sharing provisions or penalties for nonperformance. Outsourcing failures also often result from a lack of understanding based on information shortages and sometimes as the result of bad faith negotiation and misrepresentation. (Armstrong, 2001). Clearly these various concerns and issues need to be addressed if customers are to benefit, on an ongoing basis, from outsourcing relationships. (Garschagen & Martin, 2001). Chapter 4-99

100 Cancelling/replacing outsourcing providers As was also alluded to in previous sections, research has shown that the growth in outsourcing may stabilise in the near future, and that several large companies have indicated that they plan to reduce the number of functions that they outsource. Several large shippers have specifically indicated that they have plans to sharply reduce their outsourcing, cancelling a general trend toward additional outsourcing. It appears that some incidents of poor service and supply chain execution may have reduced enthusiasm for additional outsourcing among large-scale shippers. However significant growth potential remains with shippers of all sizes, provided cost and service concerns can be addressed. (Burns, et al. 2001). As was also mentioned in Section , a survey conducted by the Outsourcing Institute indicated that 55% of all third-party partnerships fail within five years. (Lynch, 2000). Furthermore, while the average contract renewal rate in the 2000 Lieb survey was 93%, there were many instances where at least one customer had terminated a contract in the past year, consistent with the performance observed in past surveys. (Garschagen & Martin, 2001). When asked why agreements had been severed, top management cited several reasons which included management change at the client organisation; problems meeting service targets; client failure to recognise their own organisational issues; sale of the business unit; and a change in the client s overall strategic direction. Such issues and areas of concern in current relationships were also discussed in Section However, the reason most commonly cited by clients, was non-performance by the third party, and surprisingly, the reaction to these failures has not been for companies to pull the function back in-house when a contract ends, but to find an alternate provider. (Cooke, 1998; as quoted by Garschagen & Martin, 2001). In summary, the very real possibility of failure is too often ignored in the initial outsourcing contract; and what should be a business-like agreement between parties to move ahead separately, sometimes turns into an adversarial struggle which, at worst ends upon in courts, and at best, results in operational disruptions for both parties. As was alluded to in Section , one of the steps in the outsourcing Chapter 4-100

101 process, should be the establishment of exit provisions and these should be included in the agreement. These should be specific contractual provisions for termination, both for a normal expiration and for service or performance deficiencies. (Lynch, 2000) Contract termination should always be viewed as the last resort, one to be used only when all other efforts have been exhausted. Seldom will simply terminating the relationship be enough to resolve the problems, and ending outsourcing relationships can be far more challenging than getting into them. (Greaver, 1999) General outsourcing trends and opinions In their 2000 study, Langley, et al. found that 78% of the respondents stated that logistics represented a strategic competitive advantage for their company, and 78% also stated that their customers were placing greater emphasis on logistics customer service. In the 2002 seventh annual study on 3PLs in North America (NA) and Western Europe (WE), it was found that respondents attached great importance to logistics processes and supply chain issues. For example 89% of the NA respondents and 90% of the WE respondents agreed that logistics represents a strategic competitive advantage for their companies. While most NA and WE respondents (more than 90%) suggested that their customers are placing greater emphasis on logistics customer service, more than one-half of all respondents (50% to 60%) indicated that their customers are more interested in price than service. Overall, 71% of NA companies and 86% of WE companies indicated agreement with the statement that the use of 3PLs is a key to satisfying their company s customers. (Langley, et al. 2002). (i) Information technology It has been showed that many users rely on their 3PLs for information technology (IT) support. (Wilson, 2001b). The availability of capable IT-based services is increasingly an expected dimension of 3PL service offerings. Today s users of 3PL services generally anticipate that the near-term differentiators will include electronic markets, supplier management systems, and supply chain planning. (Langley, et al. 2002). Chapter 4-101

102 The seventh Langley, et al. (2002) survey, also showed an increased need for warehouse/distribution centre management technologies which suggests a continued recognition for the core value provided by such solutions to the logistics and supply chains of 3PL users. The industry is also beginning to understand the value of electronic marketplaces. With this exception, the availability of other IT-based services did not exhibit increases between 2001 and A case in point is that of supplier management systems where 9% of the 2001 respondents indicated availability and 44% suggested that such systems would be among future requirements. In spite of this optimistic projection, the availability of supplier management systems in 2002 was 6%. This suggests that 3PL customers are reevaluating whether supplier management is a core competence that should be kept in-house or that customers must develop stronger strategic relationships with their service providers before proceeding with supplier management systems. These observations counter the 2001 study figures that suggested future requirements would result in an overall increase in the availability of the IT-based services studies. A partial explanation for the decrease might be because of the trauma experienced by the economy s technology sector in the past two years, with logistics and supply chain technologies being among those significantly affected. Table 4.10 provides a summary of current availability and future requirements of IT-based services. Table 4.10 Current availability and future requirements of IT-based services Service category North America Western Europe Currently available Future requirement Currently available Future requirement Warehouse/distribution centre management Web-enabled communications Transportation management Shipment tracking/tracing/event managing Ex/import/freight forwarding/customs clearing Transportation/logistics electronic markets Customer order management Product vertical electronic markets Supplier management systems Supply chain planning systems Source: Langley, et al Chapter 4-102

103 (ii) Management consultants In the Langley, et al. (2002) survey, 48% of the North American and 62% of the Western European respondents consider management consultants valuable in helping to assess the need for third-party services and to assist with the technology implementation and integration. Management consulting services that were not required included managing the negotiation process with third-party suppliers and helping to manage multiple providers of component supply chain services. Nevertheless, according to Langley, et al. (2002), these results understate the extent to which current and potential 3PL users actually do involve management consultants, and logistics outsourcing relationships are of great interest to many management consulting companies. Furthermore, the knowledge, technology, and relationship-based skills of management consultants are differentiators that can significantly benefit 3PL users. Similarly, according to Greaver (1999), some organisations may have outsourcing expertise, while others may have a need for consultants to assist in the process. Reasons may include the following:- to help manage risks; level the playing field with provider expertise; assist the project manager in focusing on outsourcing issues; challenge established thinking; and to offer independent observations on the outsourcing environment. Outsourcing initiatives have risks and experienced consultants can help manage them. The strategic implications and economic costs of an outsourcing error can be significant. Scope, performance, provider relations, and pricing are just a few of the issues that must be comprehensively addressed, if the organisation s objectives for outsourcing are to be achieved. Senior management may bring in outside advisers therefore to discuss procedures and their implications and the project team may do the same to address key issues in detail, or help the project manager manage the project. (iii) Provision of international supply chain solutions Chapter 4-103

104 The globalisation of traditional businesses is a major factor affecting logistics and supply chain management. In particular, globalisation involves considerations of market expansion; new sources of supply; advanced security processes; continuous improvement initiatives; and the redesign of logistics and supply chains for greater efficiency and effectiveness. In the 2002 Langley, et al. survey, approximately 41% of the respondents world-wide felt that 3PL providers would be able to keep up with the challenges of global supply chain integration. This percentage was less than in the previous year s study. This change suggests a large opportunity for improvement by those 3PLs that provide global supply chain solutions. This change also represents a key challenge for companies providing 3PL services. The respondents ranked globalisation as the fourth most important to reasons to outsource, after significant pressure to reduce costs; consolidations, mergers and acquisitions; and emphasis on improved supply chain management. Chapter 4-104

105 (iv) Sophisticated supply chain solutions Increasingly 3PL users want their 3PL service providers to take on more meaningful, strategic roles, and provide a wider variety of services as they strive to consolidate the number of providers they use. The idea of involving a commercial company as a lead logistics manager is also receiving increasing attention. 3PL users feel that existing 3PLs represent a key source of such expertise. A large percentage of the respondents to the Langley, et al. (2002) study (approximately 90% in North America and Western Europe), feel that logistics represents a strategic, competitive advantage for their companies. Another strategic issue is how customers feel 3PLs should position themselves in terms of depth and breadth of their service. Overall, and consistent with findings reported in previous studies, the North American and Western European respondents of the 2002 study significantly agreed that 3PLs should provide a broad, comprehensive set of service offerings. The relationship of this finding to the desire by customers for single-source solutions or LLM relationships is significant. The research shows that the future role expected for 3PLs is a sophisticated one, and one that will require a great deal of integration into clients businesses. This observation is supported by user preferences for a broad range of 3PL services, the development and use of capable IT by 3PLs, and more collaborative relationships with 3PLs. These signals all point to a desire for 3PLs to essentially assume more of a LLM role than has been evident to date. Such a development should result in clients having a more of a strategic view of their 3PLs, well above the current resource provider and resource manager descriptors. (Langley, et al. 2002). (v) Integration of logistics services Some users of logistics services choose to outsource basic logistics activities and provide integration of these activities and of their supply chain, themselves. Based on their 2002 survey of North America and Western European logistics service users, Langley, et al. state that North American 3PL users are aiming for 86% of their services to be integrated, while for Western European respondents this figure was Chapter 4-105

106 100%. The same study indicated, however, that only 63% of the North America respondents and 56% of those from Western Europe stated that services were already integrated to some extent. This supports the continuing contention that considerable additional progress through integration remains to be experienced. (Langley, et al. 2002). (vi) Reduced costs In the survey quoted by Wilson (2001b), the most important factor driving the rise in outsourcing was the containment of logistics costs. Of the 3PL users surveyed, 84% reported positive cost containment. In another quote by Sopher, et al. (2002), cost containment was also the most positive result of outsourcing reported. (vii) Overall success About 90% of the time, the 3PL outsourcing process produces satisfactory results. (Armstrong, 2001). Users of logistics service providers, generally report high levels of success with their 3PLs. In their 2000 study, Langley, et al. found that more than 80% of 3PL customer companies indicated satisfaction with their logistics outsourcing efforts, although this was a few percentage points below previous studies. The percentages of customers surveyed by Langley, et al. in 2002 who felt their 3PL relationships are successful are as follows: 89% in North America, 81% in Western Europe, and 89% in Asia-Pacific. Chapter 4-106

107 Conclusion In conclusion, there are various reasons for outsourcing and it has become a significant strategy in a company s search for competitive advantage and profitability, irrespective of its industry, supply chain position, or size. For a company to create market expansion for its products and/or services, they must lower costs while increasing customer service. Outsourcing can contribute to such short- and long-term goals, and companies are increasingly realising that outsourcing has a significant role to play in the optimisation of their logistics systems. They are increasingly identifying activities that are appropriate for outsourcing and contracting these out to companies that specialise in the provision thereof. However due to the importance of the logistics function and the role that it plays in the customer service provided by the company, this outsourcing must be undertaken strategically and thoroughly. Companies are therefore increasingly being driven by the potential long-term benefits in their decision to undertake outsourcing, and many are also considering reducing the number of providers to whom they outsource in order to build stronger, more strategic relationships in this regard. However, many providers do not provide the necessary range of services and often a number of providers must be used. Nevertheless in order to promote supply chain integration and collaboration, outsourcing companies are electing to use one of the providers or an outside company to co-ordinate the activities outsourced and services used. The outsourcing decision is therefore a variant of the classical make/buy decision; companies can either invest in building a logistics organisation, or they can contract this function out. In its decision-making the company needs to determine the benefits of outsourcing according to some criteria, such as return on assets. Risk factors must also be considered in the outsourcing decision. Other considerations include fit with corporate objectives; strengths and strategy; social, political and environmental concerns; security and market conditions. (Maltz & Ellram, 1997, Sheffi, 1990, Trunick, 1989, Bradley, 1994, Leenders & Nollet, 1984; as Chapter 4-107

108 quoted by Razzaque & Sheng, 1998). It must be borne in mind, at all times, that the decision to outsource is a strategic decision, with far-reaching implications. However, few companies take a strategic view of outsourcing decisions, with many companies deciding to buy rather than make for short-term reasons of cost reduction and capacity, basing their outsourcing decision primarily on the basis of reducing headcount and costs. (Ford, et al. 1993, Lonsdale & Cox, 1997; as quoted by McIvor, 2000). It is crucial to approach the outsourcing decision from an activity perspective within the company s value chain. (Porter, 1985; as quoted by McIvor, 2000). Companies planning to outsource their logistics must therefore address the initiative carefully, so that contract logistics becomes a catalyst for improvement, rather than another problem to handle. By considering various aspects of the outsourcing process cautiously, companies will achieve greater success with third-party logistics. (Razzaque & Sheng, 1998). Therefore, as companies seek to undertake new or increasing numbers of outsourcing initiatives, they must employ a meticulous and thorough selection process that addresses all key issues and potential problems as well as the logistics capabilities of the candidate providers. (Sopher, et al. 2002). Logistics service users must also remain acquainted with outsourcing trends and practices in the industry to continuously benchmark themselves again these and other important trends in an increasingly competitive marketplace. Technology, for example, is playing an increasingly important role in providing seamless fulfilment in the supply chain across many trading partners; connecting customers and their supply chain partners through a real-time information hub; improving real-time monitoring and enabling intelligent order sourcing. (Descartes, 2003). Many companies are also seeking to contract with a smaller number of providers, and are seeking to engage in a closer partnership-type agreement with those providers. Furthermore, providers are playing an increasingly important role in providing value-added services and integration of clients supply chain requirements. Companies considering the outsourcing of their logistics must also fully understand the activities to be outsourced and the reasons that they are undertaking the initiative, as well as the potential pitfalls, and concerns of companies that outsource. Chapter 4-108

109 It is therefore important for a company that is considering an outsourcing strategy to involve the necessary company functions and managers in the decision-making, and actual outsourcing, processes which must include, for example, the careful selection of the best possible service provider for the outsourced activity. The company must also ensure that the appropriate relationship is decided upon and undertaken with a well-drafted and well-managed outsourcing agreement. In the drafting of such an agreement, scope of work; pricing; SLAs and the measurement thereof; co-operative incentives for all parties; and dispute resolution guidelines and exit provisions should be considered and documented. It is furthermore key in this relationship that the necessary attention is paid to the transitioning of resources, that the company ensures ongoing and close contact with the service provider, that control is maintained at a desired level, and that at the same time the best possible relationship is encouraged between the parties. Implemented properly, logistics outsourcing continues to transform companies as they focus on core competencies to meet corporate objectives. Chapter 4-109

110 4.4 CONCLUSION Logistics and supply chain management are vital areas in which both companies and countries compete, and companies in a growing economy must implement modern management practices and adopt a broader conceptual framework that recognises the importance of the growth of logistics and supply chain management to ensure competitiveness and growth. (Mangan & Hannigan, eds. n.d.). With this increased focus on logistics and its contribution to a company, as well as the various competitive, performance and cost pressures on companies forcing them to focus on their core competencies, cut costs, and improve service, the idea of outsourcing logistics activities is increasingly receiving consideration. However, it important to note that while many companies regard outsourcing as an allencompassing solution, it is anything but risk-free, and the outcomes of outsourcing are most frequently mediocre. (Lonsdale & Cox, 1998). Therefore, the decision to outsource should not be taken lightly and must be strategically considered by the company before undertaking such an initiative, particularly if the true benefits of outsourcing are to be achieved and at the same time the many potential problems avoided. Furthermore, the risks and problems inherent in outsourcing must be carefully identified and skillfully managed. In this chapter, therefore, an overview was provided of the importance and development of the logistics outsourcing concept, based in particular on studies and surveys conducted in the US, as representative of a developed economy. Chapter 4-110

111 From such studies, for example Langley, et al. (2000, 2001, 2002), the following trends and practices appear to be prevalent: Customers are placing greater emphasis on logistics customer service. Companies are increasingly recognising the role of logistics service providers in meeting the needs of their customers. Companies are understanding that the issue of integration is central to the effective utilisation of outsourced logistics services. Companies are shifting from the use of transportation-based providers to those that are more oriented towards warehousing and distribution, as well as to comprehensive providers of logistics and supply chain services. Customers of logistics providers are increasingly showing a significant interest and concern for the availability of capable information technology-based services. There is a growing need for providers to improve their services and responsiveness to customers that have global logistics and supply chain needs. The use of logistics service providers is generally considered to help a company to achieve operationally-focused customer objectives; however room for improvement still exists for achieving those that are more strategic in nature. Future priorities focus on the more effective and meaningful utilisation of logistics service provision by customers throughout industry. It has also been found that users of 3PL services in the US are becoming more knowledgeable and better prepared to effectively utilise the available range of services. Furthermore, while customers generally indicate satisfaction with many of the more routine, day-to-day activities of providers, there is a great need for improvement in areas such as development and utilisation of technology and ecommerce-based capabilities; availability of a broader range of global logistics services; faster and better implementation of change; the availability of projectmanagement skills; and using logistics services to provide differentiation from their competitors. There is increased emphasis on value creation as a criterion for selecting providers; significant future reliance on providers to facilitate the availability and use of capable information systems and technologies for logistics and supply chain processes; and the need for providers to become more involved in identifying Chapter 4-111

112 and implementing global solutions for customers. Therefore, as companies increasingly focus internal resources on their core competencies, they turn to external providers of certain logistics and supply chain services to achieve greater competitiveness and responsiveness in the marketplace. (Langley, et al. 2000). For the logistics service provider therefore, for example in the US, there is considerable scope for increases in the extent to which providers services are integrated or bundled together; as well as for IT-based services; and increased involvement by providers in logistics strategy formulation and management of a broader range of resources pertinent to logistics and supply chain processes. (Langley, et al. 2000). A trend to expand outsourcing logistics to logistics service providers internationally is also gaining momentum among US manufacturers, for example, and also alluded to in Section 4.2.2, due to greater satisfaction with outsourcing of this function domestically. (Accenture, 2001). However, with regard to high IT expectations by customers, and requirements for provider involvement in ecommerce-based services, positive results have yet to be prevalent. Effective utilisation of technology requires meaningful working relationships between users and providers of logistics services. With respect to the increasing need for logistics services that are global in nature needs, providers will need to develop a broader range of globally-capable services. (Langley, et al. 2000). Chapter 4-112

113 For providers, improvement priorities should therefore focus on efficient and effective planning and implementation of services to customers; concern for ITrelated matters; availability of global capabilities; and development and delivery of comprehensive, integrated solutions that create real supply chain savings. After their 2002 survey, Langley, et al. stated that providers should focus on a number of key objectives, including implementing capable information technologies, instituting effective management and relationship processes, integrating services and technologies globally, and delivering comprehensive solutions that create value for users and their supply chains. Considering that customer demands for performance and sophistication are accelerating, improvement in these areas is critical to the future success of providers. In summary, such trends and practices with regard to the provision and use of outsourced logistics services was discussed in some detail in the preceding sections of this chapter. Particular attention was paid to the trends and practices with regard to the outsourcing and use of logistics services in the US, as well as various other countries. This included an in-depth discussion of reasons that companies do and do not outsource, potential problem areas and issues of concern, as well as the steps that need to be taken in the outsourcing process if the benefits of outsourcing are to be achieved and the problems avoided. In South Africa, however, there have been no previous formal studies or surveys undertaken to ascertain various trends and practices regarding logistics outsourcing specifically. This issue and the logistics outsourcing survey that was undertaken for this thesis will be dealt with in greater detail in Chapters 5, 6 and 7. Chapter 4-113

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123 Nell, F 2001b: 3PL and 4PL The Future is an Environment of Adjusting and Changing Perceptions. Logistics News, April 2001: 19. Patterson, D 2002.: Impact of Collaborative Logistics on the Bottom Line. CLM Annual Conference Proceedings, Oct Also available from: [email protected] Potgieter, A 2003: Interview on 29 August 2003 with a representative of Sasol Polymers regarding their outsourcing experiences. Rabinovich, E; Windle, R; Dresner, M & Corsi, T 1999: Outsourcing of Integrated Logistics Functions: An Examination of Industry Practices. International Journal of Physical Distribution and Logistics Management, 29(6). Available from: nw=1/rpsv/cw/mcb/ /v29n6/s1/p353.html (Accessed 25 March 2002). Ravi, R 2001: elogistics: Key Trends in the Logistics Outsourcing Marketplace. IDC - Bulletin, 24119(1), March Razzaque, MA & Sheng, CC 1998: Outsourcing of Logistics Functions: A Literature Survey. International Journal of Physical Distribution and Logistics Management, 28(2). 1998: Reichard, R & Morgan J 1998: Freight-billing Services can Cut Costs Significantly. Purchasing, 125(1), July 1998: 102. Roeser, J 2001: Jack s Quacks On the Issue of Why Logistics Outsourcing Fails. Logistics-aug.com, 2001: 1-4. Sankaran, J & Charman, Z 1999: An Inductive Investigation into Third Party Logistics Contracts. Proceedings of the 28 th Annual Transportation and Logistics Chapter 4-123

124 Educators Conference: LaLonde, BJ & Pohlen, TL eds. 1999: The Ohio State University & CLM: Seideman, T 1999: To Get What You Want Know What You Need. Inbound Logistics, January 1999: Slater, A 1998: Standard Form Contracts: Specimen Contract from Added Value Logistics Consulting Ltd, April Sopher, S; Lareau, M & Crum, M 2002: Third-Party Logistics Outsourcing. Deloitte & Touche s Transportation Trends, 4(1), Winter Sowinski, L 1999: Money in the Pipeline Boosting Profits with Supply Chain Management. World Trade (Logistics & Supply Chain Management), November Stock, JR & Lambert, DM 2001: Strategic Logistics Management; fourth edition. Boston: McGraw-Hill International Editions. Supply Chain Planning Limited. n.d.: Supply Chain Outsourcing and Distribution Partnerships. Logistics Outsourcing and Distribution Distribution Consultants. Available from: uk.com/page55.html (Accessed 9 June 2003). Thuermer, K 2000: International Logistics Hubs. Business Facilities, November Available from: busfac/bf_00_11_cover3.asp. (Accessed 9 June 2003). Trunick, PA 2002: 4 Trends Driving and Driven by 3PLs. Latest Logistics Articles, October Available from: logistics/articles/pr_ html (Accessed 9 June 2003). Chapter 4-124

125 Van Hoek, RI 1999: Expanded Service Strategies for Third Party Logistics Service Providers from Commodity to Speciality Through Customisation and Postponement. Proceedings of the 28 th Annual Transportation and Logistics Educators Conference: LaLonde, BJ & Pohlen, TL eds. 1999: The Ohio State University & CLM: Weiskott, MN 1999: Logistics Outsourcing Third-Party Providers can Cut Costs. Plants Sites and Parks Magazine, February/March Available from: (Accessed 9 June 2003). Wilson, T 2001a: Online Logistics Options Multiply Freight Carriers Take a Second Look at Outsourcing the Management of Transportation Services. InternetWeek, 1 October Available from: galegroup.com/itw/infomark/258/473/ w4/purl=rc1_gbi (Accessed 14 March 2002). Wilson, T 2001b: Outsourcing Cuts Logistics Complexity. InternetWeek, 26 November Available from: infomark/258/473/ w4/purl=rc1_gbi (Accessed 14 March 2002). Chapter 4-125