Outsourcing & the impact on the Logistics World

Since the industrial revolution, firms have grappled with how they leverage on their competitive advantages to increase their market share and their profits. The model for most of the 20th century was a large company that can “own, manage, and directly control” its assets and operations. From 1950s and 1960s, the rallying philosophy was diversification to broaden corporate bases and take advantage of economies of scale. By diversifying, company’s expected to protect profits, even though expansion required multiple layers of management (Quinn, 2000).

There are a lot of reasons for logistics outsourced. Decisions to use logistics outsourcing services can be influenced by the region, company size, industry type, occupied markets or many others (Hong et al., 2004). Grossler et al. (2013) discovered that while companies that outsource internationally focus on achieving cost benefits, companies that outsource domestically focus on achieving capacity flexibility.

In general, logistics outsourcing can be used at one of the following stages (Idnes, 2013):

2PL (second-party logistics)

This form of logistics outsourcing is suitable for small companies with a very simple supply chain. The manufacturing company orders some logistics services from a specialized firm (for example transport).

3PL (third-party logistics)

As Third-Party Logistics (3PL) are termed organisations offering external logistics services such as transportation, distribution services, warehousing, packaging and many others. This branch has become very popular with manufacturing companies which need to decrease their logistics costs or to implement some verified strategies of supply chains. Third-Party Logistics providers gain more expertise and, therefore, their level of service can bring more value to customer companies. This type of logistics outsourcing is the most often used in practice.

4PL (fourth-party logistics)

It is the closest type of cooperation, in which case a 4PL provider takes responsibility for the whole supply chain optimization and helps to manage individual subordinate 3PL providers. This type of logistics outsourcing is used especially by large supranational organisations.

ECONOMIC ASPECTS AND MEASURABLE BENEFITS OF LOGISTICS OUTSOURCING

The major problem for many companies is how to measure the strategic or economic value that logistics outsourcing can offer. Several authors, researchers, managers and other interested parties have tried to answer this question and create a list of key indicators. However, their points of view are quite different.

While some claim that logistics outsourcing must always bring some cost reduction, others highlight its strategic value in terms of fulfilling goals that are not always directly concerned with financial targets. As Hsaio et al. (2010) confirm, most studies of logistics outsourcing are focused on cost reduction and only a few of them report on service and strategic benefits. In general, outsourcing non-core processes (as logistics is for the majority of manufacturing companies) decreases capital investment requirements, which in turn drives more of the company’s profit into return on assets. Mojsilović, Ray, Lawrence and Takriti (2007) proved, in their study, that outsourcing does have a quantifiable impact on a company’s finances, but they also admit that outsourcing decisions are extremely complex and influenced by both quantitative and qualitative factors.

Marshall, McIvor and Lamming (2007) conducted a study on the experience of three telecommunication companies with outsourcing some non-core processes (logistics, testing, calibration, etc.). In all cases, outsourcing was regarded as a major strategy for achieving required flexibility, which helped to place the companies in a better position to react rapidly to market changes.

However, higher flexibility is only one of the key logistics service performance indicators. The analysis of outsourcing from a network point of view conducted by Gadde and Hulthén (2009) showed that the outsourcing of logistics is not only about moving some logistics activities from one organisation to another, as it affects many other activities and brings some new approaches to resource management and relationships between supply chain members.

SOME RISKS AND NEGATIVES OF LOGISTICS OUTSOURCING

There are many potential benefits from logistics outsourcing. However, there are also huge potential risks associated with it. Bjornar et al. (2008) argue the fact that the evolution of gradually more complex supply chains makes decisions about logistics outsourcing more difficult. Their empirical analysis showed that it is not always beneficial to outsource some activities what is proved by an example from the Norwegian oil and gas industry explain in their paper.

 Li-jun (2012) describes a control model of logistics outsourcing risks which includes the following five basic types or categories:

  • Contract risk – the risk that a third party logistics provider cannot fulfil all requirements in required quality or required time.
  • Management risk – this type of risk can be caused by the difference between the management methods and the culture of the company used by the provider and client.
  • Information risk – the risk of poor quality information sharing which can result in serious problems and dramatic losses.
  • Market risk – this type of risk refers to market fluctuations such as labour price, raw materials price, the changes in customer demand, etc.
  • Financial risk – financial risk means that the real return on investment of logistics outsourcing is lower than the expectation.

Many authors deal with logistics risk from various viewpoints. For example, Tsai et al. (2012) examined the links between three types of risks in logistics outsourcing: relationship risk, asset risk and competence risk. They found that relationship risk leads to both asset risk and competence risk.

Most important is to try to prevent potential risks. Sun and Zheng (2008) carried out a research study in which they tried to create a model of early-warning logistics outsourcing risks based on four phases introduced in their paper. However, the practical implementation of such results is always very difficult and requires a high level of experience, time and patience.

Outsourcing with Paragon we endeavor to reduce your risk by working closely alongside your management team. Our solutions are created and then quantified by your company insuring a clear path to success.

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