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):
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).
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.
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
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
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.
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
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
Financial risk – financial risk means that the
real return on investment of logistics outsourcing is lower than the
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
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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