Most studies of logistics outsourcing have focused on cost reduction, while few studies have reported on service benefits. This study empirically examines if outsourcing different logistics activities results in differences in logistics service performance. We identify and analyze the outsourcing of four levels of logistics activities: transportation (level 1), packaging (level 2), transportation management (level 3), and distribution network management (level 4). A research framework was formulated to discuss the effect of the outsourcing decision of different levels on perceived logistics service performance and includes the moderating role that supply chain complexity may play in the proposed relationships. Our findings show that outsourcing has no direct impact on service performance (delivery reliability, flexibility and lead-time) in any of the four levels. However, the performance when outsourcing level 4 activities increases with an increasing degree of demand complexity. Furthermore, chilled foods have higher service performance than non-chilled foods. These findings show the complex relationships between levels of outsourcing, performance and supply chain characteristics.
Supply chain management involves the design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer (Christopher, 1992; Ellram, 1991; Fawcett et al., 2007). The essence is to align goals, share resources, and collaborate across company boundaries (Fawcett et al., 2007). For example, collaborating with a third-party service provider, that is, outsourcing, allows a company to concentrate on its core business—the few activities it does very well and for which it has unique skills.
Logistics outsourcing is growing in importance and incidence worldwide. According to Capgemini (2007), more than 70% of companies in Western Europe, USA and Asia Pacific have outsourcing experience in a pattern expanding from basic transportation to full logistics network control. In the early 1980s, logistics services in the outsourcing market were confined to the traditional activities, for example transportation and warehousing. In the 1990s, a number of network players such as DHL and TNT entered the outsourcing market and began providing a wider geographic coverage of their transport networks. At that time also value adding activities were introduced, such as sorting and labeling. In the late 1990s, a number of players from areas as information technology, management consultancy and financial services began working together with logistics service providers. This period saw the creation of a new service, the ‘supply chain solution’, also called ‘fourth-party logistics (4PL)’, where a logistics service provider (LSP) is hired to manage a customer's complete logistics network (Carbone and Stone, 2005; Hertz and Alfredsson, 2003; Lai, 2004).
Outsourcing can be a value-enhancing activity. However, the top benefits for companies outsourcing are often related to costs-savings (Capgemini, 2005 and Capgemini, 2007). Among the outsourcing performance-related studies conducted to date, few empirical studies have reported on service benefits; most report on cost performance, for example Larson and Kulchitsky (1999) and Lau and Zhang (2006). This study seeks to advance understanding of the relationship between the outsourcing decision, outsourcing level and a firm's logistics service performance. We sought answers to the following questions:
This research establishes a base from which to extend previous work examining four levels of logistics activities and also assesses the moderating effect of supply chain complexity on logistics service performance.
Much of the prior work on outsourcing has focused on the aggregate level of activities. In this study, we focus on the outsourcing of specific value creating activities. To do this, a classification of outsourcing levels was firstly established. This is an important step, because there were no existing classifications which could be used as a reference to guide decision-making of logistics outsourcing-‘what should be outsourced’. As McCarthy and Ridgway (2000) stated ‘classifications enhance knowledge and understanding and will enable predictions to be made about system behavior’. Thus, our classification could be used to formulate appropriate action for managers who are responsible for logistics design. We believe that the future studies can gain further insight into the performance implications of outsourcing decisions by focusing on the activity level instead of aggregate level.
Contrary to our predictions, our results indicate that there are no direct service performance implications of logistics outsourcing practices. But, we found that the relationships between outsourcing and service performance are moderated by demand complexity at level 4. It shows that the relationships between logistics outsourcing and firm performance are not the same for all firms. Rather, the performance effect of outsourcing is contingent on characteristics of the firm's supply chain logistics environment. We suggest future research to include supply chain complexity as a moderator on outsourcing and performance relationships and to have more intensive examinations of organizational and environmental contingencies.
Finally, The findings indicate that chilled foods have higher service performance than non-chilled foods. We suggest that further outsourcing-related studies may have to take chilled-requirement into account as a control variable. This is particularly important when we study other industries, such as medicine (chilled-storage is also required), or when we compare with different industries.
