Data Collection: Primary Sources - Quantitative Method

4 RESEARCH METHODS AND DATA COLLECTION 4.1 Introduction

4.2 Quantitative Method

4.2.1 Data Collection: Primary Sources

The primary data source for the pilot study was a sample of 11 contracts received from the Provider. These contracts represent active users of logistics services. The scope of the contracts covers a varied portfolio of logistics services such as warehousing, transportation, distribution and inventory management.

The Users are all publicly traded firms in different industries with available financial performance information. After the pilot study was finalised the Provider made available additional 138 contracts, contracts with the same characteristics as those in the pilot sample, for a total sample size of 149. This data set represents a representative portion of the signed long-term agreements between the LSP and its users.

Each contract had available the following data elements (data presented in Table 10 below and described in detail in the Appendices):

 Operational performance indicators (based on the scope of services)

 Service level agreements (SLAs) per operational performance indicator

 Actual performance value by indicator over time (2 year horizon)

 Contract profile (signing date, active or not, with or without a programme manager, etc.)

In the SLAs both parties agree on the operational indicators that will govern and track the overall performance of the Provider, whilst also executing the

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contracted services. SLAs also state the performance goals for each indicator.

Operational indicators are limited to the scope of contracted services for a specific User and timeframe. Some contracts have one key operational performance indicator. This is especially true in cases where services are fairly simple or limited to just one activity. Other contracts may have many indicators when the scope of services is complex and when the User prefers multiple indicators to track performance of different dimensions of the operation.

Invariably, all the indicators contained in the studied contracts are operational in nature, and their performance goals are often stated in the contract or in another legally binding document.

Columns three to five of Table 11 show the main operational performance indicators in the 11 contracts of the sample for the pilot study. Contracts with Users are identified with letters, from A to K. So, Contract A is signed between User A, and the Provider. The operational performance indicators are related to logistics services offered by the Service Provider. For each performance indicator stated in the contract there is information on the SLA (required performance target value) at the starting time or renegotiation point.

Additionally, the Provider delivered information on the actual performance value per indicator for the years 2010 and 2011.

The decision to maintain, renegotiate or decommission the outsourcing contract is typically based on the latest information from a set of variables from the User’s perspective. Presumably it is decided based on the actual performance measures versus the SLAs. However the purpose of this research is to explore additional criteria mainly the contribution of the contract to the user’s financial objectives.

Columns six to eight present contract profile data that may represent the success of the contractual alliance as stated by key academics in the field (Ariño, 2003; Zollo et al., 2002; Reuer and Zollo, 2005; Reuer and Ariño, 2007).

These indicators of success include the status of the contract (1 for active

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contracts; 0 for non-active contracts); the longevity of the contract (number of years since signing); and the number of renegotiations of the contract’s terms.

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Contract Period of Analysis Longevity Stability Customer Status Industry

Contract ID End Q1 Year 2009 ^KPI1 ^KPI2 ^KPI3 ^{(in years)} (Renegotiations) (Active = 1;

Abruptly Terminated = 0) (as reported by provider) Contract Metrics Order Accuracy Logistics Cost Reduction Obsolete Inventory Reduction

Stated Contract SLA 100.0% 5% 100%

Current Performance 98.0% 4.45% 100%

Contract Metrics Fill Rate Next Day Air Performance Order Pick Accuracy

Stated Contract SLA 98.0% 100% 100%

Current Performance 96.0% 95% 99.70%

Contract Metrics On-Time In-Full Dock-to-Stock Inventory Accuracy

Stated Contract SLA 90% filled in 2 hours 4.0 hours 98%

Current Performance 88% filled in 2 hours 4.2 hours 97%

Contract Metrics Order Fulfillment Dock-to-Stock Inventory Accuracy

Stated Contract SLA 99.70% 100% in 420 minutes 99%

Current Performance 94.72% 95% in 420 minutes 98%

Contract Metrics On-Time Performance

Stated Contract SLA 98.0%

Current Performance 96.0%

Contract Metrics Delivery Performance Claims Ratio Aged Receivables Stated Contract SLA 96.0% 1 claim in 700 shipments 80% in less than 90 days Current Performance 94.0% 5 claims in 700 shipments 80% in less than 90 days Contract Metrics Delivery Performance Plant Disruptions Aged Receivables

Stated Contract SLA 96.0% 0.0 80% in less than 90 days

Current Performance 94.0% 0.0 70% in less than 90 days

Contract Metrics Delivery Performance Plant Disruptions Aged Receivables

Stated Contract SLA 96.0% 0.00 80% in less than 90 days

Current Performance 88.0% 0.18 80% in less than 90 days

Contract Metrics Delivery Performance

Stated Contract SLA 96.0%

Current Performance 95.7%

Contract Metrics Delivery EDI Compliance Aged Receivables

Stated Contract SLA 97.00% 80.0% 90% in less than 45 Days

Current Performance 95.06% 71.2% 90% in less than 45 Days

Contract Metrics Time of Arrival of Available Freight Total Transit Time

Stated Contract SLA 95.00% 4

Table 11 Operational and contract success performance indicators from contracts in pilot study

123 4.2.2 Data Collection: Secondary Sources

Secondary data from external sources was needed to build the financial indicators of the provider and users involved in the 11 contracts. Financial indicators will be used to calculate the alignment of the contract’s SLAs with the financial objectives of the participating firms.

From the myriad of financial indicators that are reported and tracked in publicly quoted firms, four indicators were selected for the study: revenue growth, profitability, cash operating cycle, and fixed asset utilisation. All are key objectives of sustainable organisations (Kaplan and Norton, 1996; Eccles, 1991;

Collins and Porras, 2000) and closely connected with decisions to outsource logistics operations and the financial impact of logistics performance (Timme, 2004; D’Avanzo et al., 2003; Lambert and Burduroglu, 2000).

Public reports of financial statements for Users A to K show the values of financial performance indicators such as:

- Revenue growth percentage - EBITDA¹⁰ as a percentage of sales

- Days in working capital (accounts payables, inventory and accounts receivables)

- Revenue over Fixed Assets

These indicators track financial performance and are close related to logistics performance and to outsourcing decisions as well (Lambert and Burduroglu, 2000). Table 12 presents reported values of each financial indicator for the end of Q1 2009 by User.

The financial objective for in each one of the indicators was estimated using as benchmark, the performance of the first quartile of firms in the same SIC code

10 EBITDA stands for earnings before interests, taxes, depreciation and amortisation and reflect the true operational margins for a firm

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of the User¹¹. For example, User D is in the SIC code 3724, currently the best performance in revenue growth for firms in the top quartile of its industry is 21.1% annual growth, thus it becomes the target performance in that indicator, where current performance by User D in revenue growth is 6.6%. From an investor’s perspective, it will be a goal for User D to close the gap from its baseline to the industry’s first quartile performance. Later in the document it will be discussed the implications of operational performance from an outsourcing contract on financial performance of the Provider and User. Table 13 summarises this example with detailed financial data from User D.

Table 12 Financial Indicators of Users in Pilot Study Contract

Party SIC

Code KEY CORPORATE FINANCIAL INDICATORS