Logistics outsourcing

(1)

Logistics outsourcing –

conceptual background

and survey results

Jari Juga

Professor, logistics

University of Oulu, Department of Marketing

(2)

Agenda

• Outsourcing

O

f

•

Outsourcing defined

•

Why (reasons for outsourcing)

•

What (outsourcing scope)

• Outsourcing relationships – loyalty/disloyalty

• Outsourcing to (in) Russia?

• Outlook

(3)

Outsourcing, def.

• Merriam Webster’s (www.merriamwebster.com)

dictionary defines outsourcing as “

to procure some

dictionary defines outsourcing as

to procure some

goods or services needed by a business or organization

under contract with an outside supplier

pp

”.

• Outsourcing involves the

transfer of goods and services

production, previously carried out internally, to an

y

external provider

(Domberger 1998).

• Typically outsourcing is based on

long-term relationship

and involves

several activities

(transport, warehousing,

etc).

(4)

Business Process Outsourcing, BPO

BPO def

.: movement of business processes

from inside the

organization to external service providers (Click & Duening, 2004)

•

Offshore PBO

means business process outsourcing where the

service proivder is in another part of the world (e.g. factory jobs

moving overseas)

•

Onshore BPO

means close to the physical location of the

company in the same city or country

company, in the same city or country.

•

Near shore BPO

means business process outsorucing taking

place in a neighbouring region or country; this allows companies

to test BPO without the level of risk associated with going

onshore.

(5)

Insourcing, outsourcing, offshoring

P.O. BOX 4600, 90014 University of Oulu •tel. (08) 553 2905, fax (08) 553 2906 •www.oulubusinessschool.fi

(6)

Logistics service providers - LSPs

Hauliers, transport operators/companies

•

provide transport services

•

provide transport services

Warehouse operators

•

provide warehousing service

F i ht f

d

Freight forwarders

•

act as brokers for transport services, particularly for international

transport, especially administrative services related to transport

Port operators, stevedors

•

Provide port services

3rd party logistics companies

p

y

g

p

•

middleman in logistics channel that provides, by contract for a given

time period, all or a considerable number of logistics activities for

other firms (Virum 1993)

4th party logistics companies

•

integrators (information management, physical operations typically

outsourced); term coined by Andersen Consulting (Accenture)

(7)

Why outsource logistics – key motives

identified in the literature

1. Cost

2

Service

2. Service

3. Operational flexibility

4

Business focus (core competence)

4. Business focus (core competence)

5. Asset utiliziation or efficiency

6

Ch

t (t

f

ti

l

t

i

)

6. Change management (transformational outsourcing)

7. 3PL expertise

8

P bl

l t d

8. Problem-related

9. Investment

Source: Wilding & Juriado 2004

(8)

Risks of outsourcing

• Unrealized savings or hidden costs

• Less flexibility

y

• Poor contract or poor selection of partner

• Loss of knowledge/skills

g

• Loss of control/core competence

• Power shift to supplier

• Supplier problems (poor performance, bad relations, etc.)

• Losing customers, opportunitiies, or reputation

• Morale and employee issues

(9)

What is being outsourced

• Transportation is the activity that is outsourced most

frequently.

Al

h

i

t

d f i l

ft

b t ft

l

• Also warehousing is outsourced fairly often – but often only

partly (e.g. peak season, during transport etc)

• Outsourcing of logistics information management and order

processing is incrasing – e.g. NokiaSiemens Networks

recently outsourced much of the purchase order processing

to CapGemini – the jobs were soon moved to India.

• A recent global survey (CapGemini & Georgia State

University) shows a wide variety of activities that have been

outsourced in logistics – but results vary in different surveys.

(10)

(11)

Current state of logistics outsourcing in Finland

(2008 survey by Oulu University)

0 % 20 % 40 % 60 % 80 % 100 % 2 3 15 79 external transport internal 36 51 23 40 17 7 24 2 internal transport warehousing 69 21 8 2 g logistics info mgmt 87 10 11 order processing

(12)

Outsourcing benefits

Outsourcing surveys

generally show high

levels of buyer

satisfaction on LSPs.

The table shows results

of a global survey in

2010 concerning

benefits achieved by

shippers.

Source: CapGemini & Georgia State Insitute of Technology 2010

(13)

Offshoring results

• With labor rates as much as 10 x higher in the U.S.

than in India, the ability of U.S. firms to capture overall

offshore cost savings of 50% or more would not seem

to be unreasonable.

• However, in their book ”

Controlled Offshore

Outsourcing with an Active Process

”, Lidman and

Jacobson claim that typical offshore cost savings are

no more than

10-15%

.

• Deloitte Consulting also discovered that the average

Deloitte Consulting also discovered that the average

reduction in total cost was in the range of

10-15%

.

(14)

Service satisfaction & loyalty (or disloyalty)

in outsourcing relationships

g

p

• Empirical research generally supports the

h pothesis that ser ice q alit e periences lead

hypothesis that service quality experiences lead

to overall satisfaction which lead to loyalty.

All th

t

h t

bl

ti

• All these concepts are somewhat problematic

and they can be measured in various ways.

O

i 2008

Fi

i h

f

t i

• Our survey in 2008 among Finnish manufacturing

companies (235 responses, 22.5% response

rate) examined this hypothesis

rate) examined this hypothesis.

(15)

Satisfaction and Loyalty intentions

Var. Description

(scale: 1 fully disagree … 7 fully agree)

Mean

St.dev.

L1

With high probability we will continue the relationship

with our present LSPs as long as possible.

5.32

1.18

p

g

p

L2

With high probability we will change our main LSP in

the near future.

3.03

1.37

L3

With high probability we will outsource more activities

to our main LSP in the near future.

3.42

1.42

L4

With high probability we will outsource more activities

3 50

1 51

L4

With high probability we will outsource more activities

to new LSPs in the near future.

3.50

1.51

S1

Please indicate your overall satisfaction with your

5 22

0 93

S1

Please indicate your overall satisfaction with your

main LSP (1 = very dissatisfied … 7 = very satisfied)

5.22

0.93

(16)

Service performance measures

F1. Operational service (α = 0.821) mean st.dev. Based on recent experiences with your main logistics service provider,

please evaluate the service in terms of (scale: 1 poor ... 7 excellent): F11

F12

ability to keep schedules (factor loading 0.89) ability to offer services promptly (0.90)

5.20 5.39 1.13 1.02 F13 y p p y ( )

ability to provide sufficient capacity (0.80) 5.29 1.22

F2. Personal service (α = 0.878)

Based on recent experiences with your main logistics service provider, please evaluate the service in terms of (scale: 1 poor 7 excellent):

mean st.dev. please evaluate the service in terms of (scale: 1 poor ... 7 excellent):

F21 F22 F23

service-mindedness of the personnel (0.89) accessibility of personnel (0.90) expertise of personnel (0.90) 5.40 5.44 5.52 1.14 1.12 1.06

F3 Cost performance (α = 0 848) mean st dev

F3. Cost performance (α = 0.848)

Please evaluate the impact of outsourcing on logistics costs (scale: 1 fully disagree ... 7 = fully agree):

mean st.dev.

F31 outsourcing has reduced our transportation costs (0.69) 4.54 1.55 F32

F33 F3x

outsourcing has reduced logistics personnel costs (0.76) outsourcing has brought savings in logistics costs (0.86) outsourcing has reduced our warehousing costs (*)

4.44 4.44 3.52 1.58 1.50 1.47

(17)

Facilitators

F4 Relationships (α= 0 795) mean st dev

F4. Relationships (α= 0.795)

Please describe the relationships with your logistics service providers (scale: 1 fully disagree… 7 fully agree):

mean st.dev.

F41 We have cooperated for a long time with our LSPs (0 82) 5 73 1 21 F41

F42 F43

We have cooperated for a long time with our LSPs (0.82) We have good personal relationships with our LSPs (0.88) We have good routines for solving emerging problems with our LSPs (0.83) 5.73 5.11 5.48 1.21 1.21 1.23 F5. Brand image (α= 0.769)

Please describe the impression you have of your main logistics service providers (scale: 1 fully disagree… 7 fully agree):

mean st.dev.

F51 F52 F53

Our main LSP is a well-known name in its industry (0.85) Compared to other logistics providers, our LSP is a leading brand in its industry (0.89)

O i LSP i hi hl t d (0 74) 5.32 4.25 4.60 1.47 1.52 1.06 Our main LSP is a highly respected company (0.74)

Note: F3x was dropped because of poor factor loading

(18)

Regression analyses: antecedents to loyalty

& disloyalty in outsourcing relationships

Dependent

var.

Explanatory vars. (standardized coefficients)

F (sig)

var.

L1 continue

0.33 F1

+ 0.11F2

+ 0.06F3

+

0.16F4

+

0.10F5

F19.8 (0.000)

L2 change

-0.00F1

– 0.25F2

+ 0.09F3 – 0.02F4 – 0.13F5

F 4.35 (0.001)

L3 more

0.02F1 + 0.11F2 + 0.14F3 – 0.10F4 – 0.06F5

F 1.57 (0.169)

L4 more to

new LSPs

-0.05F1 – 0.09F2 + 0.10F3 + 0.03F4 – 0.07F5

F 1.07 (0.379)

e

S s

F1 = operational service performance

F2 = personal service performance

F3 = cost performance

Note: statistically

significant (P<0.05)

coefficients in bold

F3 = cost performance

F4 = relationships

F5 = LSP’s image

coefficients in bold

Source: Juga & Juntunen (2011)

(19)

Structural equation model (SEM) - impact of service

performance and facilitators on satisfaction and loyalty

(20)

" Russian outsourcing set to boom"

•

The

IT outsourcing

market in Russia will

reach a billion dollars in 2007, according to

the chairman of the Russian branch of US

semiconductor giant Intel.

g

• "Hundreds of companies are investing in Russia

in outsourcing - this market is going to reach a

g

billion dollars (740 million euros) this year," Steve

Chase told the Russian Economic Forum in

London.

http://www.outsourcemagazine.co.uk May 2, 2007

(21)

Outsourcing to Russia

IT Park, Petrozavodsk

MISSION: to promote hi-tech products in Nordic countries and the Russian

Federation b b ilding on the e isting scientific ed cational and technological

Federation by building on the existing scientific-educational and technological

potential of its personnel; by formulating uniform policy throughout, and by

coordinating the activity among its entities.

Ingria Technopark

, St Petersburg

an innovative activity territory where companies of the high technology sector

enjoy accelerated interaction due to the availability of developed

infrastructure and rendering of the necessary services.

I-Park Lemminkäinen

The Industrial Park Lemmikäinen in Kaluga attracts clients who need easy

access to rail- and highway systems, proximity to Moscow, and support from

a regional government that guarantees reliable delivery of crucial

infrastructure

infrastructure.

(22)

Outsourcing in Russia - challenges

•

The study focuses on the key factors in outsourcing from the

viewpoint of manufacturing companies operating in Russia.

•

The goal has been to give an overview of the different kinds of

•

The goal has been to give an overview of the different kinds of

challenges companies might face in the case of outsourcing.

•

The qualitative study involves from large-scale manufacturing

companies (two local and one international) operating in food

industry in Russia.

•

According to the respondents, a big challenge is to

find a

suitable supplier

in the Russian markets. If there are suppliers

available, they may often not be capable of operating as

outsourcing partners The most common problems faced with

outsourcing partners. The most common problems faced with

suppliers are

unstable quality and arbitrary pricing

.

Source: Ahola (2008)

(23)

Summary & Outlook

T

t ti

h

l

d b

t

d t

l

• Transportation has already been outsourced to a large

extent (mostly cost-based competition).

• Outsourcing of warehousing and other ”value adding”

• Outsourcing of warehousing and other value-adding

activities in logistics has been slower than expected

(although many international studies say these are

increasing).

• Service quality is a key criterion for outsourcing

q

y

g

relationship continuity.

• It is difficult to explain the increase of outsourcing scope

– however, cost benefits is a plausible reason for

willingness to increase outsourcing scope.

(24)

Literature

Ahola, I. Outsourcing Challenges in Russia. Lappeenranta University of Technology. Publication , g g pp y gy 51, Lappeenranta 2008.

Click, R.L. & Duening, T. (2004), Business Process Outsourcing: The Competitive Advantage. Hoboken, NJ: Wiley.

Juntunen J (2010) Logistics Outsourcing for Economies in Business Networks PhD thesis Juntunen J. (2010), Logistics Outsourcing for Economies in Business Networks. PhD thesis,

University of Oulu, Logistics (http://jultika.oulu.fi/Record/isbn978-951-42-6224-1)

Kremic, T., Tukel, O.I. & Rom, W.O. (2006), Outsourcing Decision Support: A Survey of Benefits, Risks and Decision Factors. Supply Chain Management: An International Journal, Vol 11 No 6. Razzaque, M.A. & Sheng, C.C. (1998), Outsourcing of Logistics Functions: A Literature Review.

International Journal of Physical Distribution & Logistics Management, Vol. 28 No. 2.

Wilding R. & Juriado R. (2004), Customer perceptions on logistics outsourcing in the European consumer goods industryInternational Journal of Physical Distribution & Logistics Management g y y g g Vol. 34 No. 8.

Inside Outsourcing. Deloitte Research Outsourcing Study 2003.

The State of Logistics Outsourcing: Results and Findings of the 15th Annual Study. CapGemini Consulting & Georgia State University.

Global 3PL & Logistics Outsourcing Strategy. Eyefortransport and Mercury Gate 2011.