A DECISION FRAMEWORK FOR LEVELS OF LOGISTICS OUTSOURCING
IN FOOD SUPPLY CHAIN NETWORKS
Hsin-I Hsiaoa, Jack G.A.J. van der Vorstb, S.W.F. (Onno) Omtaa
aDepartment of Business Administration, Wageningen University, Wageningen, The Netherlands
bDepartment of Logistics Management & Operations Research, Wageningen University, Wageningen, The Netherlands
Mansholtlaan 10-12, 6708PG, Wageningen.
ABSTRACT
The food industry is becoming an interconnected system with a large variety of complex relationships, reflected in the market place by the formation of (virtual) Food Supply Chain Networks (FSCN) via alliances, horizontal and vertical co-operation, forward and backward integration in the supply chain. This has resulted in the rise of new types of Logistics Service Providers offering their advanced services to food manufacturers. The question is what logistics activities should be sourced out to which type of logistics service providers under what specific conditions? This paper investigates the outsourcing decision of logistical activities by food manufacturers. It builds up a decision making framework for levels of logistics outsourcing employing transaction cost economic theory, resource-based view and Supply Chain Management theory. Preliminary results from case studies indicate that logistical outsourcing decisions are strongly influenced by both transaction- and firm-level effects.
1. Introduction
There are a number of developments that put dynamic requirements on the performance of the food system initiating a re-orientation of companies in the Agriculture and Food industry regarding their roles, activities and strategies (Van der Vorst 2005). Demand and supply are no longer restricted to nations or regions but have become international processes. Consumers in Western-European markets have placed new demands on attributes of food such as quality (guarantees), integrity, safety, diversity and associated information (services). There is an increasing concentration in agribusiness sectors, an enormous increase in cross-border flows of livestock and food products, and the creation of international forms of co-operation. FSCN are particularly characterized by increased complexity and decision-making uncertainty related to demand and supply. Global sourcing of perishable fresh produce combined with a request for frequent, fast deliveries of increasing product assortments create shelf life and delivery time constrains, which increase the complexity of inventory planning, transportation planning and asset utilizations. In order to satisfy the increasing demands of consumers, government, business partners and NGO’s and to obtain the “license to produce and deliver,” companies continuously have to work on innovations in products, processes and forms of co-operation. The food industry is becoming an interconnected system with a large variety of complex relationships, reflected in the market place by the formation of (virtual) Food Supply Chain Networks (FSCN) via alliances, horizontal and vertical co-operation, forward and backward integration in the supply chain and continuous innovation (Van der Vorst 2005). The later encompass the development and implementation of enhanced quality, logistics and information systems. One of the consequences of these developments is the rise of new types of Logistics Service Providers (LSPs) that offer complete supply chain solutions.
The increasing interest in the role of LSP in FSCN is not only due to the increased interest in Supply Chain Management (SCM), but also due to the increased growth in logistics outsourcing of the last few years (Ernst and Young 2001; 2003). Development of supply chain partnerships, increased focuses on core business processes, reduction on distribution cost, and time saving have been cited as the main reasons why organizations choose to outsource (Razzaque and Sheng 1998; Norek and Pohlen 2001; Sohail and Sohal 2003). SCM asserts that organizations along the supply chain need to reconfigure their operations by internal integration and external integration in order to accommodate changes to their logistics strategy. In order to achieve a SCM approach, organizations are looking for solutions from LSP to achieve seamless supply chain operations. Logistics outsourcing means that an organization uses a LSP to carry out an activity which is originally performed in-house. It represents a specifically defined contractual relationship, which requires the LSP to meet specified performance criteria set by the buying organization (Bolumole 2001). Compared to traditional transportation providers, new types of LSP with complete supply chain solutions are encouraged to play a part in the strategic direction and performance of the entire supply chain. In a way, they are becoming true supply chain members (Bolumole 2001).
Most of the works in logistics outsourcing focus on advantages and risks of outsourcing and in traditional logistics relationships. However, very little attention is devoted to the new type of LSP and its potential effects on Supply Chain Networks; also less research is done on the implications for its role in FSCN (Bourlakis and Weightman 2004). This research attempts to bridge these research gaps by developing a research framework for levels of logistics outsourcing in FSCN.
2. Research design
This research aims at developing a logistics outsourcing decision framework for food manufacturers that indicates what logistics services should be sourced out to which type of logistics service provider under what specific conditions. The following research questions are postulated:
What different types of logistics service providers can be distinguished in FSCN?
What kind of logistics activities can be outsourced by a food manufacturer to a LSP?
What decision-making criteria are considered by food manufacturers when outsourcing a certain logistics activity to a LSP in particular types of supply chain settings??
The overall research project is composed of (1) a literature review, (2) a number of case studies, and (3) a comprehensive survey. This paper reports on the first activity and some preliminary results from the second activity, as the research is ongoing. First of all, a broad literature review was undertaken in order to gain a better understanding of important variables and the relationships between them and to construct a preliminary research framework. The most important issue in this activity is to discuss outsourcing decisions and identify important theories related to this subject; we identified supply chain management, transaction cost theory and resource-based view. Results of this first activity are the research framework, the identified variables, expected relationships between the variables and a typology of levels of logistics outsourcing.
For the second activity, we carried out a number of case studies. The prime sources of data are semi-structured in-depth interviews. Companies selected for the interviews are based on the premise that they (the food companies) had outsourcing experiences with logistics service providers; or the LSPs who offer logistics services to food companies. Purpose of the case studies is to verify and further detail the framework by examining the model and relationship in practice (Voss and Tsikriktsis 2002). Logistics managers of food manufacturers and general managers of logistics service providers were asked according to their outsourcing experiences and the future decisions of logistics outsourcing. A set of well-design questions is used as research protocol in each interview for the purpose of enhancing reliability; besides, in some cases multiple respondents were used also in order to improve the reliability of data. The interview with each person lasted about 60 minutes and they covered the following issues:
Detail of the interviewee;
The business context within which the company is operating;
The relationships between the variables;
The other factors to be considered and discussions on the preliminary framework.
The interview results are taped, documented and successively scanned to identify similarities and differences, thereby paving the way for identifying consistency patterns and developing plausible explanations in helping to form the hypothesis literally and to build internal validity.
The next sections present definitions of logistics outsourcing and classifications of LSP (section 3), complexity of FSCN (section 4), and classification of logistics activities (section 5),. Section 6 introduces logistics outsourcing approaches (the transaction-cost economics, resource-based view and SCM theory) and propositions to explain logistics outsourcing decisions and level of logistics outsourcing; a preliminary decision-making framework is presented in the section 7. In section 8, the framework is tested and propositions are confirmed via in-depth interviews to glean theoretical insights into an empirical practice on logistics outsourcing of logistics activities. The paper concludes with a summary of our main findings and suggestions for future research in section 9.
3. Logistics outsourcing and typology of logistics service providers
In line with Mentzer (2001) we define a food supply chain as a set of three or more entities (organizations or individuals) directly involved in the upstream and downstream flows of fresh produces, industrial food products, services, and/or information from a source to a customer. From operational point of view, a supply chain is used here to refer to a network of facilities that produces raw materials, transforms the raw materials into finished goods at processing centers and delivers the finished goods to customers through distribution warehouses (see figure 1). A FSCN consists of more than one of these supply chains, who collaborate strategically in one or more areas (Van der Vorst et al. 2005) for the purpose of efficiency and effectiveness of FSCN.
Outsourcing is an abbreviation for “outside resource using.” Lieb et al (1993) further defined logistics outsourcing as “involving the use of external companies to perform logistics functions that have traditionally been performed within an organization.” These external companies are called logistics service providers (LSPs). A LSP is an external company who performs logistics activities between two or more facilities in the chains or performs logistics activities across different supply chains.
Figure 1 Illustration of a supply chain and its involvement with LSPs
Hertz and Afredsson (2003) mentioned that future development of LSPs can be classified by the abilities of general problem solving and customer adaptation. Based on their research, we distinguish LSPs into three main types:
· Standard LSPs: the companies who provide standard and traditional services, such as carried-based, warehouse-based, forward-based all belong to the standard LSPs.
· Integrated LSPs : the integrated LSPs provide value-added services and also provide at least two standard services
· Supply chain solution providers: this is a new type of LSP, called supply chain solution providers or “4PL.” They have higher problem solving ability and higher ability of customer adaptation by involving a high integration with customers, often in the form of taking over customers’ whole logistics operations.
Provided with these different services, the biggest problem for food companies in a particular supply chain setting is what logistics services to source out to which type of logistics service provider. The following sections discuss the complexity of FSCN, and also give detailed classifications of different types of logistics activities, which will be used to further explain the differences between the types of LSP.
4. Increased complexity of FSCN and the involvement of LSP
The SCM management concept aims at managing the supply chain as a single entity to plan and control the total goods and information flows from suppliers through end users effectively and efficiently. The structure of the FSCN has been subject to change in the last decades, which has increased the complexity of managing the FSCN. A FSCN is a complex network because one chain actor is usually involved in different types of supply chains, collaborating with different chain partners. Perishability of food resulting in quality decay places pressures on time and temperature control for each food actors at each node. Specific process characteristics, long production time and large food product varieties places specific demands on inventory planning and capacity utilization. Further, the accessibility of delivery status messages at any time and immediate notification of delays or other delivery problems are regarded as basic information needs in the logistics food chain. The trend of internationalization of FSCN creates difficulties on identification of food products due to the lack of uniformity of standards. Hence, a comprehensive tracking system creating visibility of pipeline combined with a standard identification technology of food products are certainly needed in international business (Karkkainen et al. 2004). Finally, for food safety and quality concerns, and the environmental concerns on energy saving and waste management, the EU has set itself a number of targets for food tracking and tracing for more secure food products; and for saving energy and switching to more environmentally friendly sources (Walther and Spengler 2005).
Overall, the complexity of FSCN has placed many pressures on the food actors. It is vital for FSCN to work as a single entity to plan and control the logistics of food products in a more effective and efficient way and supply consumers with high quality and secure food. Outsourcing some of logistics functions and involving of LSP into to the networks might help to solve the complexity problems and achieve balances of efficiency and effectiveness.
5. Classification of logistics activities
Our literature review showed that most of the journal-articles on logistics outsourcing do not specify the criteria used to identify the logistics outsourcing area, this is also mentioned by Wilding and Jurido (2004). In this paper we explicitly describe logistics activities from the point of view of the food manufacturer. In order to have a more detailed discussion on the outsourcing of logistical activities, we will now discuss these activities. We have classified them into two levels: supply chain execution activities and planning and control activities (see Table 1).
Supply chain execution activities
Execution is the act of performing. A physical logistics activity for a food manufacturer starts from receiving materials, storing materials, processing the food, and distributing the products to customers. We further distinguish these activities into three categories: transportation execution (inbound and outbound transportation), warehousing and value-adding activities:
· Transportation execution refers to carrying out the activities of loading, driving and unloading/waiting (Amstel and Dhert 1996).
· Warehousing involves the activities of handling-in, storage, order picking, handling-out (Amstel and Dhert 1996).
· Value-adding activities (including materials preparing, food processing, and packing, labeling). These activities in general are food processing activities but are called value-adding-activities when they are outsourced and transmitted into distribution environments, for the purpose of reducing supply chain costs and perform rapid delivery, and specifically aimed at customer-specific (Van Goor et al. 2003p432).