The Strategic Development of Third Party Logistics Providers in the Netherlands

The strategic development of third party logistics providers

Erasmus school of economics /
The strategic development of third party logistics providers in the Netherlands /
Master Thesis
Lex Miechels /
August 2011

The strategic development of third party logistics providers in the Netherlands

Master Thesis

Presented to:

Erasmus School of Economics

Department of Urban, Port and Transport Economics

Burgemeester Oudlaan 50

3062 PA Rotterdam

Supervisor:

dr. M. H. Nijdam

Second Reader:

drs. L.M. van der Lugt

By:

Lex Miechels

August 2011

Arnhem

Table of Contents

ACKNOWLEDGEMENTS

SUMMARY

LIST OF FIGURES AND TABLES

LIST OF ABBREVIATIONS

1INTRODUCTION

2THEORETICAL FRAMEWORK

2.1Defining logistics services providers

2.1.1Third party logistics providers

2.1.2Fourth party logistics providers

2.1.3Carriers & transport Operators

2.2The historical development of the TPL business

2.3Outsourcing logistics

2.4TPL buyer-supplier relationships

2.4.1Applying the agency theory on TPL relationships

2.4.2Applying the network perspective on TPL relationships

2.4.3Current status of TPL relationships

2.5The geographic service area of TPL providers

2.6TPL providers’ capabilities and the role of path dependency

2.7Client specific investments

2.8Customer adaption versus offering general services

2.9Environmental awareness in the TPL industry

2.10Value added logistics

2.11Capturing the supply chain

3METHODOLOGY

3.1Setting and framework of the research

3.2Method of data collection

3.3Method of data analyses

4RESULTS AND ANALYSIS

4.1Characterizing Dutch TPL relationships

4.2The georgraphic service area of Dutch TPL providers

4.3Dutch TPL providers’ capabilities and the role of path dependency

4.4Client specific investments made by Dutch TPL providers

4.5The strategic positioning of Dutch TPL providers

4.6Environmental awareness in the Dutch TPL industry

4.7Value added logistics offered by Dutch TPL providers

4.8Dutch TPL providers capturing the supply chain

5DISCUSSION AND CONCLUSIONS

5.1Main findings

5.2Limitations

5.3future research

REFERENCES

APPENDICES

Appendix 1: The questionnaire (in Dutch)

ACKNOWLEDGEMENTS

Numerous people have assisted me during the writing of this thesis. I would like to thank my supervisor, Michiel Nijdam, for helping me to write a thesis on this subject, bringing me in contact with TLN and supporting me along the way.

Secondly, I want to thank my parents Hans and Jacqueline Miechels for their support during my whole school career. You always motivated me to develop myself without too much pushing (your math lessons aside) and always let me make my own choices. Thanks again for funding my education. Without you, I never would have become an MSc in Economics and Business.

Thirdly, I would like to thank my girlfriend Femmy Hesseling for acting as a sounding board. It must have been boring for youto listen to my endless talking about a subject you aren't that much familiar with. I would also like to thank you for your active support in elaborating the survey results. But most of all I just like to thank you for your presence and the positive distraction you caused during the writing process.

Fourthly, I am indebted to all of the respondents for their cooperation. They haveprovided me with new and original insights and made this research dynamic. I also thank Babiche van de Loo of TLN for bringing this study to the attention of potential respondents.

Last but not least, I would like to thank Marc Levinson (2006) for writing his book The Box. His book about how the Shipping Container made the world smaller and the world economy bigger inspired me to write the thesis I wrote because of the following phrases:

Sea-land and its competitors were not all like Polaroid or Xerox, companies whose proprietary technology and constant stream of innovations provided inordinately high profits for decades. Ship lines’ end product was basically a commodity. Just like farmers and steelmakers, they would always be hostage to external forces, their prices and profit margins depending mainly on economic growth and on their competitors’ decisions to build new ships. (p. 230)

SUMMARY

The transport- and logistics sector faces low margins and continuing price pressure. As was evident from the surveys conducted by TLN (2011), there is a difference in profitability between logistics service providers and transportation companies. This difference in profitability is presumably explained by the fact that logistics services providers offer a more differentiated service. This insight led to the following research question:‘’How do third part logistics providers in the Netherlands develop their business?’’

The purpose of this research was to study how TPL providers in the Netherlands differentiate their business to be more than a commodity service for their customers. Because becoming of more strategic importance for your customer presumably entails a higher profitability for the TPL provider, it is expected that TPL providers search for multiple ways to do so. In essence, this study is about TPL providers’ relationship with their customers and the development and strengthening of these relationships. Following from this, this research is about Dutch TPL providers expanding their services into less traditional logistics activities and further diversifying the services offered: TPL providers creating new (international) business for themselves.

After studying business logistics and supply chain management literature, various sub questions arose. These sub questions gave answer to the research question, all from a different angle. To give answer to the various sub-questions discussed within the theoretical framework, an online survey was conducted. A questionnaire was developed, consisting of fifteen statements and twenty-eight closed questions.TLNwas very helpful in bringing this research under the attention of the appropriate (potential) respondents. Besides through TLN, I also raised awareness about this research by LinkedIn. All these efforts finally resulted in twenty-seven responses from Dutch TPL providers.

It can be concluded that TPL providers are starting to become of more strategic importance for their customers, but there is still much to be gained in this area. Another possibility to develop business is by further internationalizing and Dutch TPL providers are planning to do so within Europe. It was also found that an acknowledged way of diversifying services, attracting and retaining (stronger) customer relationships and thus making your service less commoditized is by being an environmentally aware TPL provider. Another way of becoming of more strategic importance is by making client specific investments: as is done by three-quarter of Dutch TPL providers. The value added services offered by Dutch TPL providers contain a large spectrum of services, of which some services are not related to traditional logistics. On average, one fifth of all turnover is derived from value added logistics; thereby TPL providers prove they can develop new business for themselves. But there is more proof of this: focusing more on supply chain management is another way of getting hold of a larger part of the supply chain, thereby diversifying the providers’ service offerings. Although the majority of TPL providers see offering supply chain management as a major opportunity for them, most notice that customers are too focused on short term price levels and lowering costs of logistics. Finishing with strategic positioning, although in the current situation most TPL providers are focused on their general problem solving capabilities, it is the trend to wanting to become a more dedicated service provider: thereby again aiming at becoming of more strategic importance for the customer and taking benefit from this situation.

LIST OF FIGURES AND TABLES

Figure 1 Thesis framework

Figure 2 TheOretical framework

Figure 3 Triadic RELATIONSHIPS among seller, buyer and third party logistics provider (source: Bask, 2001)

Figure 4 The positioning of 4PL providers in the supply chain (source: van Hoek, 2001)

Figure 5 BREAKDOWNS of logistics services providers to the degree of advanced services provided (source: Siz, 2011)

Figure 6 Global TPL Revenues for 2009 (source: Langley & Capgemini, 2010

Table 7 Top 5 motivations for outsourcing logistics (source: Rahman, 2011)

Figure 8 RELATIONSHIPS between shipper and TPL provider (source: Bowersox, Daugherty, DroEge, Rogers, & Wardlow, 1989)

Figure 9 Efficient TPL SERVICES (source: Makelin & Vepsalainen, 1990)

Figure 10 Customer orientation and system efficiency: a trade off? (SOURCE: Nijdam, 2011)

Figure 11 TPL providers classified according to abilities of general problem solving and customer adaption (source: Hertz & Alfredsson, 2003)

Figure 12 Range of value added services offered by TPL providers (source: Nijdam, 2010)

Figure 13 Changing supply chains (source: Nijdam, 2011)

Figure 14 TPL providers’ shifting tasks in the supply chain (source: Nijdam, 2011)

Figure 15 Schematic representation of the survey framework

TABLE 16 Statistical ANALYSES using cross tables

Table 17 Strength of relationships between variables

Figure 18 Size of the parties involved

Table 19 reasons for outsourcing

Table 20 selecting customers

figure 21 Origin of the majority of turnover

Figure 22 the majority of investments made by tpl providers

figure 23 financing client specific investments

table 24 reasons for making client specific investments

figure 25 strategic positioning of dutch tpl providers

table 26 the path to follow in terms of strategic positioning

figure 27 value added logistics offered by dutch tpl providers

LIST OF ABBREVIATIONS

4PLFOURTH PARTY LOGISTICS

TCETRANSACTION COST ECONOMICS

TLNTRANSPORT LOGISTIEK NEDERLAND

TPLTHIRD PARTY LOGISTICS

1INTRODUCTION

After the economic crisis of 2009, 2010 was all about recovery. But transportation companies and logistics service providers could not speak of a good year for them since,despite increased costs, price levels were still below 2009 prices and profit figures were not rosy. Almost 45% of all companies in the industry expected no profit for 2010 (against 56% for 2009). The sectors profit indicator declined during 2010. All of this resulted in an average profitability rate for the sector as a whole of 3, 3 %. The logistics service providers, which are described by Transport en Logistiek Nederland [hereinafter TLN] (2011) as companies which get over 40% of their revenues from logistics services other than transportation, did better. For 2010, they achieved an average profitability rate of 4, 6%. The first quarter of 2011 looked better and gave hope for the future. Despite low profit margins, the highest position of the cost level indicator in 3 years and lagging prices not fully offsetting the costs involved, the sectors entrepreneurs voted the quarter the best since long. This could be explained by a clear recovery in activity, turnover and increasing confidence amongst logisticians. Nevertheless, the profit indicators were lagging. On a zero to eleven (maximum profit satisfaction) scale, the profit indicator scored a 4, 1 over the first quarter of 2011 (against a 4, 4 over the fourth quarter of 2010). In contrast, logistics service providers profit indicator scored a 6, 6 over the first quarter of 2011: an increase over the 5, 5 scored over the fourth quarter of 2010.Notwithstanding, 75% of all entrepreneurswas dissatisfied with the level of profits in the first quarter of 2011(TLN, 2010; TLN, 2011).

The surveys conducted by TLN (2010) give some quotes by transport companies that show how fierce competition amongst the industry is, like “the Market is broken by strong competition and everyone is moving his rate below that of others” (p. 4). In addition, a large number of entrepreneurs surveyed by TLN (2010) are worried about increasing competition from companies in Eastern Europe: “we currently have enough work, but will that stay this way? The prices are not good. We can’t compete with the Poles, Bulgarians, etc. “(p. 4).The above information shows that the transport- and logistics sector faces low margins and a continuing price pressure. This mainly has to do with their customers looking at transportation and logistics as being like commodity services.

A typical characteristic for a commodity good or service is a service which is supplied without qualitative differentiation on a market. In other words: the market treats it as a service for which it is irrelevant who provides it (O’Sullivan & Sheffrin, 2003). As mentioned before, Marc Levinson (2006) wrote the book The Box about how the Shipping container made the world smaller and the world economy bigger, whichinspired me to write this thesis because of the following phrases:

This quote shows the characteristics of, and problems related to, a commodity. The book is mainly focused on Malcolm McLean, the ‘inventor’ of the container, and his shipping line Sea-land. After container shipping was well established in maritime transport and all shipping lines build many containerships causing an oversupply of capacity and dramatically declining tariffs, the nature of the service of container shipping became clear to banks and investors. They learned the hard way that their investments wouldn’t provide tremendous yields, since the characteristics of the service eventually made it a commodity.

A commodity goodits price is determined as a function of its market: physical commodities like iron ore, gold, coal and crude oil are traded on spot and derived markets(O’Sullivan & Sheffrin, 2003)with buyers looking solely at quantity and thus without them worrying aboutthe quality of the goods. Rushkoff (2005) uses the term commoditization to refer to goods or services that used to be different in terms of quality or attributes, but end up becoming commodities in the eyes of the market. The example Rushkoff (2005) gives, is about the collapse of Marlboro’s brand value, thereby convincing cigarette manufacturers that their products had been commoditized. According to Rushkoff (2005) commoditization, a good or service becoming a commodity, is a market problem for the producers of branded goods. As Rushkoff (2005) states, the problem with commoditization is that only prices are left to make a distinction between products, thereby causing profit margins to shrink.

Commoditization can explain why the transport- and logistics sector faces low margins and continuing price pressure, although transport- and logistic services can’t be seen as a completely non-differential. Apparently, the sectors clientele is mainly focused on prices, thereby crushing the sector’s premium margins. Low service differentiation amongst competitors caused low switching costs for customers, low involvement of customers and thus a low stability of customer relationships. On top, many existing competitors and many new suppliers of transportation and logistical services entering from new EU-member states provide heavy competition in the market. As is evident from the surveys conducted by TLN (2011), there is a difference in profitability between the logistics service providers and transportation companies focusing on the more traditional task of transporting goods from (international) location A to B. This difference in profitability is presumably explained by the fact that logistics services providers offer a more differentiated servicethan just (road) haulage: a service that seems to be commoditized.

The purpose of this thesis is to study how logistics service providers in the Netherlands (try to) differentiate their business to be more than a commodity service for their customers. The objective of this thesis is to find out how, and to what extent, this is successfully done. To define the term logistics service providers, from now on this group will be defined as third party logistics (hereinafter TPL) providers. TPL is a shared internationally used term of which the exact definition will be described in the following chapter. Because of this, the following research question was formulated:

“How do third party logistics providers in the Netherlands develop their business?”

In recent years there has been much academic attention, interest and publications concerning third party logistics, although literature on the subject is typified by Selviaridis & Spring (2007) as being disjointed. The TPL definition seems overlapping and ambiguous. An analyses on literature published between 1990 and 2005 shows that most TPL studies (about 60%) are empirical-descriptive in nature (Marasco, 2007; Selviaridis & Spring, 2007). The most used methods employed for researching the subject are surveys (51%) and case studies (15%). TPL studies are weakly theorized: 69% of the papers are describing trends in the industry without paying attention to a theoretical framework. Concluding with the level of analysis of TPL studies, 67% of the studies was focused on the firm level, either from the shipper’s or logistics service provider’s viewpoint (Selviaridis & Spring, 2007).

Marasco (2007) reviewed 152 articles on TPL published between 1989-2006. She found out that early studies focused on the user of third party logistics services, but this is gradually changing. More recent studies have turned their attention towards TPL providers. A possible explanation for this might be the fast expansion and transformation of the industry. Much of the research in this area has been focusing on the strategic development of third party logistics provides, the services being offered and developed, current status and their future prospects(Marasco, 2007). Besides that, Marasco (2007) states that most recent studies are focusing more on the IT adaption of the industry since this is determined as key success factor for TPL providers. Still, Rahman (2011) quotes that “the vast majority of the 3PL studies have been conducted from the users’ perspective” (p. 5). Relatively little attention has been paid to the TPL service providers’ perspective, although even less attention has been paid to studies simultaneously examining users’ and providers’ perspectives (Rahman, 2011).

This study contributes to the research field by focusing on the providers’ perspective. The level of analysis will be that of the Dutch TPL sector. The focus will be on describing trends in the industry and trying to link these trends with a firm theoretical foundation. In general, the study will be descriptive in nature: describing how third party logistics providers in the Netherlands develop their business. Empirically, surveys will be used to obtain data. Although third party logistics conceived much attention during recent years, fewer studies have been performed from a TPL providers’ perspective. Studies on TPL providers identified some issues of importance such as providers’ strategic development and positioning, customer relationships, value added logistics, postponed manufacturing, competency development and TPL providers’ position in the supply chain. By combining these issues, this research will be about differentiating services and developing the TPL business to overcome the problems related to commodity goods, thereby becoming of strategic importance for their clients. Concluding, figure 1 schematically shows the thesis framework.