Outsourcing logistics functions: examining the trend

Shams Rahman
The logistics sector in Australia worth approximately A$57 billion or 9% of Australia’s GDP (Commonwealth of Australia, 2002). The significance of logistics as an economic activity is obvious when comparing its contribution with economic contributions of other sectors such as construction (5.9%), retail (5.2%), tourism (4.5%) and education (4.4%) (ABS, 2000). Of the A$57 billion logistics sector, approximately A$26 billion (or about 46%) worth of logistics functions are currently being outsourced to 3rd party logistics (3PL) providers and the market is growing.
In this study we have adopted the following definition of outsourced logistics functions:
“The outsourced logistics involves the use of external companies (3PL providers) to perform logistics functions that have traditionally been performed within an organisation. The functions performed by the 3PL providers can encompass the entire logistics process or selected activities within the process.”
Using a sample of companies listed in Australia’s top 500 companies, this study examines the following:
•           Level at which the decisions to outsource are made.
•           Length of contracts with 3PL providers.
•           Types of logistics functions outsourced.
•           Satisfaction level of customer with 3PL providers.
•           Organisational impact from using 3PL services.
This study was conducted in 2003. To assess the trend in the outsourced services, the results of this study were compared with two previous studies in Australia conducted in 1995 and 1999.
A total of 200 firms were selected for the study. Logistics/operations managers were identified and sent copies of survey questionnaires, together with a cover letter and a pre-paid reply envelope. In order to maximise the response rate and to avoid non-response bias affecting the transferability of the findings, the following procedure was used: first, companies listed in the database of participants were contacted by phone. The names of the relevant managers and their current contact details were obtained. Where possible, an attempt was made to speak to the relevant manager about the aim and the content of the survey. Then a reminder call was made to the relevant managers approximately two to three weeks after the mail out. Those who had not responded were encouraged to do so, and those who had not received the package were sent a second copy. The survey resulted in a response rate of 18%. A large proportion of the companies who responded had between 101 and 500 employees (39%). Thirty per cent of the companies had over 1,000 employees, and about one-quarter (25%) of the companies had between 501 and 1,000 employees.
Trend in the usage of outsourcing logistics functions over the period of 1995-2003
The survey revealed that 66 per cent of the respondents use outsourced logistics functions from one or more 3PL providers. Of those companies currently outsourcing, about three-quarters (74%) indicated that their companies use services of more than one contract 3PL provider. Compared with a 1996 study, this study showed a slight increase (from 61% to 66%) in the extent of the use of 3PL services. However, this increase is not as significant as in the case of US where the use of 3PL services increased from 65% to 83% between 1991 and 2003. This could reflect the expansion of service offerings by providers to users, an increase in specialised 3PL services, and the competitive nature of Australian companies. This supports an earlier theoretical proposition which suggests that one important reason for the growth of 3PL services is that companies compete in a number of businesses that are logistically distinct due to varied customer needs.
At which organisational level the decisions to use outsourced logistics services are made?
The surveyed firms were asked to indicate the organisational level (corporate, divisional, and local level), at which the decision to use outsourced logistics services originated within their companies. In 65% of cases, this decision was undertaken at the corporate level. This finding represents a significant departure from both the 1995 and 1999 studies, where the figures were 38% and 51% respectively. These results indicate that the decision to use outsourced logistics functions are becoming the realm of the corporate, rather than the divisional or local level.
How long are the contracts with the 3PL providers?
The respondents were asked to indicate if their current contracts were less than one year, between one to three years in length, or over three years. The results showed that of respondents who used 3PL contracts, 61% had been using them for more than three years. This result is consistent with the findings of previous studies. However, compared with the previous two studies, this study recorded a significantly larger percentage of respondents using 3PL contacts for less than one year. This is an important observation which was not reflected in the previous Australian studies.
Which logistics functions are being outsourced?
The typical user of 3PL services purchases multiple logistics services and thus the range of services used is quite extensive. Respondents indicated that the most frequently used logistics functions were: warehouse management (64%), order fulfilment (59%), fleet management (41%). Product returns, shipment consolidation and order processing all recorded 27%. There appears to be a sharp increase in the use of warehouse management and order fulfilment compared with the previous Australian studies. Fleet management has fallen but the relationship between fleet management and shipment consolidation has remained consistent.
Are customers satisfied with 3PL providers?
About 86% per cent of respondents claimed that they were satisfied or very satisfied with using 3PL providers. Compared with the finding of the 1995 study, the level of satisfaction has dropped (from 96% to 86%). The results also show that the satisfaction at the ‘very satisfied’ level has dropped, and the level of dissatisfaction has increased. However, Lieb and Kendrick (2003) have observed that an important indication of the satisfaction of a firm with 3PL services is its plans for future usage of such services. This information was captured by asking: ‘How would you modify your company’s use of contract logistics companies if given complete responsibility for the decision?’ Of the companies who responded, 81% indicated they would moderately or substantially increase the use of 3PL services. This finding is comparable with the finding of the 1995 study (84%).
What are the organisational impacts from using 3PL service providers?
Historically, the negative impact that accompanies a decision to use a 3PL provider relates to the downsizing of the logistics workforce of the user. Fifty-five per cent of participants in this study indicated that the use of 3PL service providers had permitted their organisation to reduce the number of full-time logistics positions. It showed that 80% of the users reduced up to 20% of their full-time logistics staff. This figure is higher than the results found in the 1995 study. In one-fifth of the firms, over 40% of the logistics staff was eliminated. This is larger than the 33% indicated in the 1999 study and the 22% in the 1995 study.
This study reaffirmed a consistent consensus that the major positive impact from using 3PL services relates to performance (86%), costs (82%), and customer satisfaction (82%). These findings are consistent with the results of the 1999 study. However, employee morale has been adversely affected in 50% of users. This is not unexpected, given the elimination in logistics headcount accompanying outsourcing. The study shows that most users perceive a very positive impact from system performance but this may be indicative that performance measures are anecdotal rather than objective.
The study’s findings have significant implications. We observe that the decision to use outsourced logistics functions is becoming the realm of the corporate, rather than the divisional or local level. This study indicates that a great many users are relinquishing in-house operations and using 3PL service providers and the main 3PL services used were warehouse management, fleet management and order fulfilment. The level of satisfaction with 3PL service providers is high and is reflected in the indication to continue their use in the future. Thus, it appears that the use of 3PL services will continue to grow over the next several years. However, it does not direct our knowledge as to what areas of the logistics services will be outsourced the most.
The choice to retain more than one 3PL provider may reflect the caution of Australian businesses in retaining a ‘fall back’ 3PL in the event of uncertainties. The use of multiple contractors may also reflect the specialist nature of logistics providers in Australia. The providers may specialise in only one or two functions such as transport and warehousing, and not in other functions that the user may require. Given the small industry syndrome in Australia compared with the US and European industries, this feature is quite understandable.
The results show that the use of 3PL service providers is increasing in two ways: first, more firms are beginning to use 3PL services and second, more Australian firms are using 3PL service providers for more functions along their supply chains, i.e. the scope and depth of outsourcing logistics services are increasing. This indicates that the trend has changed over the past seven years from an increase in usage of 3PL services to an increased usage as well as increased depth of usage of services along the supply chain.
Shams Rahman is the director of the Logistics and Supply Chain Management Program at the School of Management, RMIT University in Melbourne. Email Space constraints prevent us from reprinting the full reference list, please contact the author for further information.
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