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How do regional third-party logistics firms innovate? A cross-regional study.

Article Excerpt
Complexities of global trade, increased competition worldwide, and continued downward pressure on prices and margins are urging companies to develop better logistics systems in order to fulfill the need for a high service level at a lower cost (Sheffi 1990; Wilding and Juriado 2004; Lieb 2008). The use of third-party logistics (3PL) firms is a way to meet the challenges. Companies use 3PL firms for various reasons. Outsourcing non-strategic activities enables organizations to focus on core competencies and exploit external logistics expertise (Sink and Langley 1997). Firms can acquire the necessary resources, develop unique assets, and achieve superior logistics performance through 3PL relations (Sinkovics and Roath 2004). Forming relationships with 3PL firms is an efficient and effective way to achieve the required service without investing heavily in assets and new capabilities (Stank and Maltz 1996; Persson and Virum 2001).

Companies seek not only to control costs, but also to use logistics services as a means of differentiation in both domestic and international markets (Lieb and Bentz 2005). 3PL firms can contribute to providing access to international distribution networks and improving customer satisfaction (Bask 2001). Rapid progress in information processing and communication technology supports the outsourcing of logistics activities to 3PL firms as IT allows clients and providers of logistics services to communicate quickly, thereby reducing coordination costs and fostering strategic partnerships based on mutually agreed goals (Lewis and Talalayevsky 2000).

Ashenbaum et al. (2005) show that the usage of 3PL firms has kept increasing over the past decade. In addition, they point out that expenditures on using third-party logistics has been growing constantly and is estimated to grow in the future and that the use of third-party logistics firms is becoming a common practice. The growth of 3PL firms, both on the supply side and demand side, has made it necessary to treat such firms as a separate industry (Berglund et al. 1999). As a growing industry, 3PL firms account for a large portion of the logistics sector. Currently the outsourcing volume is growing at roughly_10 billion yearly (Rebitzer 2007).

In the 3PL industry, some service providers have high standardized service offerings. This enables the provider to benefit from increased economies of scale, risk sharing, and volatility smoothing. In addition, new resources from additional clients can be utilized to improve efficiency and to further improve margins and the delivered performance/cost ratio (Berglund et al. 1999). However, providing standardized services in a cheaper way is no longer sufficient for 3PL firms. First, with more entrants in the industry, price for standardized services become commoditized and the profit margin is smaller. Second, with the constant shift in client business, more customized and value-added services are required.

Therefore, it is argued that 3PL firms need to provide more than standardized services. Innovation and new service development are vital for 3PL firms. Because different clients have different needs, differentiating logistics services is essential for a 3PL provider's business (Veeken and Rutten 1998). Further, increasing client demands compels 3PL firms to concentrate on innovation and new service development (Chapman et al. 2003). Hence, 3PL firms are urged to target customized and innovative operations and develop new services. In essence, the expansion of service offerings is driven by strategies for adding value to the client and upgrading client relations (Van Hoek 2000). Thus, executives of 3PL firms are paying greater attention to conducting innovation and providing new value-adding services.

Increasing globalization implies moving production and sourcing to low-cost foreign countries as well as distributing to end consumers in other parts of the world. Companies are now building bridges to countries like China and India and to Eastern Europe while managing their pipelines all over the world (Murphy 2007). Clearly, 3PL users would prefer to work with a single 3PL provider (Lieb and Bentz 2004). But the extent of the volume involved and geographical coverage required has made it increasingly hard for one provider to meet these requirements (Lieb and Bentz 2005). Thus, many large shippers contract with two or more 3PLs for their global operations. This indicates that large, well-known firms, such as DHL, FedEx, UPS, and TNT, cannot handle all demands. In fact, strong, regional-based, medium-sized players do exist in major economic regions and they are playing an increasingly critical role in global supply chain management, thanks to their...

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