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Article Excerpt
Abstract
Previous research points to an apparent gap between the prescriptive models designed to guide companies in making systematic outsourcing decisions and the practices some companies actually use. While prescriptive models would suggest the predominance of outsourcing decisions are made using top-down, proactive, systematic- and strategic-competence-driven processes, prior researchers observed that actual decisions are often made using local, reactive, ad-hoc, and seemingly limited-strategy-driven processes. This article addresses this inconsistency by presenting a data-driven descriptive model of logistics outsourcing strategy, based on grounded theory research methods, that explores the experiences of logistics professionals. Our findings support the idea that while prescriptive models providing cognitive approaches to logistics outsourcing exist in the literature, in practice both cognitive and experiential search and evaluation are used to make outsourcing decisions. Additionally, we extend the work of de Boer, Gaytan, and Arroyo (2006) by adding personal factors, such as experience and self-interest, and cultural factors, such as organizational values and norms, as inputs to the process.
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The reality of competing in a global supply chain environment has caused many organizations to focus on strategic renewal and creative solutions to manage and mitigate the risks of operating in today' s dynamic marketplace. One particular strategy that has become increasingly popular is the use of third-party logistics (3PL) support for global supply chain execution. Recent estimates suggest that global 3PL services is a $390-billion industry, with double-digit annual growth expected, particularly as firms continue to engage in global expansion (Quinn 2007). This suggests that, more than ever, understanding of the logistics outsourcing process is important to fully capturing the role and value of logistics in corporate strategy and competition.
There is a significant body of research that investigates facets of the logistics outsourcing phenomenon. The majority of research in this area is concerned with such topics as environmental conditions that drive companies to outsource, activities typically outsourced, selection criteria of providers, benefits and pitfalls associated with outsourcing, and the factors that lead to outsourcing success (de Boer, Gaytan, and Arroyo 2006; Knemeyer, Corsi, and Murphy 2003; Menon, McGinnis, and Ackerman 1998; Murphy and Poist 2000; Skjoett-Larsen 2000). Though this body of work has contributed to an understanding of why and how firms purchase 3PL services, it has been very tactical in nature. Little, if any, attention has been given to the understanding of how companies formulate, execute, evaluate, and determine future directions of logistics outsourcing as a company strategy. Hence, while the extant literature speaks to the logistics outsourcing process, it does not address the broader, underlying logistics outsourcing strategy development process.
Existing research on logistics outsourcing processes primarily includes prescriptive models (Bagchi and Virum 1998; Sink and Langley 1997) and descriptive models based on empirical studies (Andersson and Norrman 2002; de Boer, Gaytan, and Arroyo 2006; Marshall et al. 1999; Rabinovich et al. 1999). In discussing these research paradigms, de Boer, Gaytan, and Arroyo (2006, 450) suggest that descriptive work primarily involves observing "local, re-active, ad-hoc, [with] seemingly limited relevance of strategy and core competence" outsourcing processes, while prescriptive models suggest outsourcing processes that are "top down, pro-active, systematic, strategy-and core-competence driven." This interesting discrepancy underscores this manuscript. While it is generally prescribed that logistics outsourcing be based on corporate strategy, the reality is that such is, perhaps, not the case. Consequently, a deeper exploration of the role of outsourcing strategy development is warranted, as such an investigation may provide insights into why current tactical processes are, seemingly, not strategy-driven, and why current outsourcing strategy development processes are, perhaps, not robust and efficacious.
The purpose of this article is to address this gap in the outsourcing literature by presenting a data-driven descriptive model of the logistics outsourcing strategy development process. In particular, grounded theory research is utilized to explore the behavior of logistics professionals in formulating and executing logistics outsourcing strategies. While this article is conceptual in nature, it is based on empirical material collected during field research. Mentzer and Kahn (1995) suggest that a combination of literature and qualitative research is appropriate for developing a well grounded theoretical framework. To that end, this research combines both field research and findings from appropriate literature to investigate how firms approach logistics outsourcing as a company strategy.
This research contributes to the literature in three ways. First, our findings support and extend the idea that while prescriptive models providing cognitive approaches to logistics outsourcing exist in the literature, in practice both cognitive and experiential search and evaluation are used to make outsourcing decisions (de Boer, Gaytan, and Arroyo 2006). Furthermore, we find that two additional inputs to the process--personal factors, such as experience and self-interest, and cultural factors, such as organizational values and norms--are employed, particularly when considering outsourcing from a corporate strategy perspective. Second, we present a model of logistics outsourcing describing the manner in which firms may make decisions concerning logistics outsourcing as a business strategy. Our findings suggest that the logistics outsourcing strategy development process in some companies follows a less structured format than suggested in prescriptive models. In practice, as firms make the transition from in-house performance to outsourcing of logistics functions, the evaluations they make concerning outsourcing as a strategy can be incremental, unsystematic, and influenced by factors beyond cost or service gains. These findings may help fill in some of the gaps between theory and practice, point to areas of process improvement for buying companies, and offer ways for selling companies to take advantage of opportunities to gain new or increase existing business. Lastly, the use of grounded theory methodology with data obtained in field settings represents an application of a research approach little used in the logistics field, but one that potentially can offer insights that traditional quantitative methods may miss.
In addressing these issues, the manuscript will proceed as follows: First, an overview of relevant literature will be presented, with emphasis on highlighting the aforementioned gap in research that addresses logistics outsourcing strategy development. Second, the grounded theory methodology is presented, including a discussion on the applicability of this method for this investigation, and the steps taken to ensure research trustworthiness and validity. The findings of the research are presented next, providing an in-depth discussion of the process model that emerged during this research. Lastly, research implications and presented.
RELEVANT LITERATURE
Outsourcing is a subject of research in many areas, including transaction cost economics, strategic management, information systems, human resource management, and logistics (de Boer, Gaytan, and Arroyo 2006). According to the logistics literature, there are myriad reasons why firms choose to perform their own logistics activities in-house, or choose to outsource those functions. The two most frequently cited reasons for outsourcing logistics activities are cost reduction and service improvement expectations from outsourcing (Boyson et al. 1999; Lieb and Bentz 2005; Maltz 1994; Maltz and Ellram 1997; Rao and Young 1994; Sink and Langley 1997). In addition to cost and service, a number of other factors are cited as reasons why firms consider logistics outsourcing. These factors include opportunities to focus on core competencies (Leahy, Murphy, and Poist 1995; Razzaque and Sheng 1998; Rao and Young 1994; van Damme and van Amstel 1996), improve productivity (Leahy, Murphy, and Poist 1995), upgrade information technology (IT) capabilities (Leahy, Murphy, and Poist 1995; Sink and Langley 1997), leverage supply chain management (Lieb and Randall 1996; Rao and Young 1994), react to changes in the regulatory environment (Sink and Langley 1997), a need for expertise (Razzaque and Sheng 1998; Sink and Langley 1997; van Damme and van Amstel 1996), globalization of business (Razzaque and Sheng 1998), complexities of operating in a just-in-time (JIT) environment (Razzaque and Sheng 1998), rapid growth (van Damme and van Amstel 1996), and limited resources to apply to logistics activities (van Damme and van Amstel 1996). The extensiveness of these factors indicates that there are multiple ways in which firms consider third-party logistics providers capable of assisting them in dealing with their business problems.
The literature also discusses specific types of events that can "trigger" a company to become interested in outsourcing logistics functions. Such events as (1) corporate restructuring, (2) changes in logistics management, (3) changes in executive management, (4) corporate cost/headcount programs, (5) market and product line expansions, (6) increasing customer demands, (7) mergers and acquisitions, (8) new markets, (9) customer use of Just-In-Time or Quick Response (QR), (10) labor costs/problems, (11) instituting a quality improvement program, and (12) CEO directives to investigate the feasibility of outsourcing are noted as reasons why companies start to consider outsourcing as an option (La Londe and Maltz 1992; Sink, Langley, and Gibson 1996). It should be noted that most of these trigger events concern changes to the external and internal environment of companies. The literature thus suggests that outsourcing is a common coping mechanism companies use to deal with change.
On the other hand, there are numerous factors influencing firms to perform logistics activities in-house. Venkatesan (1992) noted several conflicting priorities regarding how managers justified in-sourcing. Filling idle capacity on equipment, preserving jobs, maintaining cordial relations with a union, and more responsibility, more authority, and bigger salaries were cited as reasons why managers are reluctant to outsource. Concern that common carriers may not service customers as well as private carriage is another reason why companies choose not to outsource transportation activities. For example, Maltz's (1994) survey of the transportation choice literature found service quality to be a main reason for using private carriage.
Other reasons cited for performing logistics activities in-house include (1) cost reductions over currently available service, (2) special handling and shipping requirements not offered by logistics providers, (3) special transportation routing needs, (4) need for tight control over interplant work-in-process goods movement, (5) loss and damage reduction or prevention, (6) need for special product control during movement, (7) availability of emergency transportation needs, (8) assurance of equipment availability, and (9) corporate advertising on company-owned vehicles (Tyworth, Cavinato, and Langley 1991). Lieb and Randall (1996) suggest that the most serious concerns to shippers in the use of third-party logistics providers include the potential for loss of direct control over logistics activities, uncertainties about the service level to be provided, and questions concerning the true cost of outsourcing. Thus, there appears to be nearly as many reasons cited for continuing to perform or bringing back the performance of logistics activities in-house as there are to outsource them.
While a good deal of research has been conducted on the strategic rationale for logistics outsourcing, the number of articles focusing on outsourcing processes is relatively small (Marshall et al. 2004). The set of articles devoted to outsourcing processes may be divided into two basic types: those that take a prescriptive model approach to provide firms with a well defined process, and those that describe models of processes that are observed in field research (de Boer, Gaytan, and Arroyo 2006).
The prescriptive model approach focuses on steps a company should take...
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