A DECISION FRAMEWORK FOR LEVELS OF LOGISTICS OUTSOURCINGIN 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 NetherlandsbDepartment of Logistics Management & Operations Research, Wageningen University, Wageningen, The Netherlands

Mansholtlaan 10-12, 6708PG, Wageningen. Lilly.hsiao@wur.nl

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. IntroductionThere 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

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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 designThis 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;

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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 providersIn 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:

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Suppliers Plants DC Customers

One LSP carries out the activities between a supplier and plants; the other activities between a DC and its customers

LSP

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

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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).

Supply chain planning and control activities These execution activities are managed by the planning activities. The purpose of planning and control is to ensure operations run effectively and produce products and services as expected. (Slack et al. 2001). Based on our literature review we conclude that the supply chain planning & control activities from a food manufacturer’s point of view include demand planning, inventory planning, purchasing and food production planning; supply chain network planning and event-based planning:

Demand planning involves the forecasting of sales based on past sales data and marketplace trends per period, per product, and per customer (or customer group). Advanced analysis techniques for the calculation are available. The sales forecast then becomes input for inventory management (Van Goor et al. 2003p331).

Supply chain inventory planning Inventory planning determines the parameters for the safety inventory, order quantify per product, per location, and per pipeline. Traditional analysis techniques use the optimal order quantity analysis or standard deviation inventory to determine the desired inventory. On the other hand, supply chain inventory planning aim at determining the optimal levels and locations of finished goods inventory to achieve the desired customer service levels, to maintain the specified service level to the customer and to reduce the inventory levels in the supply chain to minimize the investment in inventory (Stadtler 2005).

Purchasing and production planning. Purchasing and production planning concerns the planning of raw materials acquisition and production schedules. The plan should detail a schedule for each single plant based on material availability, plant capacity and other business objectives (Van Goor, 2003) in order to produce the right quantity and at the right time.

Supply chain network planning. Supply chain network planning concerns the decisions regarding the design of a transportation network and routing/scheduling from suppliers to customers. Network planning aims at optimizing the uses of resources across the current network of suppliers, manufacturing locations, distribution centers and customers. A well-designed transportation network allows a supply chain to achieve the desired degree of responsiveness at a low cost (Chopra and Meindl 2001p270). Routing and scheduling decide on the customers to be visited by a particular vehicle and the sequence in which they will be visited by routing vehicles and sequencing deliveries. The purpose is to minimize the transportation cost while meeting delivery commitments to customers (Chopra and Meindl 2001). In the ultimate chain and network planning, the functional borders are eliminated and

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total visibility of order purchasing, manufacturing, inventory, shipments and sales is achieved of all materials suppliers, plants, warehouses, and all customers.

Event-based planning. The purpose of event-based planning for a food supply chain is to control chain performance by monitoring, managing and controlling the goods flow and information flow on the pipeline. Event-based planning is important as in the current situation most events are unplanned. Events are the unexpected phenomena or deviation from expectation which decision makers could not predict due to a lack of information of the environment or current supply chain state (Van der Vorst 2000). Examples of events are materials shortage, stockout, shipment delay, food disease outbreaks, food product recalls etc. Events control can be managed more efficiently and effectively if visibility of information flow on the pipeline line is high. A serial of actions include tracking the event, alerting and reporting the changes, analyzing solutions (re-locating inventories or re-scheduling the urgent delivery to solve the event or using of faster modes of transportation or direct transportation) (Gavirneni 2001; Van Goor et al. 2003p459) and assigning of role and responsibility among supply chain entities.

Table 1 Classification of logistics activities in FSCNCategories Logistics Activities Execution activities Transportation execution

WarehousingFood processing activities, packing and labeling activities

Planning activities Demand planningInventory planningPurchasing and production planningSupply chain network planningEvent-based planning

6. Review of logistics outsourcing approaches

In order to build a comprehensive outsourcing framework for levels of logistics activities, we captured relevant factors to be taken into account in such decisions. In this step, we present the results of a literature survey on several outsourcing approaches.

6.1 Supply chain management theory SCM is the integrated planning, co-ordination, and control of all business processes and activities in the supply chain to deliver superior consumer value at least cost to the supply chain as a whole while satisfying the variable requirements of other stakeholders in the supply chain (Van der Vorst 2000). In this section, we will discuss the impacts of logistics strategy, supply chain complexity, and importance of food product on the outsourcing decision. The next we start with discussion on the relations between logistics strategy and outsourcing decision.

The logistics strategy influences the control of logistical activities and thus the design of logistics systems (Van Goor et al. 2003). A strategy of a corporation forms a comprehensive master plan stating how the corporation will achieve its mission and objectives. It maximizes competitive advantages and minimizes competitive disadvantages (Wheelen and Hunger 2002). Logistics outsourcing decisions mean an organization no longer bears the responsibility for the production of the results, transportation cost etc.

The orientation of the logistics strategy is dictated by its company’s business unit’s strategy. It is concerned with development and nurturing of a distinctive competence to provide a company or business unit with a competitive advantage. At a generic level logistics competitive strategy can be distinguished into lean, agile and leagile (integration) strategies.

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leanness means developing a value stream to eliminate all waste, including time, and to ensure a level schedule (smooth demand) (Naylor et al. 1999)

Agility means using market knowledge and a virtual corporation to exploit profitable opportunities in a volatile market place (Naylor et al. 1999). It aims at the design of responsive supply chain network to manage uncertain demand.

Leagility is the combination of the lean and agile paradigm within a total supply chain strategy by positioning the decoupling point so as to best suit the need for responding to a volatile demand downstream yet providing level scheduling upstream from the decoupling point (Mason-Jones 2000; van der Vorst et al. 2001).

The basic concept of market winners and market qualifiers are helpful to discriminate lean and agile strategies (Naylor et al.1999) and then define the logistics missions for each strategy. With lean logistics strategies, the aims of the logistical mission are to bring about a decrease in the overall cost of logistical operations. The market winner for lean logistics is cost, with quality (reliability), lead-time and service (flexibility) for market qualifiers. The agile logistics strategy focuses solely on the improvement of customer service through value-added activities for customers. The market winner is flexibility, and the market qualifiers are reliability, cost and lead-time. With a leagile strategy, the mission should be to reduce the total costs while maintaining the present perceived quality and customer service level.

To sum up, competitive strategies have effect on the nature of the logistics strategy, and it affects organization’s decision on outsourcing. A pre-proposition is that when firms outsource planning activities, the execution activities are also outsourced because the execution activities are managed by those planning activities. Overall, it may be conceptualized in this section that organizations that outsource for operational and cost based reasons will tend to restrict LSPs’ involvement to the basic logistics functions (Bolumole 2001). Conversely, these organizations that are motivated to outsource for the purpose of facilitating the integration of supply chain members tend to perceive the LSPs’ functions as an integral part of that supply chain strategy (Bolumole 2001). Based on these descriptions, we have the following propositions:

Proposition 0: When firm outsources the planning activities, the corresponding execution activities will also be outsourced.

Proposition 1: Firm in FSCN with a lean strategy will be more likely to outsource execution activities; while firm with an agile strategy will be more likely to outsource planning and execution activities

For effective SCM, managers must tradeoff asset costs (facilities, capital equipment, and inventory), time-based performance measures (lead-time and on-time delivery) and the other cost factors (transportation cost). Given the complexities of accounting for all the above factors simultaneously, the main objective of SCM is to minimize the total cost while ensuring the customer service falls within an acceptable range (Bhatnager and Viswanathan, 2000). Therefore, to accommodate the tradeoff, logistics outsourcing decisions might be favored for certain supply chain settings (Rao and Young 1994). In this paper, we propose that supply chain characteristics and its complexity could influence logistics outsourcing decision. Supply chain characteristics refers to the collective settings in which the logistics system operates. The supply chain characteristics can be described by the characteristics of products, market, process and network (see table 2). All attributes are captured according to the food’s inherent characteristics, and others are selected because of their relationships with distribution planning (Rao and Young 1994; Van Goor et al. 2003). The last proposition in the end of this part will discuss the impacts of food product’s importance on the outsourcing strategy.

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As table 2 presents, the complexity of the supply chain arises from product perishability, seasonality, lead-time requirement, distribution volumes, and the number of facilities in each stage of supply chain. Given the inherent complexity, the supply chain planning system generally is large and complex. Impacts of supply chain complexity on logistics outsourcing decisions can be stated compactly as a collection of the following propositions:

Proposition 2: The higher the supply chain complexity, the more likely a food company will outsource the planning or execution activities.

TABLE 2. Supply chain characteristicsCategories Attributes Product characteristics

Perishability of finished products Perishability of raw materials Seasonality of demand fluctuation Seasonality of supply fluctuation

Process characteristics

Leadtime requirement of finished products Leadtime requirement of raw materials

Market characteristic

Shipment size Total distribution volume per year Delivery frequency

Network characteristics

Number of products varieties Number of suppliers Number of customers Number of countries involved

Food product characteristics Products which companies produce and sell can be classified by their perishable nature. Food product characteristics refer to special circumstances required by food products and materials characteristics due to its inherent characteristics and complexity. The inherent characteristics for food products include food perishability, seasonal fluctuation of demand and supply. Perishable food needs special and specific investments on storage or transportation equipments. Short shelf-lives that are susceptible to damage and other physical properties make logistics more difficult in international trade (Rao and Young 1994). A varying demand of the logistics activity might favor outsourcing (Damme and Amstel 1996), supply of raw food materials and demand of finished food products sometimes are heavily influenced by seasons, weather or other uncertain events from nature. Therefore, the nature of uncertainties could increase the logistics control problem, which might provide a favorable climate for logistics outsourcing.

Proposition 2a: The higher the product complexity, the more likely that a food company will outsource the planning or execution activities

Market characteristicsLogistics outsourcing can be affected by firm’s market characteristics, such as delivery frequency (Damme and Amstel 1996), shipment size or distribution volume. Delivery frequency and total distribution volume might influence the decision because a large distribution volume and a low delivery frequency often results in low resource utilization within the firm. It will increase distribution cost because of low assets utilization. Small shipment size increases complexity because it causes problems on transportation cost and personnel cost. A large order that must be delivered in many small partial shipments requires more management and control than the delivery of a large order in one go. So we then propose that

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Proposition 2b: The higher the market complexity, the more likely that a food company will outsource the planning or execution activities

Process characteristicsProcess characteristics refer to time compression (short lead-time) on distribution control (Rao and Young 1994). When the logistics processes is complicated by the number of tasks which have to be performed and co-ordinated within a short span of time, numerous cost/service tradeoffs arise in operations (Rao and Young 1994), therefore this might be the climate favoring for outsourcing.

Proposition 2c: The higher the process complexity, the more likely that a food company will outsource the planning or execution activities

Network characteristicsNetwork characteristics describe a geographic structure composed of suppliers, factories, number of products, customers. Logistics outsourcing decisions are influenced by network complexity, which is contributed by the number of parties involved (Rao and Young 1994), number of countries involved in the supply chain (Rao and Young 1994), or by number of products varieties. Number of suppliers and customers involved and geographic dispersions implies that many more logistics transactions must be managed (Rao and Young 1994). The difficulty of this management depends partly on the specific countries and continents involved. Large number of food product varieties (measured by stock-keeping units) means higher management cost of inventory control, and higher inventory cost for each items.

Proposition 2d: The higher the network complexity, the more likely that a food company will outsource the planning or execution activities.

Another proposition we made is related to the impacts of product’s importance on outsourcing decision. The outsourcing strategy might be different from one product to another according to the importance of the product. The importance of food products are measured by its market position and growth rate of the industry in which it competes (Wheelen and Hunger, 2002); it is expected that logistics activities that handle products with a significant market position and growth rate will not easily be outsourced.

Proposition 3: The higher the importance of the food product, the more likely a food company will keep the planning or execution activities internally

6.2 Transaction-cost perspective The principle question with respect to the question of economic activity is “why is an activity organized within firms and not purchased?” Logistics outsourcing concerns the decision of whether a logistics activity should be carried out within the firms or purchased through market? Transaction Cost Economics (TCE) can help to evaluate this decision. TCE at its core, focuses on transactions and the costs that attend completing transactions by one institution mode rather than another (Williamson 1975). The transaction, a transfer of a good or service, is the unit of analysis in TCE. The theory’s central claim is that transactions will be handled in such a way as to minimize the costs involved in carry them out. Williamson (1991) identifies three alternate forms of transaction governance: market, hybrid, and hierarchy. TCE maintains that there are “rational economic reasons” for choosing the means of governing transactions (Williamson 1985; Williamson 1991). In other word, the governance mode (hierarchy, hybrid, or market) that minimizes transaction cost is the preferred option.

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The transaction cost can be divided into three main classifications: information cost, negotiations cost and monitor cost (Williamson 1991). The principle attributes of transactions applied on operations and SCM are asset specificity, uncertainty (Grover, 2003). The assumption of TCE describes that bounded rationality and opportunism give rise to transaction costs. And these costs are higher under conditions of high assets specificity and high uncertainty. TCE’s basic premise is that when the cost of doing transactions (ie the cost of economic exchange) is high under certain conditions, organizing the economic transaction within the firm or hierarchy governance structure might be superior to organization it as a market-based governance structure (Gover, 2003).

Asset specificity is the transferability of assets that support a given transaction (Williamson, 1985). Highly asset-specific investments (also called relationship-specific investments) represent costs that have little or no value outside the exchange relationship. Asset specificity has already often been used to evaluate a choice of whether to perform a transaction or activity internally (vertically integrate) or in the market (outsource) (Anderson and Schmitteln 1984; Poppo and Zenger 1998; Fill and Visser 2000) (Aubert et al. 2004). In logistics outsourcing, the assets which are used to carry out the logistics activities include physical infrastructure assets (warehouses, plants, fleets, equipments), information assets (computer hardware and computer software), and human assets (individual skills, accumulated knowledge). Assets specificity here in this paper refers to the redeployable value of these logistics assets (human, physical and information) to the outsourcing relationship. If assets become specialized to a relationship, the parties are locked into bilateral exchange (Aderson and Schmittltein, 1984), which means the switching value is low in another relationship. Derived from the above, we formulate the following proposition:

Proposition 4: The higher the asset specificity of a specific logistics activity, the more likely that a food company will keep this activity internally rather than outsource.

Uncertainty refers to the unanticipated changes in circumstances surrounding a transaction. This uncertainty could preclude both the formation of a contract ex ante and/or the ability to verify compliance ex post. The former (environmental uncertainty) can be reflected in constructs such as unpredictability of the environment, technology for example. The later (behavior uncertainty) includes performance evaluation and information asymmetry problems. And the effects of the bounded rationality constrain are accentuated by conditions of uncertainty (Grover, 2003). The presence of opportunism, where some parties are assumed to engage in behavior that requires monitoring, increases the cost of transactions (Grover, 2003). In this paper, we discuss technological uncertainties and measurement uncertainties on the outsourcing decision (Poppo and Zenger 1998) . SCM has high levels of technological change. Advances in computing, information technology, have dramatically altered firms’ logistical planning. Such technological change may have an important effect on the boundary choice of the firm (Poppo and Zenger 1998). The uncertainties increase the need to continually update contracts and costs of negotiations, in turn, the transaction costs are increased. Another type of uncertainty we discuss in this paper is measurement uncertainty. Measurement uncertainty relates to difficulties associated with monitoring the contractual performance of exchange partners (Williamson, 1985). It refers to the difficulties in measuring performances of a logistics company who perform this function.

Proposition 5a: The higher the technological uncertainty when outsourcing a logistics activity, the more likely that a food company will keep this activity internally rather than outsource.

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Proposition 5b: The higher the measurement uncertainty when outsourcing a logistics activity, the more likely that a food company will keep this activity internally rather than outsource.

6.3 Resource-based view (RBV)Resource-based view (RBV) of the firm provides another tool to analyze the effect of firm-level resource/capabilities on vertical integration decisions. RBV and TCE have a different domain of interest on answering why firms exist and why they differ. They are interested in different aspects of an economic activity, RBV focuses on analysis firm’s resource/capability; while TCE focuses on the transaction (Madhok 2002).

A RBV of strategic management examines the resources and capabilities of firms that enable them to generate above-normal rates of return and a sustainable competitive advantage (Barney 1991). A firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors. And a firm is said to have a sustained competitive advantage when this current and potential competitors can not duplicate that strategy (Barney 1991). From this perspective, firm heterogeneity in acquiring and deploying resources and capabilities accounts for the generation of economic rents (Barney 1991).

The firm’s resources are defined as stocks of available factors that are owned or controlled by the firm. These numerous possible firm resources can be conveniently classified into three main categories (Barney, 1991): physical capital resources, human capital resources, organizational capital resources. Here resources are broadly defined. Other researchers also distinguish resources and capabilities. Capability, refers to a firm’s capacity to deploy resources (Segal-Horn 1998p175). Prahalad and Hamel (1990) use core competencies to describe the central, strategic capabilities. They described that core competencies are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies. In section 5, we have classified logistics activities at the planning and execution level. According to RBV, logistics activities can be regarded as firm’s resource or capabilities because firm can develop strengths or weakness in any one or in any combination of these activities (Segal-Horn 1998p159). Then, the ability of these logistics activities to generate competitive advantages should be analyzed in evaluating the outsourcing decision.

Barney (1991) specifies the conditions under which such firm’s resources can be a source of sustained competitive advantage for a firm. To have this potential, a firm’s resources must have four attributes (a) it must be valuable, in the sense that it exploits opportunities and/or neutralizes threats in a firm’s environment, (b) it must be rare among a firm’s current and potential competition, and (c) it must be imperfectly imitable. Insinga and Werle (2000) use “potential for an activity to yield competitive advantage” to distinguish an activity into four different levels: key activity, emerging activity, and basic activity, and commodity activity. Key activities provide the enterprise with a sustainable competitive advantage in the

marketplace Emerging activities have the potential to become sources of sustainable competitive

advantage. Basic activities are needed simply to be a player in the enterprise’s business field and are not

significant sources of competitive advantages and Commodity activities are readily available in the marketplace and cannot be sources of

competitive advantages.

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According to these arguments, we assert that outsourcing of a logistics activity for food companies will depend on its value to yield competitive advantage. Therefore, we formulate the following proposition:

Proposition 6: The greater the importance of the logistics activity, the more likely that a food company will keep the logistics activity internally

The last proposition we make relates to performance measurement on the logistics outsourcing decision. In SCM, the objectives of performance measurements and controlling activities are to track performance against operating plans and to identify opportunities for enhanced efficiency and effective. Performance measurement is the process of quantifying effectiveness and efficiency of an action. Performance is the output of the system (Van Goor 2003). In our paper, the performance measures reflect whether an organization makes a right decision on outsourcing a certain activity. In brief, we use four key performance indicators (KPI) for logistics outsourcing associating to logistics strategy: cost reduction, reduction of lead-time, increase of delivery performance, and increase of flexibility (Bowersox and Closs 1996; Van Goor et al. 2003).

Proposition 7: Outsourcing will improve the supply chain performance

7. A decision framework for levels of logistics outsourcing in FSCNFigure 2 presents the decision framework for levels of logistics outsourcing in FSCN. It aims to provide a conceptual representation of why logistics outsourcing decisions are made and which activities should be outsourced. The relevant factors are captured from theories (SCM, TCE and RBV), the expected relationships between variables are discussed in the previous sections. In brief, the logistics strategy has an impact on which logistics activities are to be outsourced. In general, whether or not to outsource a certain activity depends on the value of the product and the degree of supply chain complexity, which is determined by the product, process, market and network complexities. Besides, it also depends on transaction costs which are determined by asset specificity and uncertainty of a transaction between food companies and LSPs. The RBV asserts that outsourcing decision depends on the potential value of a logistics activity to yield competitive advantage, which are analyzed with its value, rarity, imitability. Overall, performance measures whether the decisions are made properly or not.

Figure 2. Preliminary framework of logistics outsourcing decision in FSCN

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Logistics strategy(lean, agile, leagile)

Transaction uncertainty

Importance of logistics activities Performance

-Cost, -lead-time, -Reliability, -flexibility

Outsourcing decisionsYes (1) or No (0)

Execution activities Planning activities -product complexity -Process complexity -Market complexity -network complexity

P1P2P4

P5

P0

P7

Asset specificity

P6Importance of food products

P3

Supply chain complexity

8. Cases and discussionsThe logistics outsourcing decision is difficult to evaluate, especially for FSCN. In this report, we present three cases to uncover the important decision criteria that decide the level of logistics outsourcing. In three semi-structured in-depth interviews we tested our framework. First two cases (temperature-controlled food product group and ambient food product group) were discussed in the Company A, and the third case (the coffee producer) was investigated through the Company B. Their general information are presented in the table 3.

Table 3 Companies’ general informationCompan

ySector Turnover (2004) No.

employees

A Diary food company

About 4,500 million euros

About 20,000

B Logistics service

provider

About 100 million euros

About 1,000

Company B provides: -Fright forwarding-Transportation execution-Warehouse management

Company A is a multinational food processor that develops and sells a wide range of branded diary products and fruit-based drinks. According to product and logistical operational characteristics, all products and materials are divided into four groups -ambient products, temperature-controlled food products, pre-carry (from warehouse to port) and bulk or liquid ingredients. The logistical decisions are decentralized and operated independently, which means that each group designs its own logistic system, including purchasing logistics services. In this paper, we discuss the cases of the temperature-controlled group (Case I) and ambient food product group (Case II) because the outsourcing strategies are significantly different for these two cases. According to Company A (for both cases), the logistics strategy has to be lean (focus on cost reduction) because logistics can not add too much value to the product. With regarding to outsourced activities, the two cases had outsourced all transportation and warehousing activities to LSPs but the major difference is that the outbound network planning is kept in-house for the Case I, whilst in the Case II this activity was outsourced. One of reasons that the network planning activity was not outsourced in the Case I are because they felt uncertain about the LSP’s performance, especially the on-time delivery. And this is also because the relative importance of food products in Case I is higher than food products in the Case II due to their added value. Especially, the contractual relationships were arranged differently due to the high perishable nature and short delivery time window. In the Case I, they have long term contractual relationship with LSP in order to control the logistics performances. Besides, the execution activities are outsourced also because they don’t own any trucks or warehouse assets historically for both cases. However, we observed that the reasons not to outsource other planning and other food processing activities are that they have knowledge and people to do the demand planning, production planning, supply chain network planning etc., and secondly these planning activities are very important to them and also to their shareholders (farmers).

Company B is a Dutch logistics service provider, who provides Europe-wide service. Company B offers European forwarding, sea freight, air fright, warehouse management, transportation, and some value-added services (assembling, labeling and invocing). The major customers are from chemical industry (25%), machine industry (25%), bike (15%), food industy (8%), toy (5%) and others (22%). Coffee products (in commercial package for out-of-home uses) are the major food products the Company B handles and this client (Case III) is one of the largest coffee producers

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in the Netherlands. The end users of this type of coffee products are restaurants or offices. At this moment this client only outsources warehouse management and outbound transportation to Company B. According to the company B, the main reason for this outsourcing is cost consideration. With regard to reasons of outsourcing value-added services, we obtain the data from one of their clients (bike producer). This client considers to outsource assembling and labeling services because they have to ship the bike quickly to UK due to a make-to-order strategy. As for the future development for company B, they don’t consider so far to invest supply chain planning services. Partly reasons are that it seems that there is not so much demand for these services, and also because their clients think that outsourcing of these planning activities are very risky in a way that they could lose business if products are not produced on time and delivered according to an order.

Comparisons between these three cases are presented in Table 4. Interviews in both companies showed that the main reasons for food companies to outsource execution activities are cost reduction, which are reflected by their low-cost based logistics strategy. This fits with what Bolumole (2001) described that organizations who are motivated to outsource for the purpose of cost reduction will tend to restrict LSP’s involvement to basic logistics function. Besides, we found decisions of outsourcing the execution activities seem not significantly related to supply chain complexity, because in some cases there are low product complexity, process complexity and market complexity. But we found the outsourcing of execution activities are much related to asset specificity and transaction uncertainty. The data showed that the transaction costs tend to be low if these execution activities are performed in the market. Further, outsourcing of planning activity seems depending on the importance of food products to firm. For Company A, food products in the Case I are much important than food products in the Case II due to they are relatively high value-added. Therefore, the networking planning activity was not easily to be outsourced also because the high importance of food product to the company. With regard to the impacts of importance of each logistics activities on outsourcing decision, we observed that the execution activities are easily to be outsourced because generally they are regarded as a commodity activities which cannot be sources of competitive advantages; and the most of planning activities and value-added activities are not easily to be outsourced because they are the key activities in the company, which can be the source of competitive advantages. Finally, we tracked the performances to their outsourcing decisions. The positive results are found to support that these outsourcing decisions can significantly improve supply chain performance.

Table 4 Comparisons of cases from Company A and Company B on logistics outsourcing Company A Company B

Cases Case I Case II Case IIIOutsourced activities Transportation

execution Warehousing

Outbound network planning

Transportation execution Warehousing

Transportation execution Warehousing

1. Logistics strategy Cost reduction Cost reduction Cost reduction2. Products types Milk products

(milk, yogurt, fruit drinks)

JuiceCoffee milk

Coffee powder

3. Importance of food product

High Medium Low

4. Supply chain complexity Perishability High complexity Low complexity Low complexity Seasonal demand Low Medium

(Juice has high peak Low

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demand in summer.) Total distribution volume (year)

High complexity(300 million liter)

High complexity(500,000 pallets)

Low complexity

Average lead-time required

High complexity(24 hour)

High complexity(48 hour)

Low complexity(48 hours)

Delivery frequency Once per day Once per week - Average shipment-size Full-truck load Full-truck load Less-than truck load Total SKU 3-400 SKU - - Number of countries involved in supply chain

Low complexity(Only one country

involved)

Low complexity(Only one country

involved)

Low complexity(Only one country

involved)5. Asset specificity Low Low Low6. Transaction uncertainty Low Low Low7. Importance of the planning activities

Most of planning activities are the core

activities

Other planning activities are the core activities

Most of planning activities are the core activities

8. Performances for this outsourcing decision

They are highly satisfied with on-time

delivery and cost reduction.

They are highly satisfied with on-time delivery and

cost reduction.

They are satisfied with on-time delivery.

9. Summary and conclusionsThe purpose of this paper is to analyze the decisions to outsource logistics activities in FSCN. The results from theories and analysis from cases propose here some important findings: This paper firstly contributes to identifying different types of logistics service providers

according to different types of services, problem solving ability and ability of customer adaptation: standard LSPs offering traditional transportation and warehouse services; integrated LSPs offering value-added services and more than two standard services; supply chain solution providers offering total supply chain solutions.

Classification of logistics activities are made from food manufacturer’s point of view into planning and execution levels. At execution level, logistics activities include transportation execution, warehouse management, food processing activities and packing and labeling activities. At planning level, logistics activities include demand planning, inventory planning, purchasing and production planning, network planning and event-based planning.

Relevant factors considered in logistics outsourcing decision and level of outsourcing for food manufacturers from the theories and cases are found to be: logistics strategy, importance of food product, supply chain complexity, asset specificity, transaction uncertainty and importance of the activities. It may be conceptualized that organizations with lean strategies and outsource will tend to restrict choices only to execution activities; while organization with agile strategy will tend to involve LSPs into their supply chain. Besides, decisions of outsourcing the execution activities seem not significantly related to supply chain complexity, but it relates to the degree of asset specificity and transaction uncertainty. Further, outsourcing decisions of planning activities depend on the importance of food products which are handled by these activities and also depend on how companies evaluate the potential of each logistics activity for competitive advantage. Finally, the data showed that outsourcing could improve supply chain performance.

Overall, there are the limits to the generalisability of the conclusions on why firms outsource the planning activities and to which types of LSPs due to the limited cases studied in this paper. Hence, further research is needed to test, validate and expand the research framework. We will go on studying more case studies and we will test the validated framework empirically in a large survey in order to fully understand the practices of logistics outsourcing in FSCN.

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