198 Int. J. Logistics Systems and Management, Vol. 7, No.

2, 2010

Challenges of outsourcing logistics to third-party

providers

A. Ansari*
Department of Marketing,
Albers School of Business and Economics,
Seattle University,
Seattle, WA 98122, USA
E-mail: [email protected]
*Corresponding author

Batoul Modarress
College of Business Science,
Zayed University,
P.O. Box 4783, Abu Dhabi, UAE
E-mail: [email protected]

Abstract: The focus of this study is on the challenges that shippers faced
using Third-Party Logistics (3PL) providers. The study is based on a mail
survey of 126 shippers and personal interviews with eight shipper executives
and four 3PL provider executives. The study first identifies the major
challenges including, finding a 3PL with the capabilities meeting the shipper’s
specific logistics requirements, the incompatibility of information systems
between shipper and 3PL, the failure of 3PL to meet a shipper’s future
growth needs, and issues related to security. Second, it offers some
recommendations for shippers to consider in overcoming any challenges
encountered.

Keywords: shippers; logistics; outsourcing; 3PL providers; survey; challenges.

Reference to this paper should be made as follows: Ansari, A. and

Modarress, B. (2010) ‘Challenges of outsourcing logistics to third-party
providers’, Int. J. Logistics Systems and Management, Vol. 7, No. 2,
pp.198–218.

Biographical notes: A. Ansari, PhD, CPIM is Professor of Operations

Management at Seattle University. He received his PhD from the University
of Lincoln-Nebraska. He has published in Decision Sciences, International of
Journal of Logistics Systems Management, International of Journal
of Production and Operations Management, International Journal of
Production Research, International Journal of Quality and Reliability
Management, Industrial Engineering, Journal Purchasing and Materials
Management, Production Planning and Control, and Journal of Systems
Management.

Copyright © 2010 Inderscience Enterprises Ltd.

 Challenges of outsourcing logistics to third-party providers 199

Batoul Modarress is an Associate Professor of Operations Management

at United Arab Emirates University. She holds a MS in Engineering and a PhD
in Management. She worked for Boeing Company for 10 years and has over
20 years of experience consulting for public and private sectors in the areas
including port, cargo, and logistics security. She is the co-author of a leading
text on Just-In-Time purchasing and written papers for such journals as
International Journal of Quality and Reliability Management, International
of Journal of Production and Operations Management, International Journal
of Production Research, Production and Inventory Management, Journal
Purchasing and Materials Management, Production Planning and Control, and
Journal of Systems Management.

1 Introduction

Most companies are facing serious challenges in meeting continuously changing

customer demand (Trent, 2005). In recent years, this challenge has been intensified by the
proliferation of new information technologies, rapid product obsolescence, shorter
product life cycles (Carrillo and Franza, 2006), increase in US labour costs, and
accelerated new-product development (Carrillo, 2005). In response to these pressures and
to offset the increased US labour costs, many companies are using outsourcing for more
of their business functions. A survey by CAPS and A.T. Kearney revealed that more than
80% of respondents indicated that cost reduction was one of the main factors that led
them to offshore outsourcing (Knowledge @W.P. Carey, 2005).
The growing use of outsourcing is a major departure from traditional outsourcing
practices of the past, which involved non–core competency activities being outsourced to
multiple providers (Ansari et al., 1999). The rationale for this outsourcing practice is that
companies expect to achieve lower overall costs and reduce dependence on any single
provider. The consolidation strategy, by contrast, allows a shipper (or client) to develop a
strategic partnership with a logistics company capable of providing integrated logistics
services (Lynch, 2004). These companies are known as third-party logistics (3PL)
providers.
Sheffi (1990) predicted that during the 1990s, due to economic, regulatory, and
technological changes, the use of 3PL services in the USA would increase significantly.
This prediction turns out to be correct. From the early 1990s to the early 2000s, the
number of Fortune 500 companies outsourcing to 3PL providers increased from about
40% to 65% (Lieb and Kendrick, 2002). Outsourcing initially became widespread
primarily in the manufacturing arena, and it remains a vital strategy in that sector.
A number of companies use 3PL providers for other activities, such as strategic sourcing
(Poirier and Quinn, 2006), supply-chain demand planning (Hannon, 2004), procurement
support (Handfield and Straight, 2003), financial services (Trent, 2004) and collaborative
design (Ericson, 2001; Lieb, 2005).
In recent years, a growing body of research has examined 3PL from a number of
different perspectives. For example, Love (2004) notes that the outsourcing trend has
gathered momentum and Knauf (2006) states that businesses continue to be very
interested in outsourcing to 3PL providers. The types of services provided by 3PL
providers (Byrne, 2004), the role of 3PL providers in the entire supply chain
200 A. Ansari and B. Modarress

(Williams, 2003) and the benefits of outsourcing to 3PL providers have been
discussed (Lynch, 2004; Williams, 2003). Sinkovics and Roath (2004) suggested that
manufacturers could improve operational flexibility through relationships with 3PL
providers; Menon et al. (1998) examined the criteria for selecting 3PL providers.
Other research (Makukha and Gray, 2004; Sinkovics and Roath, 2004; Mentzer et al.,
2000) has addressed the strategic importance of 3PL providers in supporting shipper
supply-chain strategies.
More recently, some 3PL research has emerged from outside the logistics field.
For example, Stank et al. (2003) and Sinkovics and Roath (2004) examined the
relationships between manufacturer and 3PL from the management strategy-performance
perspective and Halldorsson and Skjott-Larsen (2004) studied the 3PL from the strategic
management theory perspective. Moore’s (1998) study examined 3PL providers from a
relationship marketing theory perspective by focusing only on users, whereas Knemeyer
and Murphy (2005) compared 3PL users and 3PL providers with respect to relationship
marketing elements and outcomes. Murphy and Poist’s (1998) study suggests a
relationship between company characteristics and the types of strategies in managing
logistics-related environmental impacts. Lai et al. (2007) investigated the effect of
information technology strategy on the performance of 3PL providers, and Large (2007)
identifies the factors influence the performance of 3PL providers.
In addition, other 3PL research focuses on the importance of relationships between
users and providers. For example, Boyson et al. (1999) have identified key factors in
managing successful 3PL relationships; Lynch (2004) suggests that an effective
relationship with 3PL is critical to a company’s success. Stank et al. (2003) suggested
that one way to increase a company’s success is through partnership with 3PL and
Knemeyer et al. (2003) studied the characteristics of partnership development within
logistics outsourcing relationships.
According to Lieb (2005), today, the relationships with the 3PL have become more
collaborative in nature. The collaboration between shippers and 3PL providers enhances
supply-chain capabilities and ultimately improves shippers’ competitive advantage
(Hardy et al., 2003; Soonhong et al., 2005). Although the extent of literature review on
various aspects of 3PL is extensive, virtually there has been no investigation into the
challenges that shippers could experience during the outsourcing strategy implementation
process. This article investigates the challenges that shippers have encountered
implementing outsourcing strategy to 3PL providers. It also provides a set of metrics that
focuses on the 3PL provider’s operational capabilities, financial capacity, and IT
capabilities, which gives insights into the industry for shippers considering the use of 3PL
services.

2 Importance of 3PL

The business logistics costs in the US rose only by 7% to $1.4 trillion in 2007, which
represents about 10.1% of the nominal costs of the Gross Domestic Product (GDP).
This is an increase of $91 billion over 2006 (Wilson, 2008). In addition, the total
revenues for the US 3PL market last year were 16.3% higher than 2004 levels
(Armstrong, 2005). The logistics expenditure in Europe was $1,229 billion, about 13.3%
of GDP; in the Pacific Rim it was $2,127 billion, which represents 15.7%
 Challenges of outsourcing logistics to third-party providers 201

of GDP;and in South America it was $272 billion, which is about 14.3% of GDP
(Rodrigues et al., 2005). Between 2002 and 2005, 84% of Asian-Pacific firms, 80% of
North American firms and 77% of Western European firms were using 3PL services.
In South Africa, 74% of companies are using 3PL services and in Latin America 67% of
firms are using 3PL services (Langley, 2005).
The key driver of recent growth in the 3PL industry at the global level is the relentless
competitive pressure on shippers to further reduce operating expenses, to improve quality
(Sheen and Tai, 2006), to provide flexibility, to improve short-term profitability and
to continually improve customer service. These factors have forced more shippers to
become interested in outsourcing various elements of the supply chain to a 3PL provider.
Using this strategy, the shipper transfers to a single 3PL the responsibility of managing
supply-chain activities, and accordingly, the 3PL provider is held accountable for the
overall performance of the entire supply chain. For example, Ryder Systems, Inc., one of
the largest 3PL providers in the world, supports and manages the logistics requirements
for Dell’s mass-customisation programme. A custom software platform designed for Dell
allows suppliers to fulfil orders within two hours of receipt which, in turn, enables Dell to
maintain less than six days’ inventory (“Dell Goes to the Extreme”, 2000).
Since the appearance of 3PL providers in the early 1990s – a response to shippers’
desire for integrated service providers – the industry has undergone significant changes
in size, markup, types of services offered, and geographical reach (Lieb, 2005).
Currently, the top 3PL providers are capable of offering a wide range of management
functions, including inbound and outbound freight, bar-code/RFID implementation,
cross-docking, shipment tracking and tracing, imports and exports, warehouse
management, order fulfilment, packaging, distribution, fleet management, product
returns, systems planning, web-based applications, and logistics information services
(Napolitano, 2008; Barrett, 2005; Cooke, 2005; Lieb, 2005; Morton, 2005; Tompkins
et al., 2006).
In short, since the early 1990s, 3PL service offerings have expanded to cover many
activities beyond transportation and warehousing. In recent years, the growing business
logistics need of international and domestic businesses has increased the demand for
outsourcing to 3PL providers, resulting in significant growth in this industry (Lieb and
Kendrick, 2002). According to Lieb and Lieb (2008), the demand for 3PL service has
grown steadily and has become increasingly global and selective about its customers.
The findings of a survey (3PL CEO, 2008) show modest revenue growth prospects for
the 3PL industry in recent years; for example, a one-year revenue growth projections of
12.6% for North American, 10.8% for European, and 21.4% for Asia-Pacific.

3 Research purpose and methodology

US companies are continually pressured to improve the efficiency and effectiveness of

their supply chains; hence, outsourcing logistics to 3PL providers has become a common
strategy for cost reduction and competitiveness (Lieb and Bentz, 2005; Makukha and
Gray, 2004; Sinkovics and Roath, 2004). Although researchers have investigated various
aspects related to 3PL providers and the shippers using them, based on our literature
research there is no empirical work that explores the challenges shippers can expect
implementing this outsourcing strategy. The following research questions will be
investigated:
202 A. Ansari and B. Modarress

• What are the major challenges shippers encounter outsourcing logistics to 3PL
providers?
• What measures are necessary to be developed to overcome these challenges?
The information used to support the research objectives comes from
• mail surveys sent to US companies
• discussions (personal interviews) with senior-level shippers and 3PL provider
executives.
In the first stage of the study, the initial sample questionnaire was first sent to three
shippers’ logistics or supply chain managers; after revisions the actual questionnaire,
which is provided in Appendix A, was sent to 270 shippers representing different
industries. These shippers’ names were randomly selected from outsourcing lists
available in logistics trade magazines and one of the author’s consulting firms.
The questionnaire was directed to the director of the supply-chain function or to the
logistics manager at the target shippers, gathering information on two categories:
• the firm characteristics such as type, size, and range of services used by shippers
• the challenges shippers encountered in the outsourcing logistics activities to 3PL
providers, and their suggestions for overcoming them.
A total of 126 shippers completed and returned the questionnaire, which represents
a response rate of 47% However, not all the responding firms answered all the questions
in the survey questionnaires. The respondents were asked to numerically rate the
significance of each challenge using a scale of 1 (‘little/none’), 2 (‘somewhat
significant’), and 3 (‘significant’). The type, size, and services used by the shippers
represent a broad range of industries and are discussed below.
Firm type. The type of shippers who participated in the survey represents 18 different
industries ranging from automobile, airplane spare parts, computers, electronics goods,
to food, garments, house-ware, and others. The demographic characteristics of
participating firms and their percentages are shown in Table 1. Based on the analysis of
various demographic characteristics of responding firms, these companies are organised
as manufacturers and merchandisers (wholesalers). Approximately 88% of the total
participating firms are mainly merchandisers and 12% are manufacturers and
merchandisers.

Table 1 Industry characteristics

Types of industry Percentage of respondents

Airplane spare parts 2.4
Automobile accessories 4.8
Automobiles 1.6
Bags 5.6
Computer 1.6
Electronic goods 8.7
Export/Import 20.6
 Challenges of outsourcing logistics to third-party providers 203

Table 1 Industry characteristics (continued)

Types of industry Percentage of respondents

Food 4.0
Furniture 3.2
Garments 13.5
House-ware 7.9
Medical instruments 2.4
Pharmaceutical 1.6
Retail manufacturers 4.0
Retail store fixtures 5.6
Sports goods 7.1
Tyre 1.6
Toys 4.0

Firm size. Based on the annual revenues, the firm size is grouped into four
categories – annual revenues less than $100 million, revenues between $100 million and
$1 billion, revenues between $1 and $10 billion, and revenues greater than $10 billion,
as shown in Table 2. The majority (53%) of respondents has annual revenues of less than
$100 million; more than 41% reported revenues between $100 million and $10 billion
and only about 6% report revenues greater than $10 billion. The number of shippers with
less than $10 million in annual revenues was insufficient to be grouped into a separate
category.

Table 2 Firm size

Revenues Percentage of respondents

Less than $100 million 53.2
$100 million – $1 billion 25.4
$1 billion – $10 billion 15.1
Greater than $10 billion 6.3

Type of service. The types of services most frequently used by shippers are
Transportation management of inbound and outbound freight including air, road, rail,
and ocean inter-modal. Customs brokerage provides import, export, and custom
clearance activities. Warehousing management provide managing distribution centres,
inventory management, and crossdocking. IT logistics provide real time data, design
IT platform, web base technology, and tracking and tracing orders and status. Freight
consolidations. Freight bill payment. Consulting services include demand management,
planning and scheduling shipments, procurement, and order fulfilment. Global logistics
services design supply chain solutions and supplier management. The percentages of
these logistics services used by all industries are in line with recent studies (Murphy and
Poist, 2000; Lieb and Bentz, 2004) are shown in Table 3.
204 A. Ansari and B. Modarress

Table 3 Most frequently used service

Logistics service Percentage of shippers using (%)

Transportation management
Inbound freight1 86.5
Outbound1 74.6
2
Customs brokerage 68.3
Warehousing management3 65.1
IT logistics4 61.9
Freight consolidation 57.9
Freight bill payment 42.9
Consulting5 37.3
Global logistics6 28.6
1
Includes air, road, rail, ocean intermodal.
2
Import, export, customs clearance.
3
Distribution centre management.
4
Real time data, design IT platform, web-base technology, tracking/tracing.
5
Demand management, procurement, order fulfilment.
6
Designing supply chain solutions and supplier management.

The percentages of each type of services used by industry specific would not provide
meaningful information because, according to a 3PL provider, USNW Express
executives, “We have many customers in many industries and they use combinations
of these services”. However, the type of services used by the shippers directly correlates
with their revenue. For example, the majority of the firms with revenue of less than
$100 million most frequently use 3PL providers for inbound, outbound, warehousing and
freight consolidation activities; whereas, customs brokerage, IT technology and freight
bill payment are used less frequently. The two other activities, consulting and global
logistics, are rarely outsourced, or not at all, by these firms. On the other hand, shippers
with more than $1 billion in annual revenues use all of these services.
In the second stage of our study, once the major challenges were identified through
the use of a quantitative survey questionnaire, follow-up qualitative discussions
(interviews) were conducted with eight shippers’ executives. The firms participating in
the study included representatives from Starbucks, Costco Wholesale, Brooks Running
Apparel, Panasonic, CompuChair, Aviation Partners, Boeing Commercial Airplanes and
Gourmet Display. These firms have been (self-) selected because their headquarters or
regional offices are accessible to the authors and were willing to participate in our survey.
In addition, four 3PL providers whose executives participated in the study and provided
documents from their firms are UPS, Kuehne & Nagel, Kintetsu World Express, and
USNW Express. These firms have also been chosen because of their geographical
location.
The discussions presented in the following sections will provide key insights into the
extent of the challenges that shippers may encounter in outsourcing the logistics function
to 3PL providers, and offer a comprehensive set of metrics to overcome these challenges.
 Challenges of outsourcing logistics to third-party providers 205

4 Results and discussion

Shippers use 3PL providers to improve operational efficiency and effectiveness

(Mentzer et al., 2000) to reduce freight costs and improve quality service (Thuermer,
2007; Langley et al., 2002) and to enhance flexibility in terms of delivery speed and
customer service (Power et al., 2007; Bowersox and Closs, 1996). The major benefits that
shippers identified in our study, shown in Table 4, are consistent with those cited in the
literature on using 3PL providers. Although these benefits appear to be significant
enough to justify shippers’ outsourcing of logistics activities to a 3PL provider, it is
imperative for shippers to realise that achieving these benefits requires overcoming a
number of significant challenges. Outsourcing logistics to a 3PL provider becomes
ineffective if these challenges are not addressed and resolved prior to implementation.

Table 4 Benefits of outsourcing to 3PLs

Activity Benefits
Fixed assets–based utilisation Reduction in fixed assets–based utilisation
Reduction in information technology infrastructure
Improvement in financial performance
Increase in asset turnover
Inventory investment Reduction in inventory investment
Reduction in “cash-to-cash” cycle
Improvement in inventory visibility
Increase inventory turnover rate
Logistics cost Reduction in logistics cost
Enhanced access to carriers and fleets
Leveraged cost savings across SCM
Shipper service Increased shipper logistics services
Reduced cycle time
Increased fill rates
Information technology Improved access to timely and accurate logistics information
Access to personnel skills and expertise
Elimination of inefficiency
Increased customer flexibility

The challenges identified by the shippers in the survey and then confirmed by the
executives interviewed are classified into major challenges and others. The top four
major challenges are
• lack of 3PL provider capabilities to meet a shipper’s requirements
• the incompatibility of a shipper’s and a 3PL provider’s IT systems
• the failure of a 3PL provider to meet the shipper’s future growth needs
• a 3PL provider’s lack of control and security.
206 A. Ansari and B. Modarress

Figure 1 shows the reported percentage of the top four challenges that the shippers
experienced when using 3PL providers, with respect to firm size. The following sections
present the discussions on the top four major challenges.

Figure 1 Challenges of using 3PL (see online version for colours)

4.1 Meeting shipper requirements

About 46.3% of survey respondents stated that they had significant difficulties finding a
3PL provider capable of making the necessary changes in its existing logistics
infrastructure to meet the shipper’s logistics needs. About 25.6% of the respondents noted
that they had some difficulties, whereas 28.1% reported little or no difficulty in finding a
3PL provider to meet their requirements. Our studies show that the level of difficulty that
shippers faced in finding the right 3PL provider with the right capabilities was positively
related to the shippers’ annual revenues. In most cases, shippers with more than
$10 billion in revenues had requirements that are more stringent. Consequently, it was
more difficult for these companies to find a 3PL provider with the right capabilities and
infrastructure to meet the needs of their business logistics requirements.
The main reason the larger shippers had difficulty finding the right 3PL provider was
explained by a sales executive at Kintetsu World Express, who stated that the major
problems that 3PL providers face is “having the right infrastructure to fulfil the shippers’
logistics requirements in different geographical locations they need”. For example,
he stated that one potential shipper required this 3PL provider to have a warehouse with a
specific design, various truck sizes, and an IT platform with unique capabilities to meet
its logistics needs.
Starbucks outsourced its logistics activities to a 3PL provider as part of its global
strategy. But according to the senior vice president of global logistics and procurement,
“Finding a provider that could meet our unique requirements was the major challenge”.
Starbucks needed a logistics company with the following characteristics: first, the 3PL
provider had to own and operate trucks small enough to be able to deliver small
boxes from a distribution centre to local stores. Second, the 3PL provider needed to have
a warehouse designed with shelves built to hold standard containers. Third, the
3PL provider had to be able to deliver shipments to local stores between 11:00 p.m.
and 5:00 a.m. Finally, the 3PL provider had to agree to meet Starbucks’ future growth
 Challenges of outsourcing logistics to third-party providers 207

requirements. Starbucks invested roughly three years working with a logistics provider to
develop these capabilities and developed a collaborative partnership with the 3PL
provider.

4.2 Information systems compatibility

The next challenge hindering the successful implementation of outsourcing logistics is
the lack of shipper’s IT and systems applications compatibility with the 3PL provider.
Incompatible IT systems have raised serious concerns and doubts for shippers planning to
outsource logistics to 3PL providers. Although only 41.2% of the shippers indicated
significant difficulty in finding logistics providers with IT systems that matched their
own systems, about 34.5% initially had some degree of difficulty, and 24.4% of the
companies indicated little or no serious problem.
The mismatch between a shipper and 3PL may exist for at least two reasons.
A shipper’s IT systems are designed primarily to support the strategic objectives of the
company. On the other hand, a 3PL provider’s IT systems, by contrast, are designed with
certain unique characteristics and capabilities to support industry standards. For these
reasons, in most cases the 3PL IT systems are different from those of a shipper. All of the
shippers’ executives interviewed believed that the mismatch in IT systems is one of the
major challenges for all players involved in the outsourcing decision. According to 3PL
provider executives, the mismatch in IT was the main reason for the majority of the
shippers with less than $100 million in annual revenues to delay implementing their
outsourcing strategy. The pace of implementation was particularly slower for those
shippers when they were required to invest substantial time and money to meet the
industry standard IT.
Moreover, mismatched IT systems have become more challenging for shippers with
legacy systems. A number of shippers in our study indicated that their IT comprises
numerous legacy systems, and in one case systems incompatibilities existed even among
divisions of the same shipper. Although this is not a common occurrence, it does make it
challenging for a shipper to efficiently and effectively use the logistics provider’s IT
systems. The widespread use of web-based applications and standard XML code was
suggested for improving this situation in the future.
3PL providers face significant challenges when a shipper demands customised
solutions and unique IT platforms that require additional investment in systems and
applications design. In such a situation, 3PL providers become less interested in
committing to partnerships with a shipper, particularly if the terms of the contract are too
short to recover the investment. However, the 3PL providers participating in the study
stated that in most cases they have made necessary changes in their IT systems to support
a potential customer’s requirements.
An accounts executive at Kuehne and Nagel stated that the company avoids
establishing partnerships with a shipper if the terms of contract are not long enough to
recover the initial investment. Most of the 3PL providers interviewed stated that a
prerequisite to developing partnerships with shippers is to have them redesign their IT
system’s to meet the standard platform used throughout the industry. Therefore, to work
with a 3PL provider, a shipper must develop a strategy to address the IT system’s
incompatibility issue to close the gap with the industry.
208 A. Ansari and B. Modarress

4.3 Managing future growth and expectations

The rapid growth of the global economy has created a competitive environment for
companies across supply-chain functions. To compete effectively, shippers are
continually changing their business logistics requirements. Hence, the next challenge in
outsourcing logistics is finding 3PL providers who are willing and capable of adopting
changes in services demanded by shippers in a reasonable timeframe. Only 22.7% of
survey respondents, those with more than $1 billion in revenues, faced significant
challenges getting their new requirements implemented by the 3PL providers. The main
reason for this problem was attributed to the fact that shippers’ level of changes expected
required substantial investment by the providers in terms of time and money. About
31.9% of the surveyed shippers reported that they have experienced some difficulty in
convincing 3PL providers to accept their new requirements. Approximately 45.4% of
respondents, firms with less than $100 million in annual revenues, indicated little or no
difficulties in getting their changes, which are minor or limited in scope, to be
implemented by the 3PL provider.
The majority of changes demanded from 3PL providers are related to two areas.
First, it is related to global expansion for new service offerings, and second, to integration
of logistics activities and IT systems. First, according to our interviews, shippers who
plan to establish an international presence in a new geographical area expect a 3PL
provider to expand its services to manage their logistics needs in the new market.
Although global expansion has increased 3PL provider revenues, major management
challenges remain. This is largely true for 3PL providers without an international
presence, but these challenges exist to some degree even for those operating at a global
level. Some of the 3PL providers in our study stated that they are reluctant to increase
global service offerings in certain regions for various reasons. For example, the excessive
regulations imposed by the Chinese national government, and the different sets of local
laws, are serious enough to discourage most 3PL providers from offering new services in
China. Typically, the major problems 3PL providers mostly experience are with
developing countries due to lack of road and train infrastructure, local transportation
services, cargo security, and organisation.
Second, additional changes are related to the integration of logistics activities and IT
systems. As global outsourcing strategies become more widely accepted among
manufacturers and service providers, demand increases for further integration of logistics
activities and customised IT capabilities. Despite the increased demand for these changes,
however, 3PL providers may not want to increase their IT systems capability to meet a
shipper’s new expectations, either because of financial constraints or because of lack of
clarity in a contract. Smaller 3PL providers are unable to make substantial investments in
the IT systems to meet shippers’ expectations, although this is not a problem for the top
3PL providers such as Excel, Kuehne and Nagel, Schenker, DHL, Danzas, or UPS.
Another issue is the lack of clear and effective contracts explaining in detail a 3PL
provider’s responsibilities, the extent of changes required, and the terms and conditions
of financial compensation. Hence, it is critical for the 3PL provider to understand what
the shipper wants and clearly reflect that in the contract. Otherwise, the outsourcing may
result in loss of logistical control and downgrading of services, according to an executive
at DHL Solutions (Davies, 2005). Therefore, it is recommended that shippers develop
their own individual contract, stating terms and conditions, rather than using a standard
contract. Seven key elements need to be included in this contract:
 Challenges of outsourcing logistics to third-party providers 209

• scope of work
• contract terms
• compensation
• risk allocation
• alternative dispute resolution
• confidentiality
• adjustment ([email protected] provides greater detail).
Strategic consideration should be granted to performance-based logistics, which shift the
focus, from buying and contracting for resources, to obtaining results (Sols et al., 2007).

4.4 Lack of control and security

Another major challenge associated with the decision for shippers to outsource logistics
activities to 3PL providers is lack or loss of control and cargo security. Nearly 32.2%
of survey respondents considered the risk factor to be a significant challenge, whereas
only 10.4% expressed some difficulty and about 57.4% stated that this factor had no
effect on their decision to outsource.
These challenges are the paramount concerns of shipper executives interviewed
because these factors could have long-term effects on their business strategy. Lack
of control over logistics activities is most serious when the relationship between the
shipper and 3PL provider is based on a non-collaborative foundation. In such a situation,
there are two organisations with different business strategies, operating philosophies,
priorities and cultures, each trying to attain its own goals. Typically, when a 3PL provider
takes control of a shipper’s logistics activities, the latter retains little or no control over
the provider’s operational and strategic decisions. For example, a shipper executive
explained that in one case a 3PL provider acquired more new shipper accounts than it
could handle. Shortly thereafter, the provider began experiencing staff shortages, which
consequently affected the service provided to the existing shipper accounts. Lack of
control becomes even more critical when the 3PL provider represents and acts directly
with a shipper’s suppliers or as a point-of-sale contact for the shippers. Hence, 3PL
providers are required to work very closely with shippers on decisions affecting their
business performance.
The second challenge is related to cargo security, which tends to receive little
attention despite the fact that businesses suffer substantial losses. This issue has become
more serious in recent years due to the accelerating use of insecure IT systems and
web-based applications. Insecure systems have become the major contributing factor in
cargo crime worldwide. In 2006, in the USA, the cost of business logistics (including
warehousing, transportation, administration, and shipper-related costs) rose over 11% to
a record $1.305 billion (Armstrong, 2005), with between $3 –10 billions of this figure
lost to cargo theft (Tetther and Ferreira, 2004).
One of the 3PL providers interviewed stated that IT systems and web-based
applications link manufacturers, suppliers, carriers, exporters, importers, freight
forwarders and end shippers together to improve customer service. However, although
this linkage provides major benefits to shippers, insecure systems also have become an
210 A. Ansari and B. Modarress

attractive target for sophisticated crime groups. By infiltrating insecure systems, these
groups are able to access information to find vulnerable points in the shipping route.
Here, cargo can be opened, tampered with, and counterfeit documents can be created to
redirect cargo to a targeted destination.

4.5 Other concerns

There are a number of noteworthy minor concerns expressed by shipper executives
(interviewed), such as cost overruns, lack of ownership and accountability, poor quality,
poor communication, and inflexibility. These issues are considered to be less important
because they are short-term in nature and can be avoided if shippers carefully evaluate
their 3PL provider’s business strategy prior to implementing outsourcing. A Panasonic
executive interviewed addressing cost overruns stated, “When hiring a 3PL, you must
investigate thoroughly their services and be sure that all costs for their services are on the
table so nothing is hidden”.

5 Recommendations

To address these challenges, shippers need to develop set of metrics and a service-level
agreement. The three metrics briefly explained in this section are based on our studies
and on one of the author’s personal consulting experiences. These metrics focus on the
3PL provider’s operational capabilities, financial capacity, and IT capabilities.

5.1 Operational capabilities

Shippers should develop metrics to measure a 3PL provider’s operational capabilities in
the areas of inventory management, transportation services, and warehousing facilities.

5.1.1 Inventory management

The shipper should be able to evaluate whether a 3PL provider is capable of supporting
just-in-time delivery requirements and providing real-time access to information for
visibility, tracking and tracing inventory. The shipper should also have full knowledge
and understanding of a 3PL provider’s policies and practices for managing on-hand
inventory at distribution centres, in-transit inventory, obsolete inventory, surplus
inventory, and other factors.

5.1.2 Transportation services

A shipper should develop transportation metrics to cover two areas. The first part of the
metrics should provide detailed information on the modes of transport (e.g., air, road, rail,
and ocean); and the types and sizes of motor vehicles the 3PL have available at different
locations (or at minimum has access). The second part should provide information to
measure the performance of various functions of the 3PL’s:
 Challenges of outsourcing logistics to third-party providers 211

• adaptability to accommodate changes the shipper needs

• efficiency in providing services
• effectiveness in providing services
• flexibility in handling contingency plans
• agility – how fast they can respond to changes.

5.1.3 Warehousing facilities

The shipper should evaluate the 3PL provider’s warehouse facility with respect to
• infrastructure and flexibility to meet future expectations
• availability of state-of-the-art technology at receiving and shipping locations
• maintaining a high level of inventory accuracy
• accuracy of orders processed
• on-time shipping
• cost savings and other factors.
In addition, the shipper needs to know whether the warehouse can be used for finishing
products, labelling, packaging, postponement, or for vendor-managed inventory, etc.

5.2 Financial capacity

The second set of metrics should be developed to focus on the 3PL provider’s financial
capacity. For instance, shippers need to understand any financial constraints that would
limit a 3PL provider’s ability to increase IT systems capabilities or establishing an
international presence in new geographical areas. The main concern is whether a 3PL
provider is financially capable of making the necessary changes in organisational
structure and/or business practices to meet the shippers’ current service level or future
growth requirements.

5.3 Information technology capability

A third set of metrics should be developed to enable shippers to evaluate the current
capabilities of the 3PL provider’s IT systems. Shippers must understand the 3PL
provider’s future plans for systems improvements, priorities for such advancement, plans
for adopting new technology such as RFID, and budgetary implications.
In addition to these sets of metrics, shippers need to understand a 3PL provider’s
corporate culture and management philosophy with respect to employees’ performance
evaluations, cost management, shared values, and continuous improvement. But this
should be part of the shipper’s initial investigation/pre-qualification process, lending
itself to an increasing in-depth understanding. Finally, shippers and 3PL providers should
agree on a set of legal and contractual terms and conditions to cover intellectual property,
outcomes and deliverables, implementation of growth and future changes, and steps to
terminate the agreement.
212 A. Ansari and B. Modarress

This information should enable shippers to evaluate and select a 3PL provider that
best meets its requirements. Successful outsourcing of logistics requires that shippers and
3PL providers work together to create an atmosphere conducive to the establishment of a
collaborative partnership with clear, agreed-upon service-level expectations to overcome
critical challenges.

6 Summary and conclusion

The concept of outsourcing manufacturing activity arose more than two decades ago;
however, outsourcing by non-manufacturing companies is rather recent. Similarly,
outsourcing logistics has extended from traditional inbound or outbound freight activities
to include the outsourcing of logistics activities such as crossdocking, shipment tracking
and tracing, imports/exports, warehouse management, order fulfilment, packaging,
distribution, fleet management, product returns, systems planning, bar-coding/RFID,
web-based applications, and logistics information services. As a result, outsourcing
logistics to 3PL providers has, in recent years, become a key competitive and strategic
option for shippers.
A combination of quantitative (mail survey questionnaire) and a qualitative personal
interviews with shippers and 3PL provider executives helped illuminate the challenges
that shippers may face as a result of outsourcing logistics functions to 3PL providers.
According to the responses, it seems shippers outsource logistics activities mainly to
improve their competitive position.
Although outsourcing provides shippers with many tangible benefits, it is not without
challenges. The major challenge shippers must overcome prior to implementing an
outsourcing strategy is to find a 3PL provider capable of meeting their logistics
requirements. The next challenge is the IT system’s compatibility with the 3PL provider.
Of main concern is the willingness of shippers to invest in technology to meet industry
standards. Another challenge for shippers is to determine to what extent, if any, the 3PL
provider is willing to modify its business practices to meet their future growth
expectations. The other challenge is the risk of loss or lack of control over logistics
activities and lack of cargo security resulting from insecure systems used by 3PL
providers which have become the major factor in cargo theft. Other concerns that
shippers expressed include cost overruns, poor quality, poor communication, lack of
flexibility, lack of innovation, over-promised service capabilities, and inconsistent
definitions and measurements. The key to minimising these challenges is the
development of collaborative relationships between both parties.
For future research, a number of variables such as distance (short vs. long-haul) and
the size (small-to-medium) of shippers should be investigated to determine the degree of
challenges they experienced in using 3PLs. Furthermore, since the global trend is toward
adopting eco-friendly practices, the Green Transportation and Logistics research should
be investigated.

Acknowledgements

The authors wish to acknowledge the reviewers in the revised paper for their constructive
and helpful comments on the paper.
 Challenges of outsourcing logistics to third-party providers 213

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Appendix

Outsourcing logistics: the latest trends in using 3PLs providers

Industry characteristics (1–4)
1. Identify the industry in which your company’s belong – i.e., manufacturing, retail,
electronics, etc.
2. Are you currently outsourcing logistics function to a 3PL?
3. What percentage of your overall logistics function budget is outsourced?
4. Do you plan to increase the use of 3PLs in the future?
Which, if any of these criteria does your company use to selecting a 3PLs provider? (5–9)
216 A. Ansari and B. Modarress

5. LOGISTICS SERVICES & CAPABILITIES – Please check all that apply.

Lead Logistics Provider (LLP). LLP is a lead company and does not act as
intermediary
Integrated Logistic
Just-in-Time
Global Trade Services
Inbound Logistics
Warehousing
Logistics Process Reengineering
Payment Auditing/Processing
Inventory Management
Vendor Management
Product Life Cycle Management
None
6. WAREHOUSING SERVICES & CAPABILITIES – Please check all that apply.
Pick/Pack, Subassembly
Cross docking
Distribution Centre Management
Location Services (site selection, real estate)
Vendor Managed Inventory
Fulfilment
None
7. SPECIAL SERVICES – Please check all that apply.
Ship direct to Store
Ship direct to Home
Import/Export/Customs (e.g., clearance documentation)
Reverse Logistics
Marketing /Customer Service
Logistics/Transportation Consulting
None
 Challenges of outsourcing logistics to third-party providers 217

8. TRANSPORTATION SERVICES & CAPABILITIES – Please check all that

apply.
Small Package
Air Cargo
Less-Than-Truck Load (TLT)
Truckload
Intermodal – managing all types of transportation modes, i.e., ocean, rail, truck,
Ocean
Rail
Bulk
Dedicated Contract Carriage
Fleet Acquisition
Equipment/Drivers
None
9. TECHNOLOGY/WEB SERVICES & CAPABILITIES – Please check all that
apply.
Information Systems
EDI
Wireless Communication - Cellular RFID, Satellite, Wi-Fi
Web Enabled Services
E-Operations, e.g., e-procurement
E-Commerce
E-Fulfilment
E-Supply Chain Management
Online tracking and tracing ability
Customer Relationship Management
None
The following questions relate to Benefits achieved using 3PL (10–12)
10. Identify the degree of benefits achieved using a 3PL. Please check all that apply.
Not Important Important Most Important
• Reducing logistics costs ___ ___ ___
• Increasing customer satisfaction ___ ___ ___
• Increasing speed of services ___ ___ ___
218 A. Ansari and B. Modarress

• Improving supply chain management ___ ___ ___

• Reducing staff headcount ___ ___ ___
• Globalising the supply chain ___ ___ ___
• Increase efforts on core competencies ___ ___ ___
• Reducing in-house skills ___ ___ ___
• Reducing fixed assets-based utilisation ___ ___ ___
• Reducing inventory investment ___ ___ ___
• Increasing access to information technology ___ ___ ___
• Other? Please explain:
11. Overall performance of 3PL providers
a. Outstanding
b. Higher than expected
c. Good
d. Lower than expected
e. Poor
12. What are the potential barriers (problems) using 3PL?
• Meeting our company requirements
(e.g., schedule, warehouse locations, equipment, etc.)
• Lack of information systems compatibility
• Future growth and expectations (e.g., unexpected spikes in service demand)
• Lack of infrastructure (i.e., roads, rail, shipping ports)
• Government policies, regulations, and control
Please explain: ___________________________________________
_______________________________________________
_______________________________________________
OTHERS
• Risks: e.g., loss of control, security, costs over-runs, lack of ownership and
accountability, failure to meet delivery schedules, poor quality, poor communication,
and inflexibility.
Please explain: ___________________________________________