Third-Party Logistics Services in Australia
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International Journal of Physical Distribution & Logistics Management Third party logistics services usage by large Australian firms Peter Dapiran, Robert Lieb, Robert Millen, Amrik Sohal,
Article information: To cite this document: Peter Dapiran, Robert Lieb, Robert Millen, Amrik Sohal, (1996) "Third party logistics services usage by large Australian firms", International Journal of Physical Distribution & Logistics Management, Vol. 26 Issue: 10, pp.36-45, doi: 10.1108/09600039610150442 Permanent link to this document: http://dx.doi.org/10.1108/09600039610150442
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Third party logistics services usage by large
Australian firms Peter Dapiran
Department of Marketing, Monash University, Victoria, Australia, Robert Lieb and Robert Millen
College of Business Administration, Northeastern University, Boston, Massachusetts, USA,
Amrik Sohal Department of Business Management, Monash University,
Victoria, Australia
Outsourcing of logistics functions is a business dynamic of growing impor- tance in Australia (for example, see [1]) and elsewhere in the world (see, for example [2,3]. Third party logistics involves the use of external companies to perform logistics functions which have traditionally been performed within an organization. The functions performed by the third party can encompass the entire logistics process or selected activities within that process.
The extent of logistics outsourcing in the USA[4] and Western Europe[5] has been examined in a number of previous studies. However, there has been no systematic study of the experience of Australian firms using third party logistics services. The purpose of this research is to provide such information.
Other case studies[6] and a limited number of commercial surveys[7] exist regarding the Australian experience. In general, these sources indicate that an increasing number of Australian firms are choosing to outsource some logistics activities (either partially or wholly). However, this is by no means a uniform trend. For example, a number of key retailers in Australia have taken the opportunity to bring back in house both outsourced transport and warehousing on the expiration of recent contracts. It is essential, therefore, to gain a clear understanding of general industry practice.
Because of the theme of this special issue, a brief description of the Australian transport environment is provided. The subsequent section describes the research methodology which is then followed by the results from the survey. The paper concludes with a summary and description of the implications of the findings.
The Australian transport environment With an area of 7.7 million square kilometres, Australia has 82 per cent of the land mass of the USA. On the other hand, Australia’s population of 18 million is less than 10 per cent of the USA’s population of more than 270 million or the
International Journal of Physical Distribution & Logistics Management, Vol. 26 No. 10, 1996, pp. 36-45. © MCB University Press, 0960-0035
Received August 1995 Revised March 1996
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estimated 320 million plus population of the European Union. The Australian population is highly centralized in the southeast of the continent with 40 per cent living in the cities of Melbourne and Sydney. The balance of the population is dispersed across the whole continent creating pockets of habitation in need of transport service. An interesting response to this isolation has be en the Australian Flying Doctor Service.
In Australia, the establishment of coastal colonies with easy access by sea slowed the development of land modes of transport, unlike the circumstances which drove the construction of the US railroads. Nor did Australia develop the canal systems of Britain or the USA. Political developments created a multitude of rail gauges similar to the differences between European countries historically.
These factors led to a road-based transport system. Costs have be en compensated for by high levels of efficiency due, in part, to high levels of competition especially in interstate line haulage. With increased service expectations, many firms offering third party transport services were quick to recognize the demand for complementary warehouse facilities. The resulting efficiency and management skills of Australia’s large logistics services companies (e.g. TNT, Linfox and Maynes Nickless) have enabled them to be competitive in the European and US markets.
Methodology To determine the current usage of third party logistics services, a survey was conducted during May-June 1995. The survey instrument was based on the questionnaire developed originally by Lieb[8]. Several minor changes were made to localize the questionnaire for the Australian environment. The survey instrument focused on the following six areas: the extent to which those firms use the services of contract logistics companies; the specific contract logistics services used; the benefits which have emerged for the user firms; the obstacles encountered in implementing contract logistics relationships; the impact of the use of contract logistics services on logistics costs, customer satisfaction, and employees of the user firm; the future plans of current users of contract logistics services.
The sample population for this study was the 1994 Business Review Weekly list of 500 largest Australian fir ms. Financial, banking, real estate, and insurance organizations were eliminated from the group as they were less likely to have significant logistics needs. The exercise resulted in a list of 220 firms. The remaining firms were then contacted by telephone to obtain the name and address of the senior logistics executive for each of their most substantial operating units (e.g. Cadbury Confectionery and Cadbury Beverages). A total of 308 operating units were identified in this fashion.
Each of the senior logistics executives at the 308 operating units was then contacted by telephone to determine if there was interest in participating in the study and 127 senior logistics executives agreed to participate. Within one week of the telephone contact, a questionnaire with a cover letter and pre-paid reply envelope were mailed to the 127 executives. A total of 84 usable
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questionnaires were received in the following five-we ek period. This represented a response rate of 27 per cent, which compares favourably to response rates for other recent studies of the use of contract logistics services[9]. Analysis of the responses is presented in the next section[10].
Results Extent of use When asked whether or not their organizations use contract logistics services, 51 of the 84 respondents indicated that their fir ms did so. Of those firms currently outsourcing logistics services, two-thirds indicated that their firms employ the services of more than one contract logistics firm.
Among the respondents, less than one-third of the non-users are looking into the use of these service providers and 70 per cent do not plan to investigate the use of such services in the near future.
Aspects of the size of the firms which responded to the survey are provided in Table I. Approximately one-half of the users and non-users of contract logistics services employ 500 or more individuals[11]. User firms reported average annual revenues of $777 million and non-users reported average annual revenues of $295 million. (All revenue figures are in Australian dollars.)
Of those using contract logistics services, most are relatively experienced with the concept. As shown in Table II, 70 per cent of the users have been doing so for more than three years. Hence, the results provided by this survey can provide insight into the long term impacts of using such services.
Users Non-users
Approximate current employment < 499 52 55 500-999 12 36 1,000-4,999 20 6 5,000+ 16 3
Approximate current annual sales revenue (A$ million) <100 26 50 100-499 38 35 500-999 17 4 1,000+ 19 12
Table I. Characteristics of users and non-users of contract logistics services (percentages)
Time period using contract logistics services Percentage of respondents
Less than one year 6 One to three years 24 Three to five years 18 More than five years 52
Table II. Length of experience with contract logistics services
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The decision-making process Those surveyed were asked to indicate the organizational level at which the strategic decision to use contract logistics services originated within their company. The answer varied considerably among users. While 38 per cent indicated it originated at the corporate level, 29 per cent traced it to the divisional level, and 33 per cent said it began at the local level. (Only one respondent noted multiple levels, and those were the corporate and divisional levels.)
Those using contract logistics services became aware of the services of the company or companies they employ in a variety of ways. As presented in Table III, the most common ways were sales calls by representatives of the contract logistics firms and discussions with other logistics professionals.
Managers in other functional areas are routinely involved in the decision to use the services of contract logistics companies. Of the respondents using such services, 67 per cent indicated that this was the case in their companies. Typically, managers in several other functional areas were involved. The responses, summarized in Table IV, show that marketing and finance were involved in the decision process by more than one-half of the firms. Manufacturing and human resource management (HRM) were also involved in the decision process by a number of firms. Other functions, such as information systems and engineering, were noted by several respondents (3 and 2, respectively) but were not included in the table because of the few mentions each received.
Contract logistics services used The use of contract logistics services in Australia is primarily focused on domestic operations – 65 per cent of the firms employ contract logistics
Percentage of respondents Information source citing that source
Sales calls by contract logistics representative 47 Discussions with other logistics professionals 38 Advertising in professional publications 6 Direct mail advertising from contract logistics firm 6 Sales contact at a logistics conference 3
Table III. Most frequently cited
ways those using contract logistics
services became aware of such services
Percentage of respondents Functional area indicating that participation
Marketing 58 Finance 54 Manufacturing 38 HRM 15
Table IV. The participation of
managers in other functional areas in the
decision to use contract logistics services
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service providers for domestic operations only. The other 35 per cent use such services for both international and domestic operations. No respondent indicated that their firm uses such services for international operations only.
These large companies use a wide range of contract logistics services as is shown in Table V. Those logistics functions outsourced by at least one-third of the respondents are fleet management, warehouse management, shipment consolidation, order fulfilment, and product returns[12]. In general, it appears that the most “hard” asset intensive activities have been allocated to the contract logistics providers.
Implementation In many instances when the possibility of outsourcing logistics activities is initially discussed, logistics managers are less than enthusiastic. Thirty per cent of the respondents noted such concerns. The most commonly expressed concerns were: the potential loss of direct control of logistics activities; uncertainties about the capabilities of the contract logistics firms; the costs of outsourcing; and the deployment of company personnel. (On the other hand, one manager noted that there were no concerns at her/his firm because the internal system was abysmal.)
Logistics managers usually have several contract logistics companies from which to select. The survey sought to determine the most important factor in mak- ing the final selection among competing companies. In answering an open-ended question, more respondents noted cost versus service factors. A total of 12 res- pondents noted cost considerations as the most important selection factor, while seven said that service considerations were most important. Other factors cited by respondents as being most important were personal knowledge of the contractor, coverage provided, previous experience and references, experience in project management and new systems implementation, and perceived competence.
Percentage citing use of Logistics service contract firm for that service
Fleet management 53 Warehouse management 47 Shipment consolidation 42 Order fulfilment 33 Product returns 33 Carrier selection 27 Logistics information systems 22 Order processing 16 Product assembly/installation 13 Inventory replenishment 13 Rate negotiation 11 Freight payment 9 Customer spare parts 9
Table V. The most frequently used contract logistics services
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Implementation issues were also addressed in the survey. More than 60 per cent of the users indicated that they experienced significant impediments in bringing contract logistics firms on line. In response to an open-ended question, the most often cited implementation issues included teaching the contract logistics firm about the company’s policies and business requirements, and reaching agreement on service definition(s). Also noted by several firms was the need to overcome the “us versus them” attitude of internal staff. No respondent indicated that they encountered any difficulties in merging information systems.
Training Because the introduction of contract logistics services into a company represents an important shift in the way in which business is conducted, it might reasonably be assumed that related training would occur. However, one- half of the users of contract logistics services identified in this survey indicated that implementation of those arrangements did not necessitate retraining of logistics personnel. The training efforts that have been undertaken have typically focused on information and computer systems, and new technologies. Only one firm noted that it had introduced a prog ramme in change management, while another firm indicated that it had begun a programme in team building including personnel from the contract logistics firms.
Commitment to the concept and expenditures While many large firms now use contract logistics services, the degree of commitment to the concept varies considerably from company to company. As shown in Table VI, 56 per cent of users indicated that their firm’s commitment to the concept was “moderate” or “extensive”. The other 44 per cent indicated that their firms’ commitment was “limited” or “very limited”.
This varying deg re e of commitment is also reflected in Table VII which contains information related to the percentage of the total logistics budget paid to contract logistics companies. One-half of the respondents allocate 20 per cent or less of their total logistics budget to contract logistics service providers, whereas only about one in five firms allocate more than 71 per cent of their total logistics budget to such providers.
Contract usage with services providers Nearly 60 per cent of the user firms have signed contracts with their services providers. Of these contracts, none had been signed for periods of less than one
Percentage of respondents Extent of commitment indicating that commitment
Very limited 8 Limited 36 Moderate 34 Extensive 22
Table VI. Extent of company
commitment to contract logistics services
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year nor for periods greater than five years; 83 per cent were for periods of one to three years; and 17 per cent for more than three years, but less than five years. Of these contracts, 54 per cent include performance incentives and 52 per cent contain penalties for non-performance.
Organizational impact According to the survey respondents, companies using contract logistics services typically experience multiple benefits. The most frequently cited benefits are cost reduction, improved expertise, and a reduction in capital requirements for the user firm. Several other users noted the enhanced flexibility (particularly with respect to seasonality), access to markets that would not have been accessible otherwise, the ability to offer services that would not have been possible otherwise, and the opportunity for the user firm to focus on its core business.
Users of contract logistics services were also asked to categorize the impact of those services on their companies in terms of logistics costs, internal logistics system perfor mance, customer satisfaction and employe e morale. The responses are summarized in Table VIII. Clearly, the use of contract logistics
Percentage of respondents Expenditure category in that category
0-10 39 11-20 11 21-30 11 31-40 11 41-50 2 51-60 2 61-70 2 71-80 4 81-90 11 91-100 7
Table VII. Percentage of total corporate logistics expenditures paid to contract logistics companies
Nature of the impact Area of impact Very negative Negative Positive Very positive
Logistics costs 0 12 74 14 Customer satisfaction 4 4 71 21 Internal logistics system
performance 2 9 78 11 Employee morale 2 30 64 4
Table VIII. Respondents’ assessment of the impact of the use of contract logistics services (percentages)
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services has had a strong positive impact on costs, system performance, and customer satisfaction. A minimum of 88 per cent of the respondents noted the impact as “positive” or “very positive” in each of these areas.
Interestingly, 68 per cent of the respondents noted the impact of the use of contract logistics service providers as having a “positive” or “very positive” impact on employee morale. This level is somewhat surprising in that 50 per cent of these firms indicated that their use of contract logistics service providers had permitted their organization to reduce the number of full-time logistics positions. Data on the extent of these reductions is provided in Table IX. Of those indicating that a reduction had occurred, for the most part the reduction was 20 per cent or less. No firms reported eliminating more than 80 per cent of the positions in logistics.
A variety of methods have been used in addressing the displacement of logistics personnel. The typical company responded with several programmes; 41 per cent reported transfers within their firm; 30 per cent offered employment with the contract firm; 52 per cent terminated employees; and 11 per cent employed other approaches, such as attrition and early retirement.
Plans for the future Almost all of the firms using contract logistics services are at least satisfied with the performance of those companies. A total of 33 per cent indicated that they were “very satisfied” with the performance of their contract services providers. Another 63 per cent indicated they were “satisfied”. Only one firm indicated that it was “dissatisfied” and another firm indicated that it was “very dissatisfied” with performance of the contract logistics firms. Not surprisingly, 94 per cent of the respondents indicated that the use of contract logistics services had been a positive development.
Users were also asked how they would modify their use of contract services if they were given complete corporate responsibility to make that decision, and this data is provided in Table X, where 84 per cent indicated they would moderately or substantially increase use. Conversely, 16 per cent indicated they would moderately or substantially decrease use of contract logistics services.
Percentage of full-time positions Percentage of respondents eliminated indicating that category
0-20 59 21-40 19 41-60 15 61-80 7 81-100 0
Table IX. Percent of full-time logistics positions
eliminated through the use of contract logistics
services
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Summary and implications Results reported in this study indicate that a number of operating units at many of the largest Australian firms are utilizing the services of contract logistics providers, and have be en doing so for several years. Many of these organizations employ the services of more than one contract logistics firm to provide a wide variety of services. Furthermore, many non-users are interested in this approach as evidenced by the 30 per cent who are exploring the idea.
Those operating units utilizing contract logistics services providers have substantial experience with this practice as evidenced by more than one-half having done so for more than five years. The decision to utilize contract logistics firms is almost as likely to originate at the corporate, divisional or local level. However, wherever the idea originates, managers from other functional areas will usually be involved in the decision to outsource.
The level of commitment to the utilization of contract logistics providers varies across firms, but more than one-fifth of the firms responding to this survey characterize their commitment as extensive. Additional evidence of this high level of commitment is provided by the one-quarter of the firms allocating more than 50 per cent of their total logistics budget to contract providers.
In almost all cases, senior logistics executives view the use of contract firms as having had a positive impact on logistics costs, logistics systems performance, customer satisfaction, and employee morale. Based on these results, more than 80 per cent of the managers would at least moderately expand their companies’ use of contract logistics firms.
To those logistics executives considering outsourcing, this very positive feedback should be reassuring. The number of experienced organizations provide an important source of information about how to proceed and what to expect.
Consideration of the use of contract logistics services providers will bring logistics managers in contact with colleagues in finance, marketing, manufacturing, and other areas, potentially expanding the logistics influence throughout the organization. This should improve the scope of the analysis, as well as subsequently facilitating implementation.
The experience of the firms in this study also provides insights as to how to plan for implementation; for example, the need to educate the third party logistics services provider about the firm’s requirements. Programmes to place redundant employees must also be developed.
Percentage of respondents Nature of modification indicating that modification
Moderately increase use 64 Substantially increase use 20 Moderately decrease use 7 Substantially decrease use 9
Table X. How respondents would modify their companies’ use of contract logistics services if given complete responsibility for the decision
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The survey also contains useful information for the providers of contract logistics services. The most important means for establishing contact with potential customers are through sales calls by representatives of the contract firms and discussions with other logistics professionals. Significant resources spent on other approaches should be questioned, based on the results from this survey. In addition, while users are quite satisfied with their experiences to date, few envision contract providers as a means to enter new markets, develop new customers or expand their current offerings. Those contract logistics firms able to offer opportunities of such a nature may find their markets growing rapidly.
Too often, outsourcing has be en characterized as an “all or nothing” proposition. As many of the respondents to this survey and other firms have learned, a mixed system may prove best. This approach can provide a balanced and controlled operation to ensure consistency and flexibility. The merging of best practice and industry expertise resulting from such an arrangement could provide leadership in logistics cost and value.
Notes and references 1. Gottliebsen, R.,“Taking stock of logistics”, Business Review Weekly, 27 March 1995. 2. Richardson, H., “How much should you outsource?”, Transportation and Distribution,
September 1994. 3. Cooper, J., Browne, M. and Peters, M., European Logistics: Markets, Management and
Strategy, Blackwell, Oxford, 1991. 4. Lieb, R. and Randall, H., “A comparison of the use of third-party logistics services by large
American manufacturers, 1991 and 1994”, Journal of Business Logistics, Vol. 17 No. 1, 1996. 5. Lieb, R., Millen, R. and Van Wassenhove, L., “The third man”, Logistics Europe, Vol. 1
No. 2, April 1993. 6. “The pros and cons of contract distribution”, Materials Handl ing and Distribution,
January-February 1988. 7. “Logistics markets to continue 20 per cent growth”, Daily Commercial News, 14 August
1995. 8. Lieb, R., ”The use of third party logistics services by large American manufacturers”,
Journal of Business Logistics, Vol. 13 No. 2, 1992. 9. Previous studies on the use of third party logistics services reported response rates of 24
per cent in[4] and of 19 per cent in[5]. 10. A paper is planned which will compare the Australian results with those obtained by
previous studies of logistics outsourcing in the USA and Western Europe. The focus of this paper on the Australian experience only was selected given the Asia Pacific theme of the special issue.
11. The responses of firms using contract logistics services were separated on the basis of the number of employe es, in order to examine whether siz e impacted usage patter ns. Depending on the nature of the data, either a chi-square or student t-test was applied. No significant differences were found when the responses of smaller firms (less than 500 employees) were compared to those of larger firms (500 employees or more).
12. The usage of third party providers for freight payment services by Australian firms will appear very small to those familiar with the situation in other parts of the world. Until the late 1980s, freight payment services were not offered by banks and other intermediaries in Australia. Hence, many Australian firms developed their own systems, and, based on the data, continue to perform this service internally.
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