Download Title: A framework of logistics outsourcing in FSCN

A DECISION FRAMEWORK FOR LEVELS OF LOGISTICS OUTSOURCING
IN FOOD SUPPLY CHAIN NETWORKS
Hsin-I Hsiaoa, Jack G.A.J. van der Vorstb, S.W.F. (Onno) Omtaa
aDepartment
bDepartment
of Business Administration, Wageningen University, Wageningen, The Netherlands
of Logistics Management & Operations Research, Wageningen University, Wageningen, The
Netherlands
Mansholtlaan 10-12, 6708PG, Wageningen. [email protected]
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. Introduction
There 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;
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Norek and Pohlen 2001; Sohail and Sohal 2003). SCM asserts that organizations along the 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 design
This 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:
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Detail of the interviewee;
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 providers
In 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.
LSP
One LSP carries out the activities between
a supplier and plants; the other activities
between a DC and its customers
Suppliers
Plants
DC
Customers
Figure 1 Illustration of a supply chain and its involvement with LSPs
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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:
 Standard LSPs: the companies who provide standard and traditional services, such as carriedbased, 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).
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Supply chain execution activities
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 valueadding-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 eventbased 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 welldesigned 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
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
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
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 FSCN
Categories
Execution activities
Planning activities
Logistics Activities
Transportation execution
Warehousing
Food processing activities, packing and labeling activities
Demand planning
Inventory planning
Purchasing and production planning
Supply chain network planning
Event-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
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business unit with a competitive advantage. At a generic level logistics competitive strategy can
be distinguished into lean, agile and leagile (integration) strategies.
 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
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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.
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 characteristics
Categories
Product
characteristics
Process
characteristics
Market characteristic
Network
characteristics
Attributes
 Perishability of finished products
 Perishability of raw materials
 Seasonality of demand fluctuation
 Seasonality of supply fluctuation
 Leadtime requirement of finished products
 Leadtime requirement of raw materials
 Shipment size
 Total distribution volume per year
 Delivery frequency
 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 shelflives 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 characteristics
Logistics 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
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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
Proposition 2b: The higher the market complexity, the more likely that
a food company will outsource the planning or execution activities
Process characteristics
Process 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 characteristics
Network 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
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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.
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.
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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.
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.
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

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.
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 FSCN
Figure 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.
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Logistics strategy
(lean, agile, leagile)
P1
Asset specificity
P4
Transaction
uncertainty
P5
Importance of
logistics activities
P2
Supply chain complexity
P0
Execution activities
Planning activities
P7
P6


Outsourcing decisions
Yes (1) or No (0)
Performance
-Cost, -lead-time,
-Reliability, -flexibility


P3
-product complexity
-Process complexity
-Market complexity
-network complexity
Importance of food products
Figure 2. Preliminary framework of logistics outsourcing decision in FSCN
8. Cases and discussions
The 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 information
Company
Sector
Turnover (2004)
A
Diary food
company
Logistics
service
provider
About 4,500
million euros
About 100
million euros
B
No.
employees
About
20,000
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.
13
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
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.
14
Table 4 Comparisons of cases from Company A and Company B on logistics outsourcing
Company A
Cases
Outsourced activities
1. Logistics strategy
2. Products types
3. Importance of food
product
4. Supply chain complexity
 Perishability
 Seasonal demand
Total distribution
volume (year)
 Average lead-time
required
 Delivery frequency
 Average shipment-size
 Total SKU
 Number of countries
involved in supply chain

5. Asset specificity
6. Transaction uncertainty
7. Importance of the planning
activities
8. Performances for this
outsourcing decision
Case I
 Transportation
execution
 Warehousing
Cost reduction
Milk products
(milk, yogurt, fruit
drinks)

Case II
 Outbound network
planning
Transportation execution
 Warehousing
Cost reduction
Juice
Coffee milk

Company B
Case III
Transportation execution
 Warehousing
Cost reduction
Coffee powder
High
Medium
Low
High complexity
Low
Low complexity
Medium
(Juice has high peak
demand in summer.)
High complexity
(500,000 pallets)
High complexity
(48 hour)
Once per week
Full-truck load
Low complexity
(Only one country
involved)
Low
Low
Other planning activities
are the core activities
Low complexity
Low
High complexity
(300 million liter)
High complexity
(24 hour)
Once per day
Full-truck load
3-400 SKU
Low complexity
(Only one country
involved)
Low
Low
Most of planning
activities are the core
activities
They are highly
satisfied with on-time
delivery and cost
reduction.
They are highly satisfied
with on-time delivery and
cost reduction.
Low complexity
Low complexity
(48 hours)
Less-than truck load
Low complexity
(Only one country
involved)
Low
Low
Most of planning activities
are the core activities
They are satisfied with ontime delivery.
9. Summary and conclusions
The 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;
15
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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