Cost accounting of logistics-specific service providers. Outsourcing of a logistics service

Content

1 Introduction
1.1 Problem
1.2 Aim of the work
1.3 Delimitation of the subject

2 Theories from logistics
2.1 Process cost accounting

3 Theories of service management
3.1 The Principal-Agent Theory

4 Conclusion

5 References

Abstract

When making the decision to outsource a logistics service, one must be prepared to face several issues. For some companies outsourcing is the better alternative, for others it is not.

In this paper, we will take a closer look at the topic of outsourcing a logistics service and present the possible solution that can be made based on activity-based costing and the study of principal-agent theory.

1 Introduction

1.1 Problem

A trend towards outsourcing can be seen among logistics-specific companies. The reasons for this are different. Before making a decision, a company has to clarify some questions. First and foremost, it is the correct and precise calculation of costs in order to be able to compare the in-house production costs with the external production costs. Which is very often connected with the problem of cost transparency. In addition, the behaviour of the new partner in the customer-provider relationship must be taken into account. The new possibilities are connected with the risks of opportunism, which leads to distortion of information, increasing the dependence on the service provider. Both parties pursue different goals, which leads to conflicting objectives.¹

The medium-sized company A, which develops and produces injection moulded plastic parts, is taken as an example. The distribution of the goods is organized through plastics wholesalers and to industrial bulk consumers. The raw materials, semi-finished products and finished goods are stored in the company's own high-bay warehouse. In order to save costs, the company is considering outsourcing the storage of finished goods as well as the activities of picking and shipping.²

1.2 Aim of the work

The aim of the thesis is to examine the cost-based decision on logistics outsourcing and to give the reader an overview of the possible risks and the corresponding solution approaches.

1.3 Delimitation of the subject

It should be noted that this paper only presents the cost-based decision to outsource a logistics service, ignoring the other important criteria.

2 Theories from logistics

2.1 Process cost accounting

Theories from logistics and service management were taken as basic theories. These are activity-based costing and the principal-agent theory. Activity-Based Costing is best suited for logistics because other cost accounting systems do not provide cost transparency and do not allow a more cause-oriented cost distribution³. Thanks to activity-based costing, every logistics company can plan and control its costs better. With regard to the direct costs of outsourced processes, it should be noted that outsourcing of a logistics service creates a customer-provider relationship, which can also result in additional costs for both parties.⁴

Since this paper only presents the cost-based decision to outsource a logistics service and ignores the other important criteria, the company must first compare the in-house production costs with the external production costs. External production costs are the price quoted by the service provider. In order to determine the value of the outsourced logistics service, the relevant logistics processes must first be recorded. Most companies have the problem of cost transparency when determining the in-house procurement costs.⁵ In this case, the costs for the operation and maintenance of the warehouse are also managed together with the personnel costs on one cost center, which makes it difficult to calculate the actual costs relevant for the decision.

For this reason, the activity sequences of the processes of storage and retrieval as well as picking and shipping must first be recorded. The relevant processes are evaluated in terms of the process costs incurred and the desired performance. For the evaluation, one uses the data on the scope and duration of the personnel capacities necessary for the coordination and execution of the individual activities. On the basis of a reference order, the sequences of activities are recorded, individual steps are analysed, and the supporting activities from the other company divisions are taken into account. From the duration of the individual activities one gets the total process duration.

The number of orders processed is called cost driver. When the total number of processed orders for a certain time interval has been entered and the personnel capacities have been determined, the distribution of the total personnel costs of the cost center to the processes is carried out more accurately. After determining the in-house production costs based on Activity-Based Costing, the possible outsourcing alternatives are compared⁶. However, the costs that may arise from the customer/provider relationship must be taken into account.

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¹ Cf. Bretzke, W.- R. (2010), S. 337-353

² See Gebhardt, A. (2006), p. 179

³ See Weber, J. (2012), pp. 54-55/ Göpfert, I. (2013), p. 350

⁴ See Raubenheimer, H. (2010), p. 141

⁵ See Czenskowsky, T.; Poussa, J. ; Segelken, U. (2002), p. 2

⁶ See Gebhardt, A. (2006), pp. 179-185