Outsourcing and Third Party Logistics

Essay, 2013

12 Pages, Grade: 1


Table of Content

List offigures


Development of Third Party Logistics

Drivers for Outsourcing

Outsourced activities and how these add value to the business


List of references

List of figures

Figure 1: Business operations, competencies, and outsourcing

Figure 2: Drivers for outsourcing

Figure 3: Activities outsourced to 3PL provider


The process of globalization and the removal of barriers to international trade have led to an increased importance of Supply Chain Management for most businesses involved. To remain competitive, there is a need for all partners within the supply chain to collaborate and communicate (Zacharia et al. 2011; Christopher 2011). These two requirements, together with the creation of efficiency in all processes involved, an increased concentration on core competencies and the outsourcing of certain functions, can enhance the competitiveness and the service level of a company, as discussed by Christopher (2011). According to Bolumole (2003), there exists an imbalance between what companies seek to achieve and what they are able to perform in-house. Therefore, "the rationale for outsourcing to third party increases" (Bolumole 2003, p.93).

This assignment will illustrate the development of third party logistics companies (3PLs) from the initial outsourcing to a collaborative partnership in supply chains today. The essay will be divided into three parts: development of 3PL, drivers for outsourcing as well as outsourced activities and how these add value to businesses.

Development of Third Party Logistics

Third party logistics, also known as outsourcing logistics activities (Grant et al. 2006; Bolumole 2003), has become more popular over the last four decades. According to Halldorsson and Skjptt-Larsen (2004), there exists no consistent definition of a 3PL company nowadays and there is a variety of approaches in defining 3PL (Andersson 1997).

Historically, relationships with 3PLs were based on basic functions such as warehousing and transportation (Chopra and Meindl 2007). Each 3PL provider was a specialist in one part of a business (Persson and Virum 2001). Berglund et al. (1999) states three stages in the development of 3PL. In 1980, traditional logistics providers developed, who focused on transportation or warehousing. Both the deregulation of the transportation industry in the USA in 1980 and the following implementation of free-trade zones emphasized a trend towards globalization and a development of 3PL. Therefore, many transportation carrier installed modern systems for information and communication and were able to provide more efficient transport systems (Sheffi 1990). Thus, traditional logistics suppliers emerged to 3PLs to perform logistics activities for companies that were previously carried out in­house (Menon et al. 1998). The second stage in 1990 describes the entrance of network players like DHL, UPS and TNT into the market. This development, together with an increasing customer expectation, lead to the demand of integrated logistics services as the basic functions have become commoditized (Berglund et al. 1999). Therefore, carriers expanded their portfolio and began offering an overall set of integrated logistics activities (Chopra and Meindl 2007; Hertz and Alfredsson 2003). As discussed by Lynch (1998), the services offered in the USA by 3PLs expanded rapidly after the deregulation of the transportation industry and besides the initial transportation and warehousing, value-added services were adopted by 3PLs (cited in Andersson 1997). In this decade, 3PLs became very important in logistical management (Murphy and Poist 2000). In addition, all parties involved started to share necessary information to become more efficient and competitive (Christopher 2011). The last stage, as discussed by Berglund et al. (1999), began in the late 1990s, where players of financial services, management consultancy and information technology entered the market and are working together with participants from the other stages. Since the late 1990s the trend of outsourcing a wide range of supply chain activities has increased significantly (Chopra and Meindl 2007).

Therefore, today's provided logistics activities require more strategic expertise in contrast to the traditionally offered basic functions. The following definitions emphasize the development of 3PLs and their services offered to customers. Stefansson (2006, p.80) described 3PL services and relationships as follows:

The third-party logistics arrangements cover straightforward arm's-length relationships involving everything from a few, rather simple logistics activities to advanced logistics solutions including value-added activities such as merge-in-transit setups.

According to Berglund et al. (1999) and Hertz and Alfredsson (2003) a 3PL provider can be defined as an external company who provides logistics services to a customer and acts as an intermediary between the supplier (1st party) and the customer (2nd party). The services offered can consist of, but are not limited to the traditional functions of transportation and warehousing. It can also include operational, strategic and tactical services such as information services, value-added services and the management of supply chains. The relationship can be seen as a long-term partnership as opposed to a distant contractual relationship. Especially when referring to long-term relationships between the involved parties, both benefit because the 3PL provider encompasses a large number of activities. In comparison with the definition of Stefansson (2006), this definition points out the length of the arrangement between the supplier and the 3PL provider. It emphasizes the change from historical, function-based outsourcing with a traditional arm's length relationship, to focus on mutual, closely integrated long-term relationships and the management of varying activities (Bolumole 2003; Hertz and Alfredsson 2003). Because of its strategic importance and value, 3PL is today closely related to the overall corporate strategy and therefore is part of many supply chain activities today.

Drivers for Outsourcing

The increasing competition in the global business environment and the importance of Supply Chain Management can be seen as reasons that have led many companies to focus on those functions in their supply chain where they can provide a competitive advantage (Zacharia et al. 2011; Christopher 2011). Therefore, Mclvor (2009) recommends specializing only in core areas and outsourcing non­core activities, which were carried out previously within the business (Figure 1).

illustration not visible in this excerpt

Figure 1: Business operations, competencies, and outsourcing

(extracted from Bansal et al. 2008,p.8302)

The decision to make or buy an activity, i.e. whether to outsource or to keep it in-house, is a core aspect of the business of 3PLs (Mentzer et al. 2007), because logistics management activities "are deemed as noncore functions for many firms" (Zacharia et al. 2011, p.40) and critical for most firms (Hobbs 1996). Mentzer et al. (2007) stated that companies whose core competency does not lie with logistics or certain components of logistics will consider outsourcing these operations to 3PLs, because they can execute them more effectively and efficiently. Le Bon and Hughes (2009) divide the reasons for outsourcing into three parts: saving of costs, improvement of service due to the expertise of contracted service providers and the focus on own core strengths. However, there are different and no clear views what the key drivers for outsourcing activities are.

Rushton et al. (2010) splits the mayor drivers for outsourcing into four categories: organizational, financial, service and physical. Organizational factors include the focus on the company's expertise whereas financial factors concentrate on capital cost advantages, i.e. companies do not have to invest anymore in warehouses and resources while using 3PLs. In addition, the service offered can be improved because 3PLs provide flexibility and a portfolio of value-added services. Both have a positive impact on the customer relationship. Physical factors describe the planning and management of widespread logistics activities due to the expertise of 3PLs. Moreover, many companies only use 3PLs on occasion, e.g. for peaks in demand, non-standard operations or promotion activities (Rushton et al. 2010). Eyefortransport (2005) carried out a survey in which they pointed out the key drivers for outsourcing (Figure 2).

illustration not visible in this excerpt

Figure 2: Drivers for outsourcing

(extracted from Eyefortransport 2005, p.5)

In addition, suppliers often decide to outsource their logistics services, because their supply chain management becomes too complex. Hence, many 3PLs support the supplier to resolve cultural incompatibility due to their comprehensive global expertise (Rushton et al. 2010). Moreover, companies outsource to benefit from the 3PLs wide network of logistics relationships and the efficiency provided (Zacharia et al. 2011).

However, Rushton et al. (2010) announced that the question whether to source an activity out to a 3PL provider or to carry it out in-house depends on several impacts, such as the industry, type of company and the products offered. Chopra and Meindl (2007) summarize "the decision to outsource is based on the growth in supply chain surplus provided by the third party and the increase in risk incurred by using a third party" (p.419).

Outsourced activities and how these add value to the business

The definitions in the first chapter have already provided some logistics activities that might be outsourced by a company. According to Bolumole (2003), firms usually outsource only some parts of the logistics function, i.e. especially operational functions, whereas strategic functions are still carried out in-house. Zacharia et al.


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Outsourcing and Third Party Logistics
Heriot-Watt University Edinburgh
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Critically evaluate the development of third party logistics companies (3PLs) from the initial outsourcing of warehousing to their partnership in supply chain activities today.
outsourcing, third, party, logistics
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Janina Bohling (Author), 2013, Outsourcing and Third Party Logistics, Munich, GRIN Verlag, https://www.grin.com/document/265030


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