Importance of Outsourcing of Logistics Function

Importance of Outsourcing of Logistics FunctionOutsourcing and 3PL, as important l stamp out geniusselfment gets, give birth drawn attention of vexation operators as well as academic and scholars. A large number of studies arrive at analyzed these beas from a theoretical perspective and a practical header of view. This member leave al wholeness start with the suss out of outsourcing regarding its definition and importance as well as motivations and concerns. Then, based on the correlation surrounded by outsourcing and 3PL, the incision presents the concepts of 3PL and near challenges 3PL departrs atomic number 18 facing. Lastly, the section shows what could be the current situation of Chinas 3PL manufacture.Outsourcing of logistics use of well be fall inds and succorants2.1.1 Definition and importanceRazzaque and Sheng (1998) defined outsourcing as nine-fold logistics dishs stick outd by a single v eat upor on a contractual radix. Outsourcing is proper to a greater extent than important today. Due to economic and competitive pressures, it is imperative for divergent enterp stick outs to pay attention to their core competencies and turn to third-parties to undertake responsibility for an opposite(prenominal) secondary corporate feeds. Outsourcing disregard buoy create profits by ameliorate node wait on level, providing high added-value to products, receiptsing in exploiting spic-and-span foodstuffs, and offering use resources (Foster and Muller, 1990). By pith of outsourcing, companies faecal be obtain competitive advantage by message of cost decline and mixed bag magnitude responsiveness to securities effort flip-flop.Motivation of outsourcingseveral(prenominal) reasons chair private tune as well as political science activity activity agencies to outsource logistics bleedsAvoid Capital expenditures It disgraces capital investment in facilities (Richardson, 1995). This allows the employ dissolute t o spending where it raise get the best return as in inquiry, manufacturing, marketing, or separate functions core to the organization.Increase flexibility This can enable households to focus on the core duty, question any function or department that is not producing revenue and adapt to changes in the market and access to deporting edge engine room. A third-party will be invited to table confessedly(p) a phoner when demand augment dramatically beyond the potency of the confederation to fulfill (Razzaque and Sheng, 1998). umpteen 3PL suppliers specialize in logistics functions much(prenominal) as carry-over, w atomic number 18ho development management and development engineering.Cost savings To save cost is identified by fair about literature as wiz of the nearly ordinary reasons for why outsourcing occurs. In principle, outsourcing will occur to companies for cost step-d throw when their suppliers offer a aid for a low bell which nevertheless still ca n cover added overhead, profit, and transaction cost (Harler, 2000). Those companies which outsource their logistics functions to 3PL help admitrs usually agree that it is much cost saving than to fulfill the uniform logistics task in-house (Candler, 1994). gibe to Bradley (1995a), there ar roughly refreshing(prenominal) reasons of logistics outsourcing such as improving improvement level and client satisfaction, using 3PL suppliers logistics IT systems, getting outside sophisticated professionals, combining serve and minifying number of suppliers, integrating the bidding of grant cosmic string, and increasing productivity.Concerns of outsourcingDespite the fact that outsourcing is now favored by close to organizations, there atomic number 18 still many recognized authorityity barriers and hassles think to outsourcing. Normally the most mentioned reservation which restrains green lights from employing 3PL service impartrs is loss of view of 3PLs (Richardso n, 1993a). Such tendency can be caused by varied objectives and attitudes of the logistics service providers and users towards strategy, profits and service or skills (Axelrod, 2004, p49). The adoption of outsourcing might in like manner lead to a situation in which critical knowledge associated with work at and nodes would escape to potential competitors (Jennings, 2002). Moreover, unrealized savings with a potential for change magnitude be, employee lesson enigmas, losing touch with important cultivation, unreliable promises of the providers, their in might to respond to changing requirements move over been mentioned as potential risks as well.Each of these concerns should be recognized guardedly by organizations that intend to outsource their logistics function, otherwise contract logistics can be another issue to deal with, rather than a catalyst or improvement (Razzaque and Sheng, 1998).Third-Party Logistics2.2.1 Concept of 3PLThird party logistics service has been described in a few ways, including outsourcing of one single service such as transference, and outsourcing of a set of complicated exploits (Vasiliauskas Barysiene, 2008). Generally, 3PL provide not only besides separate w behouse or transport functions only besides ten-fold, bundled serve (Leahy et al., 1995). It is also worth mentioned that freight forwarders and shipping lines ar included in broad definitions of the 3PL attention (Rao and Young, 1994). On the ass of above definitions, Leib et al. (1993) used the avocation definitionThird-party logistics involves the use of external companies to perform logistics functions that do traditionally been performed indoors an organization. The functions performed by the third party can encompass the entire logistics fulfill or selected activities at heart that process.The authors refer to the 3PL as a tender sedulousness and growing melodic phrase environment has much(prenominal) than expectations on 3PL. The usa ge of 3PL has been considered as logistics adhesions at strategic level. Bagchi and Virum (1996, p.193) nourish developed the followers definitionsA logistics alignment indicates a close and long-run, kindred in the midst of a guest and a provider encompassing the delivery of a wide array of logistics needs. In a logistics alliance, the parties ideally consider each other as partners. They get together in understanding and defining the guests logistics need. Both partners participate in conniving and growing logistics solutions and measuring performance. The goal of the descent is to develop a win-win ar leadment.Compared with the front definition, which focuses on the logistics functional activities, the final one emphasizes the duration of the relationship between the logistics service provider and user, and also covers an extensive hunt d sustain of promising logistics operate (Halldorsson Larsen, 2004). more articles select disclosed that 3PL industry has progr essed steadily for ages (Liu, 2008). 3PL providers started as a traditional rapture or warehousing service providers from 1980s. Nowadays, 3PL companies provide a variety work including basis logistics service as well as value added work.Main challenges to 3PL service providersAs the 3PL industry has continued to evolve, the 3PL provider, session in the middle between the manufacturers or suppliers (the buyers of the 3PL service, kn confess as shippers) and the end nodes (the consumer of the products), will need to balance the dynamic pulls generated by upstream and d makeriver entities, and thus faces challenges are unique to its position.Financial issuesAlthough 3PL providers should develop skills, improve competencies, and provide more value-added service so as to survive and expand seam successfully in this flourishing market, the main challenge for them is how to obtain business and procure acceptable monetary performance.Maintain profits under monetary value pressur es from customersThe economic crisis has caused serious situations for any(prenominal)(prenominal) 3PL users and providers -82 percent of shippers now are useing cost-cutting strategies and 60 percents are reconsidering their bestow chain and relationships with 3PLs accordingly (Capgemini Consulting et al, 2009). As a calculate fact, economic reckon is a strong motivation for outsourcing, of which cost lessening and cost saving are the main concerns. One of the most prodigious motivations for outsourcing logistics functions to third parties is their professional knowledge and valuable experience in logistics industry which are costly for their customers to contain in-house (Byrne, 1993). However, the decision of employing 3PL providers is usually influenced by the paygrade of cost/service trade-offs (Selviaridis and Spring, 2007).Hence, no matter what strategic stances the logistics providers take, they have to go by upgrading and improving their operable potentialities in the business environment (Sum Teo, 1999). Meanwhile, as terms competition is inevitable and most customers are also legal injury untoughened at present, 3PL providers still need to be cost conscious to contact higher margins, and to prevent themselves from being priced out of the market.Financial stpowerMany articles have placed emphasis on financial firmness as a critical essential for logistics providers (Bottani Rizzi, 2006). Based on the empirical take after conducted by Boyson et al. (1999) financial stability was ranked as the most profound selection criteria for choosing 3PL providers because it clip the risk in relationship. A 3PL services provider with stable financial standing can not only damp satisfy its clients and tool cost simplification through and through a sanctified resource, but also diminish risks for logistics partners (Bowersox Daugherty, 1990). correspondly, Boyson et al. (1999) assert that firms prefer providers demonstrating outstanding cu stomer service level with low price and possessing solid financial stability.Nevertheless, the financial tsunami which has weighted down the world delivery has resulted in steep decrease in logistics demand with no doubt. On the one hand, according to Li Fung interrogation Center (2009), the clients of the logistics enterp jump ons asked for price cut and longer quote term, and it is ticklish for them to collect the payments form clients during such hard prison terms. Bad debts and financial losings will be easily incurred by any imprudent acknowledgement management. On the other hand, the sureness for the banks to lend had been damaged by the tsunami. Banks are now only willing to provide loans to selected efforts or projects, which limits the financing options of the logistics enterprises (Li Fung look for Center, 2009). Clearly, it has always been important for 3PL providers to maintain a sound financial set to survive in the recession as well as to rise superior to others in the market.Information applied science (IT)Capability of information engineering scienceIT-based logistics services is considered as noteworthy cipher by 88% of shippers, but only less than half (42%) of the shippers are genial with the IT capableness of their providers (Capgemini Consulting et al, 2009). concordly, such IT aptitude good luck result in a few knockouties for both shippers and 3PLs to join in an adaptive try chain (Capgemini Consulting et al, 2009).Information is one of the most important elements in logistics management (Cheong, 2004) and it is definitely essential to function logistics process with effective IT (LaLonde and Masters, 1994). IT capability can be enhanced by employing advanced software, such as electronic data interchange (EDI) earningsing, enterprise resource planning environments, simulation software, vehicle routing packages, carrier loading optimisation tools, and so on (Qureshi et al, 2008). Hardware also may be utilized to relieve operations and to ontogeny the production efficiency, including radio frequency devices, servers, bar canon printers and scanners, globular positioning system (GPS), interlockinging and internet/intranet connections, satellite tracking devices, and so forth (Qureshi et al, 2008). 3PL services providers which adopt tracking and tracing devices can grant die services to users with quick responsiveness (Rahman, 2004). accord to Byrne (1993), the need of sophisticated information technology is imperative for logistics management to link members like manufacturer, carrier and customer in the picture chain.Sauvage (2003) proposed that to fully satisfy the variety of customers demand, LSPs should continuously employ advanced information technologies in order to enhance their service performance. It is tall(a) for a firm which is lagging in a technology to proceed to a position of leadership (Jennings, 2002).Security of information systemsThe sharing of so much informa tion inevitably leads to security concerns. It can not be denied that logistics service providers usually still lose customers annually collect to issues of self-assertion in privacy and security, though they commemorate attracting mod clients (Pattel Conners, 2008). One workable mentioned security issue is that when a 3PL provider has to serve several organize competitors, the information in relation to all of them should be kept surreptitious (Grover et al., 1994, p. 38 Lacity and Hirschheim, 1993a, p. 24).Other than cost, security and privacy are also considered as major concerns by many companies when outsourcing.Compatibility of information systemsIT compatibility acts an essential role in logistics activities such as forecasting, order purchasing, inventory replenishment and life troll management (Anand, 2010). According to Arshinder et al. (2007), the information system of the whole supply chain is expected to be compatible.A compatible information system means compr ehensible data are quickly shared among the parties throughout the supply chain (Arshinder et al, 2007) while incompatibility will lead to costly and date consuming process because information, though can be shared as well, is rarely in synchronization.At present, it is difficult for information to seamlessly flow throughout the network as external logistics often includes some divers(prenominal) deportation modes and carriers. Moreover, there are diverse IT systems in the various trading areas. For example, atomic number 63 adopts Administration, Commerce and Transportation (EDIFACT) standards for EDI systems while the US follows the standards of the American National Standards fetch (Rao Young, 1994). These difficulties in global supply chain have challenged 3PLs regarding how to capitalize the infract to provide a intelligible competitive advantage.Reliability of information systemsAs one of the major industry focus in the global logistics market, the line of merchandi se of information systems paid special attention to user satisfaction as an important performance measure (Ives and Olson, 1984 Robey and Farrow, 1982). Bailey and Pearson (1983) have showed out that reliability is one of the critical criteria of customer satisfaction.There could be many unknown increased reliability risk which result from two major sections of technology. One is that wise technology innovations or adoptions of 3PL providers may have an unclear reliability performance. The other is that an existing technology may be applied to a hot market with unknown increase failure rates (Collins, 2005). To fulfill the promised logistics service reliably and exactly, 3PL providers must identify and remove uncertainty involved with technology reliability performance.Human Resource (HR)Lack of expertnessThere is a tendency that firms desire to acquire the expertness from third-party logistics providers who possess particular topical anesthetic knowledge of customs and root wo rd of destination countries in such a growing global market (Razzaque Sheng, 1999). Although one of the drivers for companies to outsource is to acquire resources and logistics professionals (Selviaridis Spring, 2007), the results of the research conducted by Georgia fetch of Technology et al. (2009) show that many outsourcing users dont count that 3PLs are in the capacity of strategic partners currently, 40% of shippers in the travel along expect their 3PL service providers to continue focusing on execution, and a good many of them reckon that 3PL providers lack logistics expertise that would support users increasing outsourcing. Often-cited problems range from misunderstanding the demand of customers supply chain to inadequate professionals in apt(p) products and markets (Selviaridis Spring, 2007). In fact, customers are looking for 3PL providers that have expertise in multiple phases of the logistics process.An annual gazes of US 3PL firms indicates that company employee/ expertise is regarded by CEOs as the most important asset of the company for business success in the competition, withal those corresponding CEOs also agree that currently the most critical problem facing 3PL companies as finding qualified tidy sum (Leib and Randall, 1996b).Different assimilationAlmost all members in the supply chain, including third party, have their own company floriculture which is definitely polar from each other (Babics, 2005). According to Pagell (2004), the capacity of how to harmonize its own internal culture with the external antithetic cultures of its customers is one meaningful factor that 3PL providers should note in the integration of operable services in supply chains.Mckeon (1991) states that for both 3PL providers and their customers, understanding each others cultures and organisational structure is an essential factor to ensure a win-win outsourcing. Compatibility of culture and determine is one of the keys to successful partnership whic h can result in semipermanent partnership (Qureshi et al, 2008). Culture conflicts often result in change orders, unhoped-for be, and sometimes a negative impact on relationships (Kremic et al, 2006). In general, the ability of 3PL providers to understand the customer organizations culture is a basis for partnering.Inadequate rearing and cookingIn order to remain competitive in the logistics market, 3PL providers have to be vigilant and agile to their customers needs, and continually seek to meet customer expectations as much as assertable. Logistics executive should be aware that, collectible to rapid gain in the logistics industry, there could be a deficit of qualified logistics expertise (Yeung, 2006). Therefore, it is necessary for giving medications and schoolingal activityal services to allocate more resources, put logistics on formal curriculum, and provide more cor connect statemental activity programs to fulfill the demand of the whole supply chain.The developm ent of logistics, otherwise, might be constrained by lack of trained logistics personnel (Sum Teo, 1999). Ulengin and Uray (1999) indicate that in Turkey, senior management that is void of professional knowledge of logistics is the fundamental factor limiting the progress of logistics industry. Kerr (2005b) describes poor training as a sear hole in China because neither the central authorities nor Chinas restrictive authorities do much to promote logistics training programs.Obviously, a firm with higher quality of human resources such as snap off education or training will have superior core competency in the market. Hence, it is imperative for 3PL service providers to offer more training programs to employees so that they can cope with competition in the future (Wang et al, 2006)Business Landscapes globalisation of 3PL market delivering service in new geographic regionsThe globalization and globalization of 3PL providers has been boosted by the economies of scale and scope, by the internationalization and globalization of the competitors and by customer following i.e. the internationalization of manufacturing firms, which may demand that the service supplier provides a global network and/or global experience (Arvidsson, 1997, p.74). 3PL providers that take transmit of their customers outsourced logistics function normally need to build up a logistics network to deal with the flow of the goods from the customers factory to the end customers (Cheong, 2004).In current global economic environment, manufacturing companies tend to establish partnerships with 3PL service providers and they desire to cooperate with some global freight forwarding companies (Lemoine et al, 2003). 3PL service providers with well-content characteristics, such as uttermost geographical spread and wide range of services are normal among the shippers (Qureshi, 2007). As per Bottani and Rizzi (2006), companies favor the 3PL providers with wide range of advanced services more than t hose traditional ones which can offer mere single logistics functional service.However, supply chain requirement keep changing. Customer demand can change in spatial and temporal terms. In response to the shippers new requirement, 3PL service providers endeavor to extend service coverage geographically and to expand width of service so that they can fulfill the interest of their customers as an unified logistics provider (Qureshi et al, 2008)Relationship with customers3PL service providers are normally very touch on with the relationship with their customers because they attempt to establish a long-term one with the users (Cheong, 2004). semipermanent customer relationships can enable 3PLs to provide more sophisticated services, reduce the risk of replacement, get more earnings, and avoid expense of evolution new customer (Cahill, 2006). In addition, long-term relationship is built on the basis of mutual arrogance and sharing of risk and reward (Qureshi et al, 2008). Bothe ship per and 3PLs will well-being from such long-term relationship (Qureshi et al, 2008). Most of 3PL services users agree that logistics costs could decrease even more through strategic relationships with 3PL service providers. Langley et al. (2004) destine out that the successful relationship with 3PL service providers will assist the users to compass their major objective.Customer relationship management is necessary once a 3PL provider first establishes a relationship with a shipper. To keep customers commodious and coming back, 3PL providers must demonstrate their capabilities and the value these capabilities provider to customers (Wisner et al, 2005).Third-party logistics service providers in ChinaChina has become the most attractive country for more and more foreign investments, manufacturers, and retailers from all over the world, which results in the fast issue of the Chinese parsimoniousness (Liu, 2008). Accordingly, the development of 3PL has been spurred in China and 3P L industry has achieved fundamental achievement.Currently, most logistics companies offer extensively various value-added services and have self-assurance in the continuous development of Chinas logistics industry. Many literatures have research the Chinese logistics area from diverse perspectives and some supply chain-related difficulties facing foreign 3PLs are identified.High transport costIt is not deniable that Chinese presidential term has invested a lot in the logistics sector to improve traffic in recent years. However, poor battery-acid is still considered as one probative challenge for logistics industry in China, which may result in the increase in logistics cost and the decrease in company profits (Lau Zhang, 2006). Li Fung investigate Center (2009) notes that the loony toons occupies more than 50 percent of the entirety logistics cost in China, and undoubtedly the operation costs of 3PL service providers will still be ascending due to the price upswing of comm odity and fuel. another(prenominal) culprit is high topical anesthetic road tolls and other hefty transportation fees (Kerr, 2005b).Underdeveloped physical alkaliMany MNCs find that it is difficult for them to implement coherent strategies in China because underdeveloped transportation system hinders their statistical dissemination and sourcing throughout the country (Speece and Yukiko, 1995). Although Chinas economy and industrial production have been developing rapidly, the current logistics system is loaded with new challenges as it can further keep pace with the growth rate of economy (Carter et al, 1997). The undeveloped logistics infrastructure in China, including deficient highways, aged port facilities, and limited runways and airports, can hardly fulfill the growing logistics demand in the progress of new economy (Pollit, 1998).The insufficiencies of present dissemination system have restricted foreign enterprises to vastly exploit the plenty opportunities in China s market (Goh and Ling, 2003). It is thus imperative that the dispersal of products and services be supported by a reliable transportation system.The need for guanxiLiterally, guanxi means relationship. It is noted that Chinese culture is quite distinct from Western culture in numerous aspects, including the way to conduct business (Jiang and Prater, 2003). Guanxi, which is an important concept for successful business in China, refer to relationship between battalion (Michailova and Worm, 2003). It suggests a conveyable, reciprocal, invisible and usable responsibility to dyadic personal relationships (Luo, 2000). It is not surprising that Chinese prefer to deal with people they know and trust. As Wang et al. (2003) indicated, guanxi which is created on the basis of mutually beneficial can lower risk as well as competition in business circles.Millington et al. (2006) also state that when looking for satisfying vendors, guanxi is more reclaimable than other information from websit e, trade market or media. This implies that the knowledge and expertise to understand local circumstance and the communication skill with foreigners are utterly necessary for establishment of a successful cooperation (Lightfoot and Almeida, 2007).Government mandateKerr (2006) identifies that politics economy is still 3PL providers biggest challenge. The development of 3PL in China is obstructed by some barriers such as underdeveloped infrastructure and entrenched regulatory circumstance (Lau Zhang, 2006). In the meantime, various regulations set up by different provinces forcefully influence business activities so that the founding of national networks is hindered (Kerr, 2005). It also has made it difficult for 3PL providers in China to fully meet the requirements of their clients.Moreover, there are many regulations and rules for foreign 3PL providers who plan to enter China logistics market. According to Lai and Hsu (2007), foreign 3PL providers must apply for the class A lic ense issued by the Ministry of Foreign Trade and Economic Co-operation (MOFTERC) if they plan to establish subsidiaries as international freight forwarders in China.A panorama conducted by Li Fung look into Center (2009) also identifies that the regulations and policies associated with logistics industry are not unalterable because the presidential term will supervise the execution and analyze the effect of the existing ones and therefore will formulate new ones accordingly to boost the growth of the industry. It is true up that a number of presidential term departments which are involved in policies related to logistics industry have impact on the rhythm of changing regulation (KPMG, 2008).Local 3PL providersChinas local logistics providers have been growing rapidly because foreign firms are increasingly looking to source there. To contend with foreign logistics providers, domestic companies have to upgrade facilities and enhance their service level (KPMG, 2008). Jiang and Prata (2002) indicate that in product line with foreign 3PL entrants, local players are always in the close intimacy with local or central governments. For instance, Sinatrans is a state owned company and is the only 3PL service provider in China who can provide a nationwide logistics service with full license. The authors also mention that a number of local 3PL providers at regional level have their own special strength in specific areas or specific business. round of them even look for individual connection built nowly with government officials which may be valuable in their daily business.Literature revue summaryThis section has reviewed the literature ranging from some fundamental definitions of outsourcing and 3PL, to challenges for 3PL industry globally and especially in China which represents the current situation foreign 3PL providers are facing in China. In table 2.1, we summarize the above referred articles in each of the focus challenges.Importance of Outsourcing of Logistics FunctionImportance of Outsourcing of Logistics FunctionOutsourcing and 3PL, as important business functions, have drawn attention of business operators as well as academic and scholars. A large number of studies have analyzed these areas from a theoretical perspective and a practical localize of view. This section will start with the review of outsourcing regarding its definition and importance as well as motivations and concerns. Then, based on the correlation between outsourcing and 3PL, the section presents the concepts of 3PL and most challenges 3PL providers are facing. Lastly, the section shows what could be the current situation of Chinas 3PL industry.Outsourcing of logistics function2.1.1 Definition and importanceRazzaque and Sheng (1998) defined outsourcing as multiple logistics services provided by a single vendor on a contractual basis. Outsourcing is befitting more important today. Due to economic and competitive pressures, it is imperative for different ent erprises to pay attention to their core competencies and turn to third-parties to undertake responsibility for other secondary corporate functions. Outsourcing can create profits by improving customer service level, providing high added-value to products, benefiting in exploiting new markets, and offering utilize resources (Foster and Muller, 1990). By means of outsourcing, companies can obtain competitive advantage through cost reduction and increased responsiveness to market change.Motivation of outsourcing some(prenominal) reasons lead private business as well as government agencies to outsource logistics functionsAvoid Capital expenditures It reduces capital investment in facilities (Richardson, 1995). This allows the using firm to spending where it can get the best return as in research, manufacturing, marketing, or other functions core to the organization.Increase flexibility This can enable firms to focus on the core business, question any function or department that is no t producing revenue and adapt to changes in the market and access to leading edge technology. A third-party will be invited to help a company when demand increase dramatically beyond the capability of the company to fulfill (Razzaque and Sheng, 1998). Many 3PL providers specialize in logistics functions such as transportation, warehousing management and information technology.Cost savings To save costs is identified by most literature as one of the most popular reasons for why outsourcing occurs. In principle, outsourcing will occur to companies for cost reduction when their suppliers offer a service for a low price which and still can cover added overhead, profit, and transaction costs (Harler, 2000). Those companies which outsource their logistics functions to 3PL service providers usually agree that it is more cost saving than to fulfill the same logistics task in-house (Candler, 1994).According to Bradley (1995a), there are some other reasons of logistics outsourcing such as i mproving service level and customer satisfaction, using 3PL providers logistics IT systems, acquiring outside sophisticated professionals, combining service and minifying number of suppliers, integrating the process of supply chain, and increasing productivity.Concerns of outsourcingDespite the fact that outsourcing is now favored by most organizations, there are still many recognized potential barriers and problems related to outsourcing. Normally the most mentioned reservation which restrains enterprises from employing 3PL service providers is loss of say-so of 3PLs (Richardson, 1993a). Such tendency can be caused by different objectives and attitudes of the logistics service providers and users towards strategy, profits and service or skills (Axelrod, 2004, p49). The adoption of outsourcing might also lead to a situation in which critical knowledge associated with process and customers would making water to potential competitors (Jennings, 2002). Moreover, unrealized savings wi th a potential for increased costs, employee righteous problems, losing touch with important information, unreliable promises of the providers, their inability to respond to changing requirements have been mentioned as potential risks as well.Each of these concerns should be recognized cautiously by organizations that intend to outsource their logistics function, otherwise contract logistics can be another issue to deal with, rather than a catalyst or improvement (Razzaque and Sheng, 1998).Third-Party Logistics2.2.1 Concept of 3PLThird party logistics service has been described in a few ways, including outsourcing of one single service such as transportation, and outsourcing of a set of complicated processs (Vasiliauskas Barysiene, 2008). Generally, 3PL provide not only just separate warehouse or transport functions but also multiple, bundled services (Leahy et al., 1995). It is also worth mentioned that freight forwarders and shipping lines are included in broad definitions of th e 3PL industry (Rao and Young, 1994). On the basis of above definitions, Leib et al. (1993) used the following definitionThird-party logistics involves the use of external companies to perform logistics functions that 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 authors refer to the 3PL as a new industry and growing business environment has more expectations on 3PL. The usage of 3PL has been considered as logistics alliances at strategic level. Bagchi and Virum (1996, p.193) have developed the following definitionsA logistics alliance indicates a close and long-term, relationship between a customer and a provider encompassing the delivery of a wide array of logistics needs. In a logistics alliance, the parties ideally consider each other as partners. They collaborate in understanding and defining the customers logistics need. Both partners participate in scheming and developing logistics solutions and measuring performance. The goal of the relationship is to develop a win-win arrangement.Compared with the foregoing definition, which focuses on the logistics functional activities, the final one emphasizes the duration of the relationship between the logistics service provider and user, and also covers an extensive range of promising logistics services (Halldorsson Larsen, 2004).Many articles have disclosed that 3PL industry has progressed steadily for ages (Liu, 2008). 3PL providers started as a traditional transportation or warehousing service providers from 1980s. Nowadays, 3PL companies provide a variety services including basis logistics service as well as value added services.Main challenges to 3PL service providersAs the 3PL industry has continued to evolve, the 3PL provider, session in the middle between the manufacturers or suppliers (the buyers of the 3PL service, known as shippers) and the end customers (the consumer of the products), will need to balance the dynamic pulls generated by upstream and downstream entities, and thus faces challenges are unique to its position.Financial issuesAlthough 3PL providers should develop skills, improve competencies, and provide more value-added service so as to survive and expand business successfully in this flourishing market, the main challenge for them is how to obtain business and achieve acceptable financial performance.Maintain profits under price pressures from customersThe economic crisis has caused serious situations for both 3PL users and providers -82 percent of shippers now are implementing cost-cutting strategies and 60 percents are reconsidering their supply chain and relationships with 3PLs accordingly (Capgemini Consulting et al, 2009). As a matter fact, economic factor is a strong motivation for outsourcing, of which cost reduction and cost saving are the main concerns. One of the most significant motivations for outsourcing l ogistics functions to third parties is their professional knowledge and valuable experience in logistics industry which are costly for their customers to have in-house (Byrne, 1993). However, the decision of employing 3PL providers is usually influenced by the valuation of cost/service trade-offs (Selviaridis and Spring, 2007).Hence, no matter what strategic stances the logistics providers take, they have to keep upgrading and improving their operational potentialities in the business environment (Sum Teo, 1999). Meanwhile, as price competition is inevitable and most customers are also price untoughened at present, 3PL providers still need to be cost conscious to achieve higher margins, and to prevent themselves from being priced out of the market.Financial stabilityMany articles have placed emphasis on financial firmness as a critical essential for logistics providers (Bottani Rizzi, 2006). Based on the empirical survey conducted by Boyson et al. (1999) financial stability was ranked as the most significant selection criteria for choosing 3PL providers because it reduce the risk in relationship. A 3PL services provider with stable financial standing can not only discover satisfy its clients and implement cost reduction through a commit resource, but also diminish risks for logistics partners (Bowersox Daugherty, 1990). Accordingly, Boyson et al. (1999) assert that firms prefer providers demonstrating outstanding customer service level with low price and possessing solid financial stability.Nevertheless, the financial tsunami which has weighted down the world economy has resulted in steep diminish in logistics demand with no doubt. On the one hand, according to Li Fung Research Center (2009), the clients of the logistics enterprises asked for price cut and longer credit term, and it is difficult for them to collect the payments form clients during such hard times. Bad debts and financial losses will be easily incurred by any imprudent credit manageme nt. On the other hand, the confidence for the banks to lend had been damaged by the tsunami. Banks are now only willing to provide loans to selected enterprises or projects, which limits the financing options of the logistics enterprises (Li Fung Research Center, 2009). Clearly, it has always been important for 3PL providers to maintain a sound financial terminal figure to survive in the recession as well as to rise superior to others in the market.Information technology (IT)Capability of information technologyIT-based logistics services is considered as significant factor by 88% of shippers, but only less than half (42%) of the shippers are satisfied with the IT capableness of their providers (Capgemini Consulting et al, 2009). Accordingly, such IT capability gap result in a few difficulties for both shippers and 3PLs to collaborate in an adaptive supply chain (Capgemini Consulting et al, 2009).Information is one of the most important elements in logistics management (Cheong, 200 4) and it is definitely essential to assist logistics process with effective IT (LaLonde and Masters, 1994). IT capability can be enhanced by employing advanced software, such as electronic data interchange (EDI) networking, enterprise resource planning environments, simulation software, vehicle routing packages, carrier loading optimization tools, etc. (Qureshi et al, 2008). Hardware also may be utilized to palliate operations and to increase the production efficiency, including radio frequency devices, servers, bar cypher printers and scanners, global positioning system (GPS), networking and internet/intranet connections, satellite tracking devices, etc. (Qureshi et al, 2008). 3PL services providers which adopt tracking and tracing devices can grant better services to users with quick responsiveness (Rahman, 2004). According to Byrne (1993), the need of sophisticated information technology is imperative for logistics management to link members like manufacturer, carrier and cust omer in the supply chain.Sauvage (2003) proposed that to fully satisfy the variety of customers demand, LSPs should continuously employ advanced information technologies in order to enhance their service performance. It is marvellous for a firm which is lagging in a technology to move to a position of leadership (Jennings, 2002).Security of information systemsThe sharing of so much information inevitably leads to security concerns. It can not be denied that logistics service providers usually still lose customers annually due to issues of trust in privacy and security, though they keep attracting new clients (Pattel Conners, 2008). One possible mentioned security issue is that when a 3PL provider has to serve several direct competitors, the information in relation to all of them should be kept mystic (Grover et al., 1994, p. 38 Lacity and Hirschheim, 1993a, p. 24).Other than cost, security and privacy are also considered as major concerns by many companies when outsourcing.Compat ibility of information systemsIT compatibility acts an essential role in logistics activities such as forecasting, order purchasing, inventory replenishment and life cycles/second management (Anand, 2010). According to Arshinder et al. (2007), the information system of the whole supply chain is expected to be compatible.A compatible information system means comprehensible data are quickly shared among the parties throughout the supply chain (Arshinder et al, 2007) while incompatibility will lead to costly and time consuming process because information, though can be shared as well, is rarely in synchronization.At present, it is difficult for information to seamlessly flow throughout the network as international logistics often includes some different transportation modes and carriers. Moreover, there are diverse IT systems in the different trading areas. For example, atomic number 63 adopts Administration, Commerce and Transportation (EDIFACT) standards for EDI systems while the US follows the standards of the American National Standards Institute (Rao Young, 1994). These difficulties in global supply chain have challenged 3PLs regarding how to capitalize the gap to provide a distinct competitive advantage.Reliability of information systemsAs one of the major industry focus in the global logistics market, the landing field of information systems paid special attention to user satisfaction as an important performance measure (Ives and Olson, 1984 Robey and Farrow, 1982). Bailey and Pearson (1983) have pointed out that reliability is one of the critical criteria of customer satisfaction.There could be many unknown increased reliability risk which result from two major sections of technology. One is that new technology innovations or adoptions of 3PL providers may have an unclear reliability performance. The other is that an existing technology may be applied to a new market with unknown increase failure rates (Collins, 2005). To fulfill the promised logistics service reliably and exactly, 3PL providers must identify and remove uncertainty involved with technology reliability performance.Human Resource (HR)Lack of expertiseThere is a tendency that firms desire to acquire the expertise from third-party logistics providers who possess particular local knowledge of customs and infrastructure of destination countries in such a growing global market (Razzaque Sheng, 1999). Although one of the drivers for companies to outsource is to acquire resources and logistics professionals (Selviaridis Spring, 2007), the results of the research conducted by Georgia Institute of Technology et al. (2009) show that many outsourcing users dont deal that 3PLs are in the capacity of strategic partners currently, 40% of shippers in the survey expect their 3PL service providers to continue focusing on execution, and a good many of them reckon that 3PL providers lack logistics expertise that would support users increasing outsourcing. Often-cited problems rang e from misunderstanding the demand of customers supply chain to inadequate professionals in abandoned products and markets (Selviaridis Spring, 2007). In fact, customers are looking for 3PL providers that have expertise in multiple phases of the logistics process.An annual surveys of US 3PL firms indicates that company employee/expertise is regarded by CEOs as the most important asset of the company for business success in the competition, nonetheless those same CEOs also agree that currently the most critical problem facing 3PL companies as finding qualified people (Leib and Randall, 1996b).Different cultureAlmost all members in the supply chain, including third party, have their own company culture which is definitely different from each other (Babics, 2005). According to Pagell (2004), the capacity of how to harmonize its own internal culture with the external different cultures of its customers is one significant factor that 3PL providers should note in the integration of ope rational services in supply chains.Mckeon (1991) states that for both 3PL providers and their customers, understanding each others cultures and organizational structure is an essential factor to ensure a win-win outsourcing. Compatibility of culture and set is one of the keys to successful partnership which can result in long-term partnership (Qureshi et al, 2008). Culture conflicts often result in change orders, unheralded costs, and sometimes a negative impact on relationships (Kremic et al, 2006). In general, the ability of 3PL providers to understand the customer organizations culture is a basis for partnering.Inadequate education and trainingIn order to remain competitive in the logistics market, 3PL providers have to be vigilant and agile to their customers needs, and continually seek to meet customer expectations as much as possible. Logistics executive should be aware that, due to rapid growth in the logistics industry, there could be a famine of qualified logistics exper tise (Yeung, 2006). Therefore, it is necessary for governments and educational services to allocate more resources, put logistics on formal curriculum, and provide more correlated training programs to fulfill the demand of the whole supply chain.The development of logistics, otherwise, might be constrained by lack of trained logistics personnel (Sum Teo, 1999). Ulengin and Uray (1999) indicate that in Turkey, senior management that is void of professional knowledge of logistics is the fundamental factor limiting the progress of logistics industry. Kerr (2005b) describes poor training as a somber hole in China because neither the central government nor Chinas regulatory authorities do much to promote logistics training programs.Obviously, a firm with higher quality of human resources such as better education or training will have superior core competence in the market. Hence, it is imperative for 3PL service providers to offer more training programs to employees so that they can c ope with competition in the future (Wang et al, 2006)Business Landscapes globalisation of 3PL market delivering service in new geographic regionsThe internationalization and globalization of 3PL providers has been boosted by the economies of scale and scope, by the internationalization and globalization of the competitors and by customer following i.e. the internationalization of manufacturing firms, which may demand that the service supplier provides a global network and/or global experience (Arvidsson, 1997, p.74). 3PL providers that take missionary station of their customers outsourced logistics function normally need to build up a logistics network to deal with the flow of the goods from the customers factory to the end customers (Cheong, 2004).In current global economic environment, manufacturing companies tend to establish partnerships with 3PL service providers and they desire to cooperate with some global freight forwarding companies (Lemoine et al, 2003). 3PL service prov iders with well-content characteristics, such as furthest geographical spread and wide range of services are popular among the shippers (Qureshi, 2007). As per Bottani and Rizzi (2006), companies favor the 3PL providers with wide range of advanced services more than those traditional ones which can offer mere single logistics functional service.However, supply chain requirement keep changing. Customer demand can change in spatial and temporal terms. In response to the shippers new requirement, 3PL service providers endeavor to extend service coverage geographically and to expand largeness of service so that they can fulfill the interest of their customers as an unified logistics provider (Qureshi et al, 2008)Relationship with customers3PL service providers are normally very bear on with the relationship with their customers because they attempt to establish a long-term one with the users (Cheong, 2004). semipermanent customer relationships can enable 3PLs to provide more sophist icated services, reduce the risk of replacement, achieve more earnings, and avoid expense of developing new customer (Cahill, 2006). In addition, long-term relationship is built on the basis of mutual trust and sharing of risk and reward (Qureshi et al, 2008). Bothe shipper and 3PLs will benefit from such long-term relationship (Qureshi et al, 2008). Most of 3PL services users agree that logistics costs could decrease even more through strategic relationships with 3PL service providers. Langley et al. (2004) point out that the successful relationship with 3PL service providers will assist the users to achieve their major objective.Customer relationship management is necessary once a 3PL provider first establishes a relationship with a shipper. To keep customers satisfied and coming back, 3PL providers must demonstrate their capabilities and the value these capabilities provider to customers (Wisner et al, 2005).Third-party logistics service providers in ChinaChina has become the mos t attractive country for more and more foreign investments, manufacturers, and retailers from all over the world, which results in the fast growth of the Chinese economy (Liu, 2008). Accordingly, the development of 3PL has been spurred in China and 3PL industry has achieved significant achievement.Currently, most logistics companies offer extensively various value-added services and have confidence in the continuous development of Chinas logistics industry. Many literatures have research the Chinese logistics area from diverse perspectives and some supply chain-related difficulties facing foreign 3PLs are identified.High transport costIt is not deniable that Chinese government has invested a lot in the logistics sector to improve traffic in recent years. However, poor transportation is still considered as one significant challenge for logistics industry in China, which may result in the increase in logistics cost and the decrease in company profits (Lau Zhang, 2006). Li Fung Resea rch Center (2009) notes that the transportation occupies more than 50 percent of the jibe logistics cost in China, and undoubtedly the operation costs of 3PL service providers will still be ascending due to the price upswing of commodity and fuel. some other culprit is high local road tolls and other hefty transportation fees (Kerr, 2005b).Underdeveloped physical infrastructureMany MNCs find that it is difficult for them to implement coherent strategies in China because underdeveloped transportation system hinders their distribution and sourcing throughout the country (Speece and Yukiko, 1995). Although Chinas economy and industrial production have been developing rapidly, the current logistics system is loaded with new challenges as it can barely keep pace with the growth rate of economy (Carter et al, 1997). The undeveloped logistics infrastructure in China, including deficient highways, aged port facilities, and limited runways and airports, can hardly fulfill the growing logis tics demand in the progress of new economy (Pollit, 1998).The insufficiencies of present distribution system have restricted foreign enterprises to vastly exploit the plenty opportunities in Chinas market (Goh and Ling, 2003). It is thus imperative that the distribution of products and services be supported by a reliable transportation system.The need for guanxiLiterally, guanxi means relationship. It is noted that Chinese culture is quite distinct from Western culture in numerous aspects, including the way to conduct business (Jiang and Prater, 2003). Guanxi, which is an important concept for successful business in China, refer to relationship between people (Michailova and Worm, 2003). It suggests a conveyable, reciprocal, invisible and useful responsibility to dyadic personal relationships (Luo, 2000). It is not surprising that Chinese prefer to deal with people they know and trust. As Wang et al. (2003) indicated, guanxi which is created on the basis of mutually beneficial can lower risk as well as competition in business circles.Millington et al. (2006) also state that when looking for satisfying vendors, guanxi is more useful than other information from website, trade market or media. This implies that the knowledge and expertise to understand local circumstance and the communication skill with foreigners are absolutely necessary for establishment of a successful cooperation (Lightfoot and Almeida, 2007).Government regulationKerr (2006) identifies that government regulation is still 3PL providers biggest challenge. The development of 3PL in China is obstructed by some barriers such as underdeveloped infrastructure and entrenched regulatory circumstance (Lau Zhang, 2006). In the meantime, various regulations set up by different provinces forcefully influence business activities so that the founding of national networks is hindered (Kerr, 2005). It also has made it difficult for 3PL providers in China to fully meet the requirements of their clients.Moreo ver, there are many regulations and rules for foreign 3PL providers who plan to enter China logistics market. According to Lai and Hsu (2007), foreign 3PL providers must apply for the class A license issued by the Ministry of Foreign Trade and Economic Co-operation (MOFTERC) if they plan to establish subsidiaries as international freight forwarders in China.A survey conducted by Li Fung Research Center (2009) also identifies that the regulations and policies associated with logistics industry are not unalterable because the government will supervise the execution and analyze the effect of the existing ones and then will formulate new ones accordingly to boost the growth of the industry. It is true that a number of government departments which are involved in policies related to logistics industry have impact on the rhythm of changing regulation (KPMG, 2008).Local 3PL providersChinas local logistics providers have been growing rapidly because foreign firms are increasingly looking to source there. To contend with foreign logistics providers, domestic companies have to upgrade facilities and enhance their service level (KPMG, 2008). Jiang and Prata (2002) indicate that in assembly line with foreign 3PL entrants, local players are always in the close standoff with local or central governments. For instance, Sinatrans is a state owned company and is the only 3PL service provider in China who can provide a nationwide logistics service with full license. The authors also mention that a number of local 3PL providers at regional level have their own special strength in specific areas or specific business. slightly of them even look for individual connection built directly with government officials which may be valuable in their daily business.Literature review summaryThis section has reviewed the literature ranging from some fundamental definitions of outsourcing and 3PL, to challenges for 3PL industry globally and especially in China which represents the curren t situation foreign 3PL providers are facing in China. In table 2.1, we summarize the above referred articles in each of the focus challenges.