The Outsourcing of Logistical Activities

Revised and updated version of a chapter in 'Global Logistics and Distribution Planning', edited by Donald Waters (Kogan Page, London, 1999)

Contents

Introduction

Growth of outsourcing

Factors promoting outsourcing

demand for logistical services

supply of logistical services

Process of externalisation

Recent trends in the provision of logistical services

Evolving relationship between providers and user

Conclusions

Introduction

Outsourcing has been one of the dominant business trends of the 1980s and 1990s. Companies have been concentrating their resources on core activities and contracting out ancillary functions. As logistics is often regarded as a supporting rather than mainstream function, it has been an obvious candidate for externalisation. For many firms, logistics has ceased to be an activity that they directly manage and become something that they purchase from outside specialists. Others have retained an in-house logistical operation but increasingly supplemented it with contract services. The manner in which these services are purchased can have a major influence on the overall quality and efficiency of a company's logistical system.

This chapter will review recent trends in the outsourcing of logistical activities, report on the experience of firms that have contracted out their logistics and outline ways in which users and providers of logistical services can develop more stable and mutually-beneficial relationships.

Growth of Outsourcing

There has been a long tradition of firms contracting out freight transport operations. In many countries, however, external purchases of freight transport services were constrained by government controls on the capacity of the road haulage industry. These controls generally excluded lorries operated on an 'own-account' basis and thus encouraged firms to internalise their road freight operations. The deregulation of road haulage over the past 30 years in most developed countries has made it much easier and more attractive for firms to contract out the transport function [1]. The recent growth in contracting out cannot simply be attributed to deregulation, though. In the UK, for example, road freight traffic remained fairly evenly divided between 'own-account' and 'hire and reward' operations for a decade after the liberalisation of the road freight market in 1970. Only since 1981 has there been a significant and sustained increase in the proportion of road freight tonnage handled by outside contractors, from 50% to 64% in 1997 [2]. The swing away from in-house transport had to await the general change in managerial attitudes to contracting out that occurred in the 1980s and 1990s.

Freight transport statistics present only part of the picture because, in addition to giving contractors greater responsibility for transport, firms have been externalising related activities such as warehousing, stock control, materials handling and order processing. This is in keeping with one of the fundamental principles of logistics which stipulates that the management of transport, stockholding and other related activities should be closely co-ordinated. The externalisation of logistics has, therefore, been a two-dimensional process, with firms increasing both the range of services that they source externally and the volume of traffic entrusted to outside agencies. There is no ideal strategy; the externalisation 'route' that a a firm follows will reflect its particular circumstances. Companies have been increasingly demanding an integrated logistical service tailored to their requirements. This places heavy emphasis on the contractor's ability to co-ordinate and customise logistics services.

In 1996 just under a quarter of total logistics expenditure in the European Union was outsourced. The total EU market for third party logistics services was worth around US$32 billion in that year [3]. There are wide international variations between EU member states in the degree of logistical outsourcing (Figure 1). In 1996, for example, British firms externalised roughly 34% of their logistics spending whereas in Greece only 11% was contracted out. It is predicted that by 2002, 28% of logistics expenditure in the EU will be outsourced, with the UK figure rising to 37%. A recent survey of expert opinion in the UK has suggested that third party operators will continue to increase their share of freight transport until around 2005 when the balance between own-account and third-party traffic will stabilise [4].

Source: ref [3]

According to a recent survey of 84 firms in Europe and 123 in the North America, the European market for logistics services is more mature than the American one [5]. Within Europe the UK market is considered 'more mature than its continental counterpart'. 59% of the manufacturers surveyed in Europe outsourced more than 20% of their logistics budget, whereas only 29% of the North American sample did so. The American third party logistics market is, nevertheless, forecast to grow more rapidly at around 20-30% per annum, by comparison with a European growth rate of 10-15%. If these forecasts prove accurate the degree of logistics outsourcing in the two continents will gradually converge.

Factors Promoting Outsourcing.

The increasing externalisation of logistical services has occurred in response to a range of demand and supply pressures. Most of these pressures are fundamental and widespread, though some are associated with particular developments in individual countries.

Demand for logistical services

In a general review of the literature on the outsourcing of services, Maltz observes that general management papers tend to emphasise the potential cost savings, whereas those written by purchasing and marketing specialists attach equal importance to cost and service benefits [6]. Much of the specialist logistics research has identified the demand for higher service standards as the main motive for outsourcing. This, for example, is the conclusion reached by LaLonde and Maltz in a study of the outsourcing of warehousing in the US [7]. More recent surveys, however, suggest that similar importance is attached to cost savings, service improvement and flexibility in the decision to outsource logistics [8] (Table 1).

Table 1: Most Frequently Quoted Reasons for Outsourcing Logistics:

Sources: ref [8]

Another highly-rated factor is the desire to avoid investing in logistical facilities. This was frequently advanced as the main advantage of outsourcing in the 1980s, particularly in the UK where a change in the system of corporate taxation in 1984 redirected tax incentives away from owning assets towards maximising their contribution to profit. This encouraged firms to concentrate capital on those core activities which earned the highest rates of return and exploited their main competitive strengths. Approximately 59% of the 300 companies surveyed by PE Consulting in 1996 did not regard logistical operations as a core activity [9]. The use of outside contractors not only reduces the need for new investment in logistical facilities; it can also release some of the capital already tied up in warehousing and vehicle fleets for more productive use elsewhere in the business.

Outsourcing also gives companies access to specialist expertise in firms whose core skill is logistics management. The management of logistics has, after all, become more demanding as a result of rising customer expectations, the proliferation of regulations on vehicle operation, working conditions and product handling, the rapid rate of technological change and uncertainties about future economic and environmental trends. Contracting out can also help firms overcome internal labour problems that have traditionally impaired the efficiency of own-account operations. Outsourcing, or the threat of it, has given own-account operators leverage in trade union negotiations and offered a means of escaping restrictive practices and pay-scales. Operating parallel in-house and third party systems has also reduced the risk of the supply system being paralysed by industrial action.

New ways have been found of overcoming the natural resistance to contracting out in firms with extensive and/or long established own-account operations. Much of this inertia has stemmed from a reluctance to relinquish control over the logistics function [10]. This has become less of a concern in recent years, partly as a result of growing confidence in the way that contract logistics operations are managed, but also because of advances in information technology (IT). These have made it possible for firms to monitor and control contract distribution operations at least as closely as in-house systems. Indeed, 50% of the firms surveyed by PE Consulting in 1996 actually advanced the need to improve control of logistics as a reason for outsourcing [11].

In some countries, particularly the UK, structural change in the retail supply system has promoted the use of contractors [12]. Large retailers have greatly increased their control over inbound logistics and contracted out much of its day-to-day management to third party operators. In 1997, the major British grocery retailers controlled the secondary distribution (from distribution centres to shops) of 94% of their supplies [13]. Approximately 47% of this distribution was contracted out. 'Quick response' pressures in the retail supply chain, which have been increasing frequency of delivery and reducing order size, have also forced suppliers to make greater use of shared-user services provided by outside contractors. There is a similar demand for third-party load consolidation services in those industrial sectors, such as automotive and electronics, where just-in-time sourcing is now widespread.

There is also an important international dimension to the externalisation of logistical services. Manufacturers tend to rely heavily on contractors both for international transport and for the distribution of their products within foreign markets. It was estimated in 1990 that across Europe contractors handled around 96% of the international movement of freight by road, as opposed to 58% of road freight movement within countries [14]. Roughly two-thirds of the European distribution centres used by American, Japanese, Korean and Taiwanese manufacturers are managed by third-party logistics companies [15]. The steep upward trend in global sourcing and distribution is therefore inflating the demand for contract services at both the international and national levels.

Supply of logistical services

There have been major improvements in the nature of the third party logistical services on offer. Standards have undoubtedly risen and operations become more efficient. New types of service have been developed which are more closely tailored to clients' requirements. Logistical services are being much more skilfully and aggressively marketed today than in the past.

Many transport and warehousing firms have evolved into broadly-based logistics service providers. In most countries, the general road haulage industry is characterised by low entry costs, high rates of entry and exit, intense competition, heavy reliance on spot hiring, low returns on capital and slim profit margins. By trading up into integrated distribution, the larger carriers have been able to add value to their services, create niche markets with much higher entry costs and secure longer term contracts with clients. This has enabled them to improve both their profitability and growth prospects. Table 2 shows the range of value-added-logistics (VAL) services that some of the larger operators now provide. These firms are becoming increasingly involved in the customisation of products, changing the physical character of the goods they handle and thus blurring the traditional distinction between distribution and manufacturing.

Table 2: Value Added Logistics: Service Portfolio

The Process of Externalisation.

As explained above, firms can outsource their logistics in various ways. The most dramatic form of outsourcing involves closure of the in-house system and transfer of all responsibility for logistics to an outside contractor. This is too radical option for many own-account operators who are unwilling to dispose of existing logistical assets, shed staff and risk disruption of their operations during the transitional period. Some prefer to adopt a more gradual process of outsourcing, phasing the transfer of responsibility geographically, by business sector or product group. It is also possible for firms to ease the transition in other ways:

1. System Takeover: There have been numerous examples of large logistics service providers buying out in-house systems, assuming ownership of vehicles, depots and equipment and taking on much of the previous work-force. Following a take-over of this type, the system may continue to be operated on an exclusive basis for the 'divesting' firm or the contractor may share the use of the acquired facilities with other clients, thereby improving utilisation and spreading overhead costs. Within the EU, it was possible until 1993 for the acquiring firm to alter the terms and conditions of employees absorbed from the own-account operation. A legal judgement in that year relating to the EU law on the Transfer of Undertakings and Protection of Employment (TUPE) tightly limited the scope for modifying earlier contracts.

2. Joint Ventures: Some clients prefer to retain part-ownership of distribution facilities and maintain closer involvement in the logistical operation. For them, joint ventures with contractors offer a more attractive means of injecting outside capital and expertise. Examples of such joint ventures in the UK would be those between IBM and Tibbett & Britten to form 'Hi-Tech Logistics' and between Bass and Exel Logistics to create 'Tradeteam'.

3. System `Spin-off' Tucker and Zivan [16] advocate the `spinning-off' of firms' in-house logistical systems as separate subsidiaries. There have been several examples of own-account operators initially making their distribution department a separate profit centre, allowing it to tender for third-party business and ultimately selling it off, typically as a management buyout. The parent company thereafter provides the base traffic but this is increasingly supplemented by third party traffic.

4. Management-only Contract: Firms wishing to retain ownership of logistical assets can still contract out their management. This has become a popular strategy among large retailers in Britain and other EU countries, many of whom see contracting out more as a way of upgrading the management of their distribution operation than of releasing capital for other uses. As this form of outsourcing is not asset-based it gives the client greater flexibility to renegotiate and, if necessary, terminate contracts.

Recent Trends in the Purchase of Logistical Services.

The recent increase in the level and diversity of firms' external expenditure on logistical services has been accompanied by important changes in the way they purchase them and in the nature of their relationship with outside contractors. Five changes have been of particular significance:

1. Increase in the proportion of logistical services bought on a contractual basis.

The purchase of haulage and warehousing services was traditionally done on a spot-hire, 'transactional' basis. Such services are fairly standardised and generally bought at minimum price. The high degree of fragmentation in the road haulage industry ensures that there are numerous small hauliers available to provide an economical service at short notice.

Buying haulage services in this way, however, has serious shortcomings. The need to deal with large numbers of separate carriers on a daily basis both inflates transaction costs and makes it difficult to ensure high delivery standards. In practice, even within the spot market, firms have been able to alleviate these problems by making regular use of the same set of hauliers. Even in the absence of formal contracts, manufacturers have, for many years, exhibited a high degree of `source loyalty' to particular carriers [17].

Where firms demand more specialist services tailored to their particular requirements and often involving capital investment on the part of the carrier, they must be prepared to enter into longer term contracts. In the case of transport operations dedicated to a particular consignor, a contractor would like ideally to secure a contract at least as long as the working life of the vehicles, though, given the competitive conditions in the haulage industry, the typical duration of contracts is usually much shorter [18]. Even where contractors invest in warehousing facilities for the exclusive use of a particular client, contracts seldom extend beyond five years, though generally require the client to assume responsibility for the lease if they are not renewed. In situations where the third-party operator merely provides a management service, contracts are usually much shorter, with 2-3 years being the norm. A substantial proportion of distribution contracts, nevertheless, do not have a fixed time limit and are simply considered to be `ongoing'. In the UK, the proportion of companies without formal logistics contracts has been declining in recent years. Between 1990 and 1996, it dropped from 37% to under 20% [19]. The average length of logistics contracts has, on the other hand, remained fairly stable at around 2.8 years, though, in 1996, 28% of the companies with contracts indicated that they had a duration of 5 years or longer. The average duration of contracts in the American motor carrier industry also remained fairly stable between 1990 and 1996 [20].

2. Reduction in the number of contractors used.

In both the `spot' and `contract' markets, the average number of contractors used has been declining. Surveys by PE Consulting in the UK reveal that the proportion of companies using six of more logistics providers declined from 21% to 14% between 1990 and 1996 [21]. Concentrating purchases of logistical services in this way enables firms both to reduce transaction costs and to improve the standard of service:

(a) Transaction costs:

In Germany, Sweden and several other European countries a substantial proportion of domestic road haulage services is purchased from freight forwarding or 'spedition' companies, who act as middlemen in the freight market. This greatly reduces the number of direct transactions between consignors and hauliers. There has also been a sharp increase in the number of freight brokers in the United States since the deregulation of its trucking industry in 1980 [22]. In Britain, on the other hand, the brokerage services of freight forwarders tend only to be used for international distribution. There has been a tradition in the UK, as far as domestic transport operations are concerned, of dealing directly with numerous hauliers. This has enabled firms to secure lower freight rates, but at the expense of higher transaction costs. In their pursuit of low haulage prices, many firms under-estimate the total cost of buying-in road haulage in this way.

It is, nevertheless, possible for firms to streamline the purchase of haulage services while continuing to exploit the very competitive rates available in the general haulage market. Under a `freight management' arrangement, some of the larger contractors, such as Exel Logistics, will, on a particular client's behalf, sub-contract trunk haulage operations to smaller carriers. Similar `one-stop shipping' services are provided by many of the `third party logistics' firms that have emerged in the US since the early 1980s [23].

In recent years, electronic brokerages for motor carrier services have emerged in the US. These essentially create an electronic clearing house for trucking services within which firms can trade haulage capacity on particular routes at particular times. One of the main American providers of this brokerage service, GE Penske, is currently establishing a similar operation in Europe. This will complement existing electronic load matching services, which have been helping carriers find return loads, mainly on international hauls. Some of these services are now supplemented by an on-line credit referencing system which gives logistics firms to an up-to-date report on the financial position of potential clients. The development of these electronic brokerages may lead to the formation of 'virtual markets' within which the use of a broad range of logistical assets will be traded over varying time periods. The agencies running these brokerages could soon become key players in the logistics service sector.

Other types of organisation, such as consultancy companies, software houses and banks, are also assuming the role of intermediary in the logistics services market. This has been described as 'fourth party logistics'. The 'third-party' logistics company actually operates the service, while its planning, management and control is entrusted to a 'fourth party' agency. This is illustrated by the case of Panasonic which, within Europe, recently outsourced its logistics operation to a consortium comprising Arthur Anderson, IBM and Ryder. Arthur Anderson plans and co-ordinates the system, IBM manages the IT and Ryder runs the vehicles and warehouses.

(b) Standard of service:

The more hauliers a firm employs, the more time it must spend vetting them and monitoring their performance. Concentrating traffic on a smaller number of more reliable hauliers simplifies these tasks. It can also win a greater commitment from these hauliers to maintain or improve the quality of service.

Firms purchasing logistical services on a contractual basis employ relatively few service providers. Survey work in the UK in 1996 revealed that around 39% single-sourced these services while a further 47% employed between 2 and 5 contractors [24]. The same survey enquired about the 'critical factors' causing firms to use more than one third-party logistics company (Figure 2). Service and cost considerations dominated this decision, though the ability to meet different operational needs, flexibility and geographical coverage were also identified by the majority of respondents as important factors. The majority of companies distributing throughout Europe outsource their logistics to several contractors usually on a country-by-country basis. This was the strategy adopted by 59% of a sample of 68 of Europe's 500 largest manufacturers surveyed in 1997 [25].

Many of the firms using more than one distribution contractor are not `multiple-sourcing' in the conventional sense. When applied to the supply of material goods, the term `multiple-sourcing' generally means obtaining identical products from different suppliers. Where a firm employs several distribution contractors, however, they seldom provide parallel services. As noted above, a dominant motive for using several contractors is to subdivide distribution operations geographically [26]. Where more than one contractor is used, it is common for each to be given exclusive responsibility for distribution within a single region. The nature of local storage and delivery operations makes it possible to split a distribution contract geographically among several agencies at little or no extra cost. Purchasing contract distribution on a regional basis can, in fact, yield important benefits by reducing the risk of the entire system being disrupted, by, for example, industrial disputes or company failure, and permitting inter-firm comparisons of rates and service standards.

Source: PE Consulting, ref [8]

3. More rigorous selection of contractors.

Numerous studies conducted over the past thirty years have shown that many firms opted for particular transport modes or carriers without fully appraising the available alternatives [27]. The observed deficiencies in the selection procedure may be partly explained by the fact that many firms' total expenditure on freight transport represented a small proportion of total costs and because differences in rates and quality of service, particularly among road hauliers, were perceived to be small. Now that firms are contracting out a broader range of logistics-related services, total external expenditure on these services has begun to figure more prominently in their budgets. This, combined with the increased strategic importance of logistics, the greater emphasis being placed on service quality, the reduction in carrier numbers and the shift to contractual relationships, has made the choice of carrier a much higher-order decision, requiring a more thorough review of the market and more formal selection procedures.

4. Closer involvement of contractors in the design of distribution systems.

In purchasing component parts, many manufacturers are replacing the traditional `design specification', which describes the required item in detail, with the more open `performance' specification, which merely outlines the function the part has to perform [28]. This gives suppliers greater scope to innovate and develop parts that meet the customer's requirements more economically and effectively.

A similar development has occurred in the purchase of logistical services. It is now quite common for firms externalising their distribution operations to involve contractors in system design. The decision to externalise is often made at the same time as the decision to restructure the distribution system. Moreover, as one of the major reasons for using contractors is to exploit their specialist expertise, it is hardly surprising that firms should seek their advice when revising their distribution strategies. Outside contractors can also take a more objective view of firms' distribution needs than in-house managers.

Participation in system design can be a mixed blessing for contractors. On the positive side, it gives them the opportunity to set up a system in which they have confidence and which they believe they can operate efficiently. The broad terms of reference also enable them to compete at a strategic as well as operational level for what is then a higher value-adding service. The main disadvantage is the high cost of preparing a tender containing proposals for the strategic redesign of a firm's distribution system. Such costs can be in the region of £100,000 and easily deter smaller contractors from tendering for the business. Even some of the larger operators, wary of providing an expensive consultancy service without any guarantee of securing the final contract, now impose a separate charge for the development of a distribution plan. This charge is usually waived, however, where the contractor is awarded the business.

5. Greater emphasis on the development of longer term partnerships.

It can be just as important for a firm to develop close, mutually beneficial relationships with suppliers of logistical services as with suppliers of products. Many such relationships have already been established and go beyond the formal terms of the logistics contract. Expressions such as `partnershipping' and `co-shippership'(!) have been coined to describe the new consignor-carrier links that have been formed.

These relationships are most likely to develop where logistical services are provided on a dedicated basis for the exclusive use of individual clients. As Cooper and Johnstone [29] point out, `..compartmentalisation of the contractor's capacity between clients means that the service needs of any one client will not be compromised by the conflicting needs of other clients, such as may occur when capacity is shared.'

While this usually ensures a high standard of service, it also weakens one of the contractor's traditional roles, that of consolidating many clients' traffic and thus running distribution facilities at a lower unit cost than in-house operators. Many manufacturers and retailers are prepared to incur the higher costs of dedicated services in order to maintain high levels of control and service quality. An increasing number of firms in the UK, however, have been relaxing the requirements of dedicated contracts to give service providers greater freedom to obtain backloads and consolidate loads. There has also been a sharp growth in demand for logistics services provided on a 'shared-user' basis. A survey conducted in 1991/2 suggested that British firms divided their expenditure on third-party transport and warehousing evenly between dedicated and shared-user services [30]. No comparable data have been collected since then, though it is likely that the balance has tilted towards shared-user operations. Providers of shared user services are now trying to find ways of cultivating closer customer links in a 'multi-client' environment.

Several recent developments have been conducive to the formation of closer partnerships between distribution contractors and their clients:

(i)   Adoption of the Just-in-Time Principle: One of the pre-requisites for a successful JIT system is the fast and reliable delivery of supplies. In the absence of buffer stocks, production and distribution operations become much more vulnerable to deviations from the delivery schedule. Ansari and Modarress [31] found that 53% of a sample of large American corporations implementing JIT purchasing experienced difficulty in getting carriers to provide services of the required standard. This forced them to change the way in which they purchased transport services. In addition to greatly reducing the number of carriers employed and increasing the proportion of work done on a contractual basis, they tried to forge 'closer, longer- term and more interdependent' relationships with transport firms [32].

(ii) Development of Electronic Data Interchange: Many contractor-client relationships have been reinforced by the establishment of EDI links, particularly where the contractor provides an integrated distribution service. In a longitudinal analysis of motor carrier-shipper relationships in the US, Crumm and Allen found that the proportion relationships with EDI links had increased from 29.3% in 1990 to 37.4% in 1996, with the value of transactions handled electronically rising by a greater margin, from 18.2% to 31.5% [33].

By making the flow of materials through the contractor's system more `visible' on a day-to-day, or even hour-by-hour, basis, EDI increases the client's confidence in the contract operation. The integration of the contractor's and client's computer systems also strengthens the operational bond between them and makes it difficult for either party to break-off the relationship at short notice. As Ellram and Cooper [34] point out, 'The integration of information and operating systems creates a relatively unified system that is difficult and costly to replicate should the partnership dissolve.' There has, nevertheless, been some disagreement between contractors and their clients over the allocation of EDI costs, particularly in the case of shared-use services, and a feeling on the part of some contractors that their clients are under-estimating the true benefits of EDI [35].

(iii) Increasing Specialisation of Logistical Equipment: Technological developments in

the fields of transport and materials handling are making it possible to tailor equipment more closely to individual firms' logistical needs. Such `client-specific' equipment is an example of what Williamson [36] calls an `idiosyncratic asset'. He argues that the inclusion of such assets in a transaction greatly increases the likelihood of a `relational contract' developing between supplier and customer. This is borne out by experience in the logistics sector [37].

(iv) Change in the Degree of Interdependence: It is generally supposed that close, co-

operative relationships are more likely to develop where there is a high level of inter-dependence between customer and supplier. As Rinehart [38] notes, consignors have traditionally considered themselves to be less dependent on carriers than carriers considered themselves to be dependent on consignors. This reflected consignors' perceptions of the road haulage market as being a `buyer's market' in which business could easily be transferred between carriers at short notice and minimal cost.

The externalisation of a broader range of logistical services to a much smaller number of contractors has increased clients' dependence and made it much more difficult for them to sever their links with a contractor, at least in the short term. Within the contract distribution market, contractor-client relationships tend to be unbalanced in the opposite direction from those in the general road haulage market. Companies outsourcing their distribution operations either on a national or regional basis to a single contractor become completely reliant on that firm within the area in question. As a result of the high degree of concentration in the contract distribution sector, major contractors can have extensive client portfolios. Even quite a large manufacturing or retail client might therefore account for only a small proportion of the contractor's total business. This differs from the situation outlined by Ellram and Cooper [39] where the shipper is the dominant party and has a tendency to behave opportunistically. Many logistics firms are now large enough to negotiate on equal terms with major corporate clients.

The fact that the pattern of interdependence between client and contractor is often asymmetrical does not appear to be hindering the development of close relationships. Nor is there any evidence to suggest that, in choosing contractors, firms have a preference for smaller operators over which they can exert greater bargaining power. It should be noted too that, despite the strengthening of contractual and operational ties between clients and third-party operators, only a small minority of firms externalising distribution services perceive themselves to be `locked-into' a particular contractor's system [40]. In non-asset-based, 'management-only' contracts, which are now common, for example, in the UK retail logistics sectors, the degree of client 'lock-in' is relatively low.

The emergence of 'Fourth Party Logistics'.

The term 'fourth party logistics' has recently been used to describe the role of an organisation which plans and manages a company's logistical system but is not directly involved in its operation. An early example of a 4PL arrangement was that provided by Andersen Consulting, IBM and Ryder for Panasonic. Andersen Consulting designed the system, but unlike most consultants retained a continuing responsibility for its implementation and overall control. IBM set up and manages IT support, while Ryder handles the physical distribution operation.

Evolving Relationship between Providers and Users of Logistical Services.

Despite the major changes in the logistical services market described above, doubts remain about the long-term stability of many contractor-client relationships. Tri-annual surveys by PE-Consulting during the 1990s have found that around 56-58% of firms change at least some of their logistics contractors over a three year period [41]. Roughly 70% of users regularly claim that they are seriously considering changing contractors when the existing contract expires. Curiously, many of these firms also report that they are `generally satisfied' with the service they are receiving. It seems, therefore, that many firms believe that, while their existing contract distribution package is adequate, other contractors might be able to improve upon it.

On the basis of a survey of fifty-five American companies in the automotive and computer industries, Andersson identified and ranked ten 'key success factors' in the creation of partnerships with logistics service firms [42]. This established the over-riding importance of well-defined requirements, measures, procedures and contracts and the need for 'communications on all levels'. 'Joint effort in the design of the system' was also highly rated. To these factors can be added the adoption of effective appraisal schemes and, in the case of dedicated operations, the use of open book accounting:

1. More precise contract specification.

Many of the early distribution contracts were inadequately specified at the outset. This has led to a good deal of misunderstanding and dissatisfaction. Both contractors and clients have learned from this experience and are now less likely to repeat earlier mistakes. Attempts have also been made to compile fairly comprehensive checklists of points that firms should bear in mind when drawing up distribution contracts [43]. Recent reports, however, suggest that some firms are now tending to 'over-specify' their contracts, making them too legalistic and relying too heavily on standard templates and clauses [44].

2. Improved contractor-client communications at all levels:

Inadequate communication is frequently cited as the main barrier to the development of close relationships between suppliers and users of logistical services. Contractors often claim that they are not given sufficient information about short- to medium-term changes in the clients' pattern of business and longer-term strategic developments. Their clients, on the other hand, often complain that they are not informed quickly enough about system failures.

Healthy, long term relationships between shippers and carriers tend to be 'very information-intensive' [45]. Information flows freely between the two organisations at different levels in the management hierarchy. This should be combined with vertical communication within each company to ensure that internal perceptions of the relationship are consistent. It is not uncommon, for example, for senior management to rate a relationship much more highly than employees with first-hand experience of its operational shortcomings.

Joint initiatives

Recent evaluations of logistics service providers by samples of users indicate general satisfaction with service standards and operational efficiency, but concern that they are not sufficiently innovative and proactive. It has been observed in the UK that:

'Almost two in three providers are believed to be essentially reactive in their approach. Customers are highly critical of the passivity of their providers. Customers are looking to providers to challenge them, to introduce best practice and to find new ways to add value. Customers believe that too often they are providing the distribution expertise rather than having it provided by their third-party supplier.' [46]

Logistics providers must also, of course, be given the freedom to innovate. Many claim to be denied this freedom by tightly specified contracts and a tendency for clients to manage contractors in a dictatorial manner. A healthy long-term relationship requires a regular injection of new ideas and vision from both sides as well as a joint willingness to innovate.

More open discussions at a strategic level and the sharing of forecasts can help contractors become more proactive. Given their intimate knowledge both of general developments within the logistics sector and of a particular client's distribution operation, contractors are ideally placed to provide expert advice on an ongoing basis. Several contractors have gone so far as to set up `think tanks' which meet regularly to explore ways of improving the service to individual clients.

They can also exploit more fully their role as intermediaries within the supply chain. This role can extend beyond simply managing freight flows on a routine basis. Beier [47], for instance, contends that they should `include problem solving and experience savings among their services'. He concludes that as `carriers see the logistics flow from a different perspective from either consignor or consigneetheir function should be to act as consultant-middlemen in synchronizing all phases of goods movement between consignor and consignee' .

4. Refinement of appraisal schemes:

Short-term auditing of contract distribution operations, using standard performance indices such as average transit times, adherence to delivery schedules and stockout levels, does not provide an adequate basis for assessing the quality of longer term relationships. As Kleinsorge, Schary and Tanner [48] explain, in appraising this type of relationship, firms must take both a short-term/operational and a long-term/strategic perspective and supplement `the 'hard' and more tangible parameters of statistically measured operating dimensions' with `less tangible measures of satisfaction.' They present a new framework for evaluating `shipper-carrier partnerships' which incorporates qualitative as well as quantitative measures.

5. Adoption of open-book accounting.

Although survey evidence [49] suggests that the level of charges is not a major source of contention among users of third-party logistical services, the choice of pricing system can strongly influence the quality and stability of contractor-client relationships, particularly in the case of dedicated services. One of the disadvantages of single-sourcing logistical services is that firms then have difficulty comparing contractors' rates. They, therefore, need frequent reassurance that they are getting value for money. Increasing numbers of contractors are offering this assurance by giving their clients detailed cost break-downs and negotiating their management fee as a separate item. A third of the sample of UK firms surveyed by PE-Consulting in 1996 had 'open-book' or 'cost-plus' contracts, up from a quarter in 1993. Open-book accounting is only appropriate, however, in the case of dedicated operations, where the costs of serving individual clients can easily be isolated. Even under these circumstances, it does not necessarily eliminate conflict between contractor and client. As Newson [50] explains, conflict can still arise 'if improvements in operating efficiency which lead to substantial savings are claimed by one side as entirely due to its initiative, yet the open book contract states that such benefits shall be shared in preordained proportions'. To operate effectively, therefore, open book accounting must be accompanied by an arrangement whereby benefits are fairly divided in relation to the costs and risks that each party bears [51].

Conclusion

Since the early 1980s, the management of logistics has been radically reorganised. An important feature of this reorganisation has been the outsourcing of many activities previously performed in-house. The resulting growth in the level and variety of external expenditure on logistics has induced important changes in the way that these services are purchased. Fewer carriers are being used; more of the work is being performed on a contractual basis; contractors are being given greater say in the design of logistical systems and greater emphasis is being placed on the development of longer term, co-operative relationships. The relationships between logistics service providers and their clients are thus evolving in a similar way to the links between suppliers and customers of material goods. More needs to be done, however, to ensure the longer-term stability of these relationships and to exploit more fully the potential contribution of third-party logistics firms to improved supply chain management.

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