Outsourcing Distribution to a Third Party Logistics Provider Relying Upon Cost Savings Criteria

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Acta Technica Jaurinensis Series Logistica

Vol. 1, No.2, 2008

Outsourcing Distribution to a Third Party Logistics Provider Relying Upon Cost Savings Criteria B. Hirkó
Department of Logistics and Forwarding, Széchenyi István University H-9026, Győr, Egyetem tér 1. Hungary e-mail: hirko@sze.hu Abstract: Outsourcing logistics areas is widely regarded for the last decades as a useful approach to reducing costs and gaining competitive advantage. Thus, the strategy of employing third-party logistics (3PL) providers’ services has attracted growing interest. Many studies have been dealt with the advantages and disadvantages of outsourcing warehousing and transportation areas to 3PL providers, however, few of them make an attempt to quantify analytically the potential savings expected by handing over these logistics activities to 3PLs. This paper tries to reveal where the savings could be derived from. It will be demonstrated that savings occur almost evidently involving the 3PL provider into the development of distribution. It will be shown that these savings are a function of the number of the suppliers who outsource their distribution to the (same) 3PL provider and that this number has probably an optimum value.

Keywords: Outsourcing distribution, third party logistics

1. Introduction
Increasing competition and rapid changes in the business world in the last 30 years world have made organizations re-think their strengths and core competencies. They are increasingly focusing on their core business process and outsourcing non-core business processes to outside service providers. Companies can outsource any function from information technology to manufacturing. Outsourcing is „a strategic use of outside parties to perform activities, traditionally handled by internal staff and resources” [6]. Organizations today have the option of outsourcing any activity or function they need. Service providers exist in almost every area of business that can provide the required services to companies. Companies today can outsource services like logistics, warehousing, information technology software and hardware, human resources, enterprise resource planning etc. More and more companies view logistics as a key component of their core business strategy. Increasing numbers of shippers are realising the potential economic advantages of outsourcing their logistics activities. In fact, 74% of Fortune 500 companies report 173

Acta Technica Jaurinensis Series Logistica

Vol. 1, No.2, 2008

having at least one contract with a third party logistics provider [11,16]. In North America, according to Goddard [5] „it is clear that manufacturers and retailers consider 3PL services to be a viable option, a strong 79% are currently using 3PL services for their logistics operations”. Without any doubt, outsourcing is widely regarded as a useful approach to lowering costs and gaining competitive advantage. Logistics and transportation were among the most popular areas that used outsourcing from the 1980s. The strategy of employing the third-party logistics (3PL) providers’ services has attracted growing interest. It means to involve external companies to perform logistics functions that have traditionally been performed within an organisation. The functions performed by the 3PL can encompass the entire logistics process or selected activities within that process [12]. There are more definitions about 3PL in [14,15]. Though there are many reasons for the companies to deploy their activities to a 3PL provider, according to many comprehensive research studies one of the main objectives is to reduce the logistics costs [5]: „73% of all companies1 expect to reduce their operating costs by taking advantage of economies of scale obtained by third party logistics companies”. A review of the literature on the outsourcing of logistics services [12] suggests that cost and service related factors are the main concerns for firms when outsourcing:...
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