The level of commitment to the usage of the third-party logistics services varies considerably amongst the respondents. Over two-third (67.7 percent) of the respondents, currently using the services of third party logistics service providers, indicate that their organizations? commitment to the concept was “moderate” or “extensive”, while the remaining users indicated that their organizations? commitment was “limited” or “very limited”. The varying degree of commitment is also reflected in the percentage of the total logistics budget allocated to the third-party providers as a proportion of the total cost of logistics function (Table III).
Of the respondents, 63.4 percent had less than 20 percent and 7.6 percent had 20-40 percent of their total logistics budget allocated to 3PL service providers. These figures indicate a fairly low level of commitment to the use of 3PL services in India currently. Furthermore there is no significant correlation between the total cost of logistics function, as a percentage of gross sales, and percentage allocation of logistics budget to 3PL providers (Chi-square Test: chi square value = 27.593; df = 16; p-value = 0.759; hence not significant at 95 percent confidence level).
Table III: Percentage allocation of Total Logistics Budget for 3PL services
Percentage allocation of Logistics Budget for 3PL services 0% - 20% 20% - 40% 40% - 60% >60%
Level of commitment to usage of 3PL services (Percentage of respondents) Extensive 8.6 0.0 5.4 6.4 Moderate 25.8 0.0 7.5 7.5 Limited 21.5 6.5 1.1 0.0 Very Limited 7.5 1.1 0.0 1.1
Reasons for Outsourcing
To determine why companies decide to outsource their logistics functions, respondents were asked to indicate the importance of a number of factors affecting the decision to outsource on a 5- point Likert scale, with a score of 1 indicating “not important” and a score of 5 indicating “very important”. The responses to this question are presented in Table IV.
Over three-quarter of the users indicate that reduction in logistics cost (overall importance rating 4.39), focus on core competencies (overall importance rating 4.28) and improvement in customer satisfaction (overall importance rating 4.11) were moderately important or very important reasons for outsourcing. About half of the users identify, improved return of assets (overall importance rating 3.91), productivity improvement (overall importance rating 3.75) and increased inventory returns (overall importance rating 3.73) as substantially important or very important in their rationale for outsourcing of logistics functions.
Table IV: Reasons for Outsourcing Logistics Activities
Reasons for Outsourcing Focus on core competencies Percentage Respondents (%) Not important O 0.0 0.0 5.9 Less important O 2.6 0.0 14.7 6.8 5.6 7.1 40.7 25.0 8.3 12.5 21.7 14.7 11.1 Important O 12.8 16.4 29.4 15.9 38.9 35.7 14.8 32.1 30.6 5.4 21.7 35.3 22.2 Moderately important Very important O 69.2 61.8 17.6 50.0 36.1 21.4 11.1 7.1 36.1 67.9 4.3 23.5 41.7 NO 0.0 4.7 6.9 2.8 3.0 20.0 11.5 20.0 3.3 6.5 20.0 3.6 3.3 NO 0.0 2.3 13.8 2.8 3.0 16.0 15.4 20.0 13.3 13.0 28.0 25.0 6.7 NO 33.3 16.3 37.9 27.8 27.3 24.0 34.6 28.0 13.3 15.2 36.0 32.1 13.3 O 15.4 21.8 32.4 25.0 11.1 28.6 22.2 10.7 16.7 7.1 26.1 11.8 19.4 NO 30.6 11.6 27.6 16.7 33.3 20.0 19.2 20.0 36.7 6.5 12.0 17.9 36.7 NO 36.1 65.1 13.8 50.0 33.3 20.0 19.2 12.0 33.3 58.7 4.0 21.4 40.0 Logistics cost reduction Imbibe more flexibility in operations Improved customer services Productivity improvements Access to emerging technology Access/Expansion to unfamiliar market Diverting capital investment 2.3 8.3 7.1 11.1 25.0 8.3 7.1 26.1 14.7 5.6 To increase inventory turn Success of firms using 3PL services Corporate restructuring To develop supply chain partnerships Improve Return of Assets
(O = Outsourcing; NO = Non-outsourcing)
Respondents were also asked to rank the top five reasons for using the services of 3PL providers. 80.6 percent of the respondents state that logistics cost reduction is an important reason for outsourcing thereby reducing their costs of servicing the customer. 76.0 percent of the respondents want to use the 3PL service providers so that they can focus on their core competencies. Further organizations want to provide improved customer service by using the competencies of the service providers as is evident from the 71.3 percent respondents stating it as an important reason for using the service. The other important factors, which have been highlighted among the top five reasons for outsourcing, include improved return on asset, increased inventory turns and productivity improvements (Figure 4). To a great extent, the ranking of top five reasons falls in line with the importance rating given by the respondents.
Logistics cost reduction 80.6 Focus on core competencies 76.0 Improved customer services 71.3 Improve return on assets
68.2 To increase inventory turn 60.6 Productivity improvement Imbibe more flexibility in operations Access to emerging technology
Access/ Expansion to unfamiliar market
Diverting capital investment
0
20
24.5 40
56.5 46.1 45.3 35.9
60
80
100
Percentage of Respondents
Figure 4: Reasons for Outsourcing
Impact of usage of third party logistics services
Users of the services of 3PL providers were asked to categorize the impact of those services to
their business in terms of logistics system performance, customer satisfaction and employee morale on a five-point Likert scale, with a score of 1 indicating “very negative” and a score of 5 indicating “very positive”. The responses to this question are summarized in Table V.
Table V: Organizational impact of Outsourcing Logistics Activities
Percentage of Respondents (%) Very Positive 13.8 22.6 6.8 Factors Logistics System performance Customer satisfaction Employee Morale Positive 54.3 45.2 42.0 Average 28.7 32.3 46.6 Negative 2.1 0.0 4.5 Very Negative 1.1 0.0 0.0
Results indicate that the usage of services of 3PL providers has had a strong positive impact on all the three dimensions. Nearly 50 percent of the users noted that the impact has been “positive” or “very positive” in all the three areas of organizational impact. However, 4.5 percent of the respondents indicated that 3PL services had a negative impact on employee morale. Also 3.2 percent of the respondents indicated a negative impact on logistics system performance. These results show that people issues are a critical factor to be considered in outsourcing of logistics functions.
Besides, the respondents were also asked to quantify the percentage improvement on financial indicators – improvement in sale revenues, working capital improvement, capital asset reduction, production cost reduction, labor cost reduction, return on asset improvement, logistics cost reduction – because of the usage of 3PL services. User organizations have cited substantial
financial improvements as shown in Table VI. The financial improvements tie well with the focus on logistics cost reduction as the primary reason for using 3PL services.
Financial Indicator Table VI: Financial Improvements
% Improvement 13.5 12.3 9.2 10.5 10.0 10.0 15.0 Improvement in sales revenue Working capital improvement Capital asset reduction Production cost reduction Labor cost reduction Return on Assets improvement Logistics cost reduction
Further, the survey questionnaire probed the respondents to report on the improvement they have had on specific business objectives related to logistics system performance. Users report obtaining multiple benefits in varying degrees compared to their expectations. More than 80% of the respondents state that the use of the service providers has helped them improve on-time delivery, provide specialized logistics service and reduce cycle time at “expected” or “more than expected” degrees. Nearly 75% of the respondents feel that they have been able to improve focus on their core competencies and reduce operational costs at or above expectations. 3PL service providers have been able to enhance the geographic reach of the user organizations as is stated by 61% of the respondents. Finally the use of the service has also helped organizations to bring in more strategic/operational flexibility and differentiation from the competitors (Figure 5).
Improve on time delivery More specialized logistics expertise Reduced cycle time Improve focus on core activities Operational cost reduction Enhance geographic reach Differentiation from competitors Facilitate growth Strategic/ operational flexibility 0
20
40
86.7
61.3 56.7 85.3 79.8 79.7 76.4 56.1 54.0 60
80
100
Percentage of Respondents
Figure 5: Improvement in business objectives related to Logistics system performance
Clearly, 3PL providers can help an organization achieve significant results, both in terms of business performance and logistics cost reduction. Logistics competency through outsourcing will definitely be a key differentiator in today's competitive world.
