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Developing a decision-makingframework for levels of logistics

outsourcing in food supplychain networks

H.I. HsiaoGraduate Institute of Management, National Taiwan Normal University,

Taipei, Taiwan, Republic of China

J.G.A.J. van der VorstLogistics, Decision and Information Sciences, Wageningen University,

Wageningen, The Netherlands, and

R.G.M. Kemp and S.W.F. (Onno) OmtaManagement Studies Group, Wageningen University, Wageningen,

The Netherlands

Abstract

Purpose The purposeof this paper is to present a decision-making framework for outsourcing levelsof logistics activities. These are: execution level of basic activities (such as transportation, warehousing);value-added activities; planning and control level of activities (such as transportation and inventorymanagement); and strategic decision-making level of activities (distribution network design).

Design/methodology/approach The research design comprises three stages. Literature review

was undertaken to study outsourcing theories. Successively, case studies on three food manufacturerswere conducted resulting in a framework for make-or-buy decision. Finally, an exploratory survey wasundertaken to examine the determinant factors for outsourcing the different activities.

Findings Results indicate that logistics activities at different levels are outsourced for differentreasons. Three maindeterminant factorsare identified: asset specificity, core closenessand supply chaincomplexity. This implies that the evaluation of outsourcing different activities requires insights of threetheories, namely transaction cost, resource-based and supply chain management theory.

Research limitations/implications The research and resulting framework are based on threesmall cases. Furthermore, there are few companies that outsource higher levels of activities, whichlimits the statistical assessment of the survey results.

Practical implications The framework can support the decision-making process for outsourcingdifferent logistics activities in food industry.

Originality/value The key contribution of this paper is that it creates a comprehensive framework

for outsourcing of both basic and advanced logistics activities specifically for the food industry.Keywords Outsourcing, Distribution management, Food industry, Decision making

Paper type Research paper

IntroductionThere are a number of changes in agri-food industry that initiate a re-orientationof food companies regarding their roles, activities and strategies. For example,demand and supply are no longer restricted to nations or regions but have become

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0960-0035.htm

Developing adecision-making

framework

395

Received July 2008Revised January 2010

Accepted February 2010

International Journal of Physical

Distribution& Logistics Management

Vol. 40 No. 5, 2010

pp. 395-414

q Emerald Group Publishing Limited

0960-0035

DOI 10.1108/09600031011052840


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international processes. Furthermore, product assortments have expanded significantlyand market requirements on product quality, traceability, delivery services andsustainability are still increasing. To react to these changes, food companies arecontinuously working on innovations by developing and implementing enhanced

quality, logistics and information systems (IS) (Van der Vorst et al., 2005). One of theinnovations in logistics is to specialise on core activities and outsource non-coreactivities to logistics service providers (LSPs). Outsourcing is a fashionable way ofsolving business problems and there are numerous reports of its increased use(Andersson and Norrman, 2002). Most literatures on logistics outsourcing discuss theuse of traditional logistics services such as transportation and warehousing (Lieb, 1992;Lieb et al., 1993; Rao and Young, 1994; Van Damme and Van Amstel, 1996; Wilding and

Juriado, 2004), advantages and risks of outsourcing (Razzaque and Sheng, 1998; Norekand Pohlen, 2001; Sohail and Sohal, 2003), or the selection process of LSPs (McGinnis andKochunny, 1995; Aghazadeh, 2003). However, very little is known about outsourcingadvanced logistics services involving logistics planning and control activities; also littleresearch is done on its implications for food supply chain networks.

The purpose of this paper is to develop a decision-making framework for outsourcingdifferent levels of logistics activities. This is done by first identifying the factors thatdetermine the outsourcing decision of logistics activities, then examine if thedeterminant factors are different for the outsourcing of different logistics activities. Themain research questions in this paper are:

RQ1. What kind of logistics activities are outsourced by food industry?

RQ2. What decision-making criteria are considered by food companies whenoutsourcing these logistics activities?

RQ3. Are the decision-making criteria different between the (levels of) activities?

To answer these questions, this research comprises three stages. In stage 1, aliterature review on the outsourcing theories and approaches was undertaken todetermine relevant factors. In stage 2, exploratory case studies were undertaken in TheNetherlands to verify the factors and, possibly, identify or specify other relevant factorsthat were not mentioned in literature. These two stages result in a preliminarydecision-making framework. In stage 3, an exploratory survey was undertaken in TheNetherlands to assess the importance of each of the identified factors for each level.

Before we discuss the results of the three stages successively and present thedecision-making framework for levels of logistics outsourcing, we will first definelogistics outsourcing and levels of activities that can be outsourced.

Definitions

Logistics outsourcingMany definitions on logistics outsourcing can be found in literatures (Lieb et al., 1993;Bagchi and Virum, 1996; LaLonde and Cooper, 1998; Berglund et al., 1999). This paperuses a combined definition of Lieb et al. (1993) and LaLonde and Cooper (1998):

Logistics outsourcing is a process that involves the use of external logistics companies toperform activities that have traditionally been performed within an organisation, where theshipper and logistics company enter into an agreement for delivering services at specific costsover some identifiable time horizon.

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Logistics process and four levels of activitiesLogistics is defined as the process of planning, implementing and controlling theefficient, cost-effective flow and storage of raw materials, in-process inventory, finishedgoods and related information from point of origin to point of consumption for the

purpose of conforming to customer requirements (Van Goor et al., 2003). A logisticsprocess consists of any activity or group of activities that takes one or more inputs(human assets, equipment, facilities, information and material), transforms and addsvalue to them, and then provides output (e.g. logistic services) to one or more customers.Table I summarises the most often outsourced logistics activities by largemanufacturers. Accordingly, we decompose a logistics process into four levels:

. 1st level. refers to the execution level of basic activities, such as transportationand warehousing. Table I indicates that activities at this level are outsourced to alarge degree in larger companies.

. 2nd level. refers to value-added activities. Examples in food industry are cutting,mixing or packing. Table I indicates that these activities are outsourced especially

in food industry.. 3rd level. refers to the planning and control level. Activities that can be outsourced

at this level are inventory and transportation management. Sub-activities ofinventory management are sales forecasting, stock control and event control.

Category of logistics activity

Lieb and Randall(1996)a

(%)

Millen et al.(1997)b

(%)

Wilding and Juriado(2004)c

(%)

1st level: execution activitiesFleet management 22 53 51

Shipment consolidation 33 42 (ocean)Carrier selection 33 33 Transport 74Rate negotiation 22 11 Logistics IS 29 22 Warehouse management 36 47 Storage 60Product returns 11 33 Order fulfilment 9 33 Order processing 6 16

2nd level: value-added activitiesProduct assembly and installation 11 13 Re-labelling and re-packaging 40Final product customisation 37

3rd level: planning levelInventory replenishment and forecasting 6 4th level: strategic planning levelRoad carrier selection and site selection

Notes: aSample: 500 largest manufacturers in the USA identified by Fortune magazine; bsample:500 largest firms in Australia in 1994 identified by Business Review Weekly magazine (excludingfinancial, banking, real estate and insurance organizations);

csample: 52 consumer goods companies in

European countries

Table I.Category of logistics

activity and the mostoften outsourcedactivities during

1996-2004


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Sub-activities of transportation management include route planning andscheduling and event control. Table I indicates that activities at this level areless common to be outsourced than the previous levels.

. 4th level. At the top level of logistics activities to be outsourced is the distributionnetwork design. This is the strategic decision-making level in which decisions aremade concerning road carrier selection, location and site analysis and logisticsnetwork management. When activities at this level are outsourced, the LSP takescare of the logistics network design and orchestrates the logistics flow of thenetwork (Van der Vorst et al., 2007). So far, few studies have included theseactivities in the investigation.

Literature review: outsourcing approaches (stage 1)In-house or outsourcing (make or buy) decisions have been investigated from differentperspectives due to its multidisciplinary nature. The literature review identified fourmajor approaches:

(1) transaction cost view;(2) resource-based view (RBV);

(3) supply chain management (SCM) theory; and

(4) other approaches.

Here, we discuss these theories in general, including historical development,assumptions and predictions on make-or-buy. Table II summarizes the key findings.

(1) Transaction cost theory ( TCT )The first stream of outsourcing approaches is based on Williamsons TCT (Williamson,1985). The concept of transaction cost which drives the governance structure was first

developed by Coase (1937). Williamson (1985) made great progress by elaborating andoperationalizing the concept. For the last 20 years, many researchers on boundary choicehave been directed by the transaction cost concept especially regarding productionprocesses or IS (Anderson, 1985; Robertson and Gatignon, 1998; Aubert etal., 2004). TCTat its core, focuses on the costs of completing transactions by one institutional moderather than another (Williamson, 1975). The transaction, a transfer of a good or service,is the unit of analysis. The primary assumptions are bounded rationality andopportunism which cause transactional difficulties. The theory and empirical studies inTable II claim that transaction difficulties and associated cost increase whentransactions are characterized by three main attributes: asset specificity, uncertaintyand frequency of the transaction.

( 2 ) Resource-based viewDiscussionson RBVof thefirm begin with Wernerfelts (1984) A resource-based view ofthe firm, by analyzing firms from the resource side rather than from the product side.Following Wernerfelts article, Barney (1991) proposes a framework, called the RBV ofthe firm to study a firms internal strengths and weaknesses. Assumptions of the RBVare heterogeneous and immobility. Firm resources are controlled by a firm and thatenable the firm to conceive and implement strategies designed to improve its efficiencyand effectiveness (Barney, 2007). As the RBV of the firm developed, scholars have

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Reference

Sample

Keyindependentvariable(s)

Keydependent

variable(s)

Keyfindings

TCTAnderson(1985)

159sa

lesmanagers

inelec

tronic

manufacturing

industry

Transactionspecificity

Difficultyofevaluatin

gperformance

Environmentalunpredictability

Salesman

outsourcing

Transactionspecificityanddifficultyof

evaluatingperformancearerelated

totheuseof

in-housesalesforce

Robertsonand

Gatignon(1998)

264R&Ddirectors

across

abroad

spectr

umUS

industries

Assetspecificity

Technologicaluncertainties

Behaviouraluncertainties

R&Doutsourcing

Thegreaterthespecificityofexistin

gassets,the

morelikelythatthefirmwilldeveloptechnology

internallyratherthanestablishatechnology

alliance

Thegreatertheabilitytomeasurean

innovationsperformanceincrease,themore

likelyalliancesareformed

Aubertetal.

(2004)

630IS

executives

Assetspecificity

Uncertainty

Businessskills,andtechnicalskills

IToutsourcing

Uncertaintyandmeasurementproblemsplaya

keyroleintheIT-outsourcingdecis

ion

RBVQuinnand

Hilmer(1994)

Conceptualresearch

Corecompetence

Outsourcing

Afirmshoulddevelopafewwell-selectedcore

competenciesofsignificancetocustomersin

whichthecompanycanbebest-in-w

orld,and

strategicallyoutsourcemanyotheractivities

whereitcannotbebest

Tengetal.(1995)118co

mpanies

Perceiveddiscrepancybetween

desiredandactuallev

elof

performance

ISoutsourcing

WhenthequalityofgeneralISsupportfallsshort

ofexpectations,theorganizationwillexhibita

noticeablystrongertendencytooutsource

(continued)

Table II.Summary of key

outsourcing approaches,attributes and predictions

on make-or-buy


framework

399


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Reference

Sample


Keydependent

variable(s)

Keyfindings

Poppoand

Zenger(1998)

152co

mputer

executives

Valuableknowledgeand

capabilities

Informationservice

Firmsinternalizeandmaintaininternallythose

activitiesinwhichtheirsuperiorcapabilities

enableefficientproduction

Insingaand

Werle(2000)

Conceptualresearch

Corecompetence

Outsourcing

Keepcorecompetencein-houseand

outsource

non-coreactivitiesbecauseacoreactivityisan

activitywiththepotentialtoyieldc

ompetitive

advantage

Arnold(2000)

Conceptualresearch

Corecompetence

Outsourcing

Onlythegoodsandserviceswhich

are

consideredtobecorecompetencies

shouldbe

producedinternally

Leibleinand

Miller(2003)

117se

miconductor

manufacturers

Sourcingexperience

Production

outsourcing

Afirmspastexperiencesaffectsfir

msvertical

boundarychoices

Safizadehetal.

(2008)

108financialservice

companies

Degreeofcustomization

serviceoffered

Financialservice

Thegreaterthedegreeofcustomiza

tionoffered

byaserviceprocess,themorelikelythat,on

average,theprocessmaintainsitsprimaryback-

officeactivitiesin-house

(continued)

Table II.

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Reference

Sample


Keydependent

variable(s)

Keyfindings

SCMperspectives

RaoandYoung

(1994)

Cases

inwiderange

ofindustries

Logisticscomplexity(product

complexity;marketcomplexity;

processcomplexityandnetwork

complexity)

Handlingactivities

Warehousing

Activities

Transportation

activities

Logisticscomplexityisproducedprincipallydue

tolargevolumeandvarietyoflogis

tic

transactions.Whenlogisticscomple

xity

increases,thelikelihoodofoutsourcingincreases

VanDammeand

VanAmstel

(1996)

Conceptual

Demandfluctuation

Frequencyofdelivery

Logistics

outsourcing

Afirmconsiderstooutsourcethelo

gisticstoan

externallogisticsproviderwhenthedemandof

activitiesisvarying

Wildingand

Juriado(2004)

50con

sumergood

companiesinUK,

Germanyand

France

Operationalflexibility

Costreduction

Expansiontonewma

rkets

Transport

Additional

storageduring

peakperiods

Fleetmanagement

Relabeling

Repacking

Consumergoodscompanieschoose

tooutsource

primarilyinordertobenefitfromthe

competenciesofLSPs(skillsandfle

xibility)and

toreducecosts.Avoidinginvestmentseemstobe

particularlyimportantinthiscapita

l-intensive

sector

Otherperspective:econom

icofscale

Poppoand

Zenger(1998)

152co

mputer

executives

Scaleofinternaldemand

Information

service

Anincreaseinthescaleofinternaldemandforan

activityincreasesthelikelihoodofv

ertical

integration

Table II.


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started a serial of discussions on boundary choices, core competencies and competitiveadvantages. Table II presents some of these studies; it identifies two main determinantfactors for outsourcing: core competences and value of human assets for specificbusiness activities.

(3) SCM theoryThe term SCM was first used by Oliver and Webber in 1982 and was developed fromlogistics point of view. A number of researchers discuss logistics outsourcing from SCMpoint of view. Rao and Young (1994) and Van Damme and Van Amstel (1996) suggestthat firms consideroutsourcing of logistics to an external LSP when logistics complexityis high. Wilding and Juriado (2004) observe that cost reduction is the main motivation forlogistics outsourcing. Bolumole (2001) mentions that firms which outsource foroperational and cost-based reasons will tend to restrict LSPs involvement to the basiclogistics functions. Therefore, an outsourcing decision might be influenced by a firmssupply chain characteristics (e.g. logistics complexity and demand uncertainty)or logistics strategy.

(4) Other approachesThe majority of the research on make-or-buy decisions use the TCT, RBV and/or SCMperspectives; however, a few studies also mention other approaches. For example, theimportance of the external environment (social elements, competition and availabilityof suppliers) (Canez et al., 2000) or attaining economies of scale in production (Poppo andZenger, 1998).

In brief, our literature review suggests outsourcing approaches in four categories.Table II summarizes key outsourcing approaches and attributes. As can be seen fromthe table, a variety of dependent variables are studied; for example, sales forces,production, information service, R&D or logistics activities. In the next stage, three

exploratory cases are used to verify these factors and possibly identify other factors thatimpact the outsourcing decision of logistics activities in the food industry.

Case studies (stage 2)Three exploratory case studies (Voss et al., 2002) were undertaken in The Netherlands.For purpose of confidentiality, the companies are referred to as Company 1, Company 2and Company 3. These companies were chosen for a number of reasons. Preliminaryinterviews with managers in these companies revealed they had outsourcingexperiences; in particular, they were outsourcing different activities. Furthermore,they produced different types of food products and thus were acting in differentenvironmental networks and circumstances. The combination of the literature reviewwith three case studies should provide us with enough insight to construct the

decision-making framework for logistics outsourcing, which can successively be testedin a survey.

The prime source of data collection were semi-structured face-to-face in-depthinterviews with logistics managers as principle respondent (Lieb, 1992). In each case,descriptions including company background, outsourcing decisions made for logisticsactivities, motivations, reason of in-house and plans for the future are presented.Key questions for the interviews were: What kinds of logistics activities arebeing outsourced? If outsourced, why did you decide to outsource the activity?

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If not outsourced, why did you not outsource the activity? How was the logisticsperformance influenced by an outsourcing decision? What are the currentperformances regarding flexibility, reliability and cost?.

(1) Company 1Founded in 1980, Company 1 began as a milk producer for calves. In 2006, Company 1had more than 160 employees and had reached e25 million turnover. The corporatepolicies were to be professional in veal and animal fodders. The logistics strategiesaimed for speed and on-time delivery at low cost.

Decisions of and motivations for outsourcing. Transportation and value-addedactivities were being outsourced when this research was taken. Company 1 is situatedin the centrum of The Netherlands. Every week it processes 5,500 calves into a 100 ofproduct varieties, which are distributed to its 800 customers in The Netherlandsand Southern Europe. Time and food quality are critical for the company. To ensurespeed and on-time delivery, it had outsourced cutting and packaging activities to

local packaging houses. Besides, a number of local road carriers were hired to executetransport activities. According to the manager, the reasons for transportationoutsourcing are the lack of own vehicles and sufficient skills to operate transportactivities at the start of business.

Reasons for not outsourcing. Warehousing, transportation management andinventory management and other logistics activities are kept in house; each for its ownreason. Warehousing is not outsourced because meat products are very perishable andcan only be stored in a warehouse for a few days before they are delivered. Regardingtransportation management, the factory director explained: Hiring a logistics companyto control all our transportations is not an option for us, because tenderingtransportation services for each market individual results in better prices. Moreover,time and effort could not be reduced if we outsource this activity. As for inventory

management, the company has its own logistics department doing the job. Overall, theseactivities are important because food quality and on time delivery are the competitivepriorities. Company 1 cannot afford loosing business in case LSPs have problems.

Plans for the future. Company 1 is facing two main challenges: the first is anincreasing competition in Italian and Spanish markets which have forced them toexpand to Eastern Europe markets. Another challenge is the time pressures fromcustomers. Nowadays, more and more customers place orders in the last minute, but stillrequest the same delivery performance. Nevertheless, even faced with such difficulties,Company 1 shows no plan to outsource other logistics activities in the near future.

(2) Company 2Company 2, founded in 1911, is a dairy company engaged in dairy drinks, buttermilk

and yoghurt production. The main activities are production, sales and marketing offresh diary products in The Netherlands. In 2006, there are more than 5,000 employeesand turnover was e600 million. The ambition of Company 2 is to be a provider ofhigh-quality fresh dairy products. Low cost and high flexibility are the main logisticsobjectives.

Decisions of and motivations for outsourcing. Company 2 is very experiencedin logistics outsourcing. The transportation activity has been outsourced for nine years.Company 2 owns three factories and one distribution centre (DC). Every year,


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each factory processes 80 million tons of milk in average with around 300 to 400varieties. Although demand is quite stable for the whole year, varying distributionchannels has made distribution management very complex. For example, fresh milksare requested direct distribution to retailer shops or DCs every day within 24 hours

lead-time, while other milk-based drinks are distributed via Company 2s own DC. Todeal with such a complex situation, an LSP is contracted for the outbound transportationactivities as this logistics activity has limited added values to the company.

Reasons for not outsourcing. Other logistics activities have been rarely outsourced,such as warehousing or packaging. The logistics manager explained that Warehousingis not outsourced because our production heavily depends on warehousing. In addition,warehousing is a very dedicated activity because of the very perishable products.Packaging and mixing are rarely outsourced because recipe and know-how are involvedin these activities. Therefore, this activity wont be easily outsourced even if it is cheaperwhen done by outside companies.

Plans for the future. In an attempt to cut more cost, Company 2 has decided to

outsource route planning (transportation management) as well. When it is outsourced,the LSP became responsible for the planning of all distribution times to the customers,but planned in such a way that its own logistical efficiency was optimised. However, thenew proposed delivery times to retailers were not accepted by these customers, limitingthe efficiency and cost effectiveness of the LSP.

Therefore, this activity was taken back in house again. The logistics manager statedthat for the coming three years no other activities will be considered for outsourcing.

(3) Company 3Company 3 produces keepable food products which can be stored at ambienttemperatures. The main activities of Company 3 are production, sales and marketing

of long-life dairy products, as well as branded fruit juices and fruit-based drinks. It hasabout 5,000 employees with e600 million turnover. The main objective is to manufactureand market dairy and fruit-based products in such a way to create value that can besustained in the long run for customers, shareholders, employees and business partners.Logistics, from the companys point of view, did not add much value to it.

Decisions of and motivations for outsourcing. Outbound transport andtransportation management were outsourced. Company 3 owned three factoriesand one DC. Each year, the three factories produced around 500,000 pallets to its250 customers in Dutch, Belgium and German markets. Demand for their productsfluctuated significantly; for example, juice products sometimes had high peak demandin summer. To deal with such situation, a long-life food specialized LSP was contractedto operate both the tactical and operational planning for Company 3. The main reasons

for hiring the LSP were its specific competences and assets for ambient food logistics,and cost reduction. An increased price competition between retailers had incurredlosses to us over the past few years, the logistics manager explained. Therefore, costreductions were necessary. In 1994, a new contract was signed, indicating that theLSP started taking over transportation management activities for Company 3.Since then, every three to six months, the LSP presented a distribution schedule toCompany 3 on volume, time and distributions by planning its own resources andequipments for efficiency maximization.

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Plans for the future. So far, the outsourcing programme was quite successful andsatisfactory; for instance, on-time delivery increased to 93 per cent and logistics costwere reduced. Although the price war between supermarkets is still a pressure,Company 3 so far has no further plan to outsource other logistics activities.

In brief, the responses from the interview data gathered from the participantsexemplify relationships between activities and outsourcing motivations. Table IIIsummarizes reasons for both outsourcing and not outsourcing. Most of these findingsare compatible with the theoretical findings in Stage 1. Based on these findings, wecreate an outsourcing decision-making framework.

Construction of the decision-making frameworkThe literature and the exploratory cases demonstrate examples of outsourcingconsiderations. This helps us construct a preliminary decision-making frameworkwhich presents key determinants for logistics outsourcing in food industry, shown inFigure 1. Asset specificity and measuring uncertainty are the attributes of TCT; core

closeness is the attribute of RBV; supply chain complexity and logistics strategy arebased on SCM. Five propositions are formulated concerning the determinants and itspredictions on outsourcing decisions. Performances are assumed to improve ifoutsourcing decisions are made.

Reasons for outsourcingExample: transportation, cutting, packaging,transportation management

Do not own any transport vehicle from thecompanys start (asset specificity TCT)The activity is less important to company(not the core business RBV)Logistics does add much value to company(low valuable RBV)Cost reduction (logistics strategy SCM)Complicated logistics requirements, such asdemand fluctuation, serving many internationalcustomers, etc. (supply chain complexity SCM)Cost pressure price war between retailers(other perspectives)Lack of professional knowledge (otherperspectives)

Reasons for not sourcingExample: warehousing, inventory management,transportation management, distribution networkdesign, etc.

Having many years of experiences knowing howto find cheap carriers (asset specificity TCT)The activity can be operated by our own logistics

department (asset specificity TCT)The activity is very dedicated for own products(asset specificity TCT)Time and effort cannot be reduced (transactionuncertainty TCT)Outsourcing these activities will damage our corebusiness (important to core business RBV)Food quality, speed, flexibility were thecompetitive priorities (logistics strategy SCM)

Table III.Summary of case results


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Asset specificityOur case results suggest including asset specificity into the framework because thecases indicate that a logistics outsourcing decision is influenced by existing assets suchas dedicated facilities or current investments in employees logistical planning skills, etc.This finding is in accordance with literature (Anderson and Schmitteln, 1984; Robertsonand Gatignon, 1998; Aubert et al., 2004). The argument is as follows: logistics-specificassets involve investments in human and physical capital which will loose value if theyare redeployed in other uses. Thus, the following proposition is formulated:

P1. The higher the asset specificity of a specific logistics activity, the more likelythat a food firm will keep this activity in-house rather than outsource it.

Performance measuring uncertaintyLiterature and case results also suggest to include performance measurementuncertainty into the framework. One of the in-house reasons is that time and effortcannot be reduced. This time and effort problem might relate to transaction uncertainty,in particular, the behavior uncertainties. Behavior uncertainty deals with the difficultiesassociated with monitoring the contractual performance of exchange partners. Thisfinding is compatible with previous research that identifies the importance oftransaction uncertainty on outsourcing decisions (Poppo and Zenger, 1998; Robertsonand Gatignon, 1998). Therefore, we argue that when performances cannot be easilyassessed, outsourcing can be inefficient (i.e. less profitable than in-house). Thecontracting costs are higher when writing an incentive compatible contract under a

complex performance assessment. Thus, we formulate the following proposition:P2. The higher the performance measuring uncertainty when outsourcing a

logistics activity, the more likely that a food firm will keep this activityin-house rather than outsource it.

Core activity or not?In this paper, we focus on a logistics activitys core closeness instead of corecompetence (Rao and Young, 1994; Franceschini et al., 2003), because the core business

Figure 1.A preliminarydecision-makingframework for levelsof logistics outsourcingin FSCN

Levels of logistics outsourcingAsset specificity

Core closeness

Measuring uncertainty

Supply chain complexity

Logistics strategy

3rd level: inventory management, transportation

management

1st level: transportation, warehousing

Performance

2nd level: value-added activities

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of food manufacturers is most often production and research and development,not logistics. Our initial finding from cases indicates that an outsourcing decision mightdepend on an activitys value to core business (core closeness). This finding is consistentwith previous research that discusses the value of human assets on outsourcing

decisions (Teng et al., 1995; Conner and Prahalad, 1996; Poppo and Zenger, 1998).Each logistics activity has human assets related with it, indicating a firms general andspecific knowledge on how to do things, for instance, transportation requires drivingskills. Therefore, we argue that firms internalize and maintain internally those activitiesin which their superior capabilities or knowledge enable efficient logistical performance.Accordingly, we formulate the following proposition:

P3. The closer a logistics activity to the core business, the less likely that a foodfirm will outsource that activity.

Supply chain complexityOur case results indicate that supply chain complexities (for instance, number of

products, demand prediction, number of international customers and distributionchannel variety) cause planning and control problems to firms and influences firmsperformances (Milgate, 2001). Literature suggests that when firms want to increaseperformances, firms can redesign chain structures (Van der Vorst and Beulens, 2002),and shift part of the complexity out-of-door (Wang and Von Tunzelmann, 2000).Therefore, we argue that supply chain complexity is positively related with anoutsourcing decision because a supply chain with a high degree of complexity mightrequire a LSP to render the managerial complexity. Therefore, we formulate thefollowing proposition:

P4. The higher the supply chain complexity, the more likely a food firm willoutsource a logistics activity.

Logistics strategyThe cases indicate that cost reduction is one of the outsourcing considerations, andcompanies with food quality, speed or flexibility priorities prefer to keep an activityin-house. This result partly fits with previous studies. Bolumole (2001) mentions thatoutsourcing of basic logistics functions is based on operational and cost-based reasons;Al-kaabi et al. (2007) study outsourcing of maintenance, repair and overhaul in airlineindustry and concluded that the low-cost airlines and new airline entrants preferredoutsourcing of all maintenance, repair and overhaul activities. However, companieswith food quality or flexibility priorities prefer to keep an activity in-house becausethey worry logistics companies have limited knowledge of food quality management orlack of flexibility. Therefore, we suggest including logistics strategy into the

framework, and propose:P5. A firm with low cost strategy is more likely to outsource a logistics activity

than a firm with flexibility or food quality strategy.

Survey (stage 3)The literature review and case results created a conceptual framework, but it does notprovide quantitative insight in the relevance of each variable for the outsourcingdecision of each level of activities. The objective of this stage is to test if activities at


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different levels are outsourced for different reasons. This part discusses findingsin relation to our RQ3.

Research method

An exploratory survey was undertaken in this stage (Forza, 2002). To analyze theoutsourcing decisions, three different activities at different levels were chosen:transportation (1st), packaging (2nd) and transportation management (3rd). These threeactivities were selected because they were also outsourced in the cases. Companys nameand address were obtained from the Dutch Chamber of Commerce (www.kvk.nl).We send a questionnaire to all companies with 40 employees or more, 385 companiesin total. Of these 385 questionnaire, 57 were returned by postal service due to wrongaddresses, relocation and bancrupcy of termination of the activities. A total of76 responses was received of which 14 had missing data and were judged unusable.Finally, the sample size was 62, resulting in a respond rate of 19 per cent.

Table IV shows the respondents profile (number of employees, number of plantsand sectors). There are 28 respondents in the category of less than 50 employees

representing the largest group (45 per cent); the second largest group are the 150-, 250employees (26 per cent). In terms of plant number, the majority of respondents own oneplant (53 per cent). Besides, these companies range widely in sectors. Most respondentsare in the other group (38 per cent), second largest group are in the meat products(20 per cent).

Measures and analysis. The variables in the survey include: make-or-buy choices,asset specificity, performance measurement uncertainty, core closeness, logisticsstrategy and supply chain complexity. Measures of these variables are described

Number (n 62) Percentages

EmployeesLess than 50 28 4550- , 100 13 21100- , 150 4 7150- , 250 16 26Larger than 250 1 2

Plants1 33 532 12 193 6 104 or larger 11 18SectorsMeat 12 20

Dairy 8 13Animal feeds 8 13Fruit/vegetables 5 8Fish 2 3Oils and fats 2 3Beverages 1 2Othersa 23 38

Note: aOthers include bread, biscuits, sugar, cocoa, macaroni, coffee, etcTable IV.Profile of respondents

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in the Appendix. A t-test was used to compare two population means (the outsourcedand in-house groups) on the variables: asset specificity, measuring uncertainty, corecloseness and supply chain complexity. The logistic strategy variable was measured bythe proportions test.

ResultsTable V presents comparisons between the outsourced and in-house groups on thedifferent activities. The test statistics indicate that transportation outsourcing isinfluenced only by asset specificity (p-value , 0.001). The packaging outsourcing isinfluenced by asset specificity (p-value , 0.001), but also by the complexity caused bynumber of products produced (p-value , 0.05), demand uncertainty (p-value , 0.05)and the average of supply chain complexity (p-value , 0.05). Transportationmanagement is outsourced under multiple conditions, i.e. asset specificity(p-value , 0.01), distribution channel variety (p-value , 0.1) supply chaincomplexity (p-value , 0.1) and core closeness (p-value , 0.01). Logistics strategydoes not differ significantly for the two groups in the three activities, but we observe that

cost priority seems higher in the outsource group, particularly in the transportation andpackaging activities and seems higher in the in-house group for transportationmanagement. To sum up, the results indicate that different activities are outsourced fordifferent reasons.

Discussion and conclusionMuch management literature exists on outsourcing of production activities or IS, butthere is a gap in literature regarding the outsourcing of the planning level of logistics

1st level 2nd level 3rd level

Transportation Packaging

Transportation

management

VariablesGo

(n 45)Gih

(n 17)Go

(n 5)Gih

(n 57)Go

(n 22)Gih

(n 40)

Q1. Asset specificity 3.60 6.94 * * * * 2.60 6.84 * * * * 4.50 5.82 * * *

Q2. Measurement uncertainty 6.20 5.50 4.80 5.98 5.82 5.66Q3. Core closeness 6.16 7.00 7.20 6.81 6.60 7.33 * *

Q4. Supply chain complexityNumber of products (SKUs) 4.80 4.90 6.00 4.74 * * 4.95 4.78Demand uncertainty 4.84 4.44 6.20 4.61 * * 5.14 4.51Number of internationalcustomers 3.50 3.00 3.80 3.32 3.67 3.20Distribution channel variety 3.58 3.00 4.20 3.35 4.00 3.10 *

Avg of supply chain complexity 4.33 3.99 5.25 4.15 * * 4.59 4.04 *

Q5 Logistics strategyCost (%) 51 47 60 49 32 53Flexibility (%) 18 29 20 21 27 25Food quality (%) 16 6 20 12 9 15Others (%) 16 18 0 18 32 8

Notes: Significant at: *p , 0.1, * *p , 0.05, * * *p , 0.01, and * * * *p , 0.001 (two-tailed); outcomesof packaging were also confirmed by Kruskal-Wallis test dueto the smallnumber in Go, results were thesame

Table V.Comparisons of the

outsourced group (Go)and in-house group (Gih)

on the three levels oflogistics activities


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activities especially in food industry. This research takes a first step in bringingoutsourcing research in this context to create a conceptual framework for outsourcingdifferent levels of logistics activities. This paper presents two principle findings:

(1) A logistics outsourcing decision is related to asset specificity, core closeness andsupply chain complexity. Our research identifies these determinant factors forfood industry. We propose that the lower the current investment by the firm inlogistics assets, the higher the likelihood that the activity is outsourced (P1).The less close the activity to the core business, the higher the likelihood that anactivity is outsourced (P3). Moreover, the higher the supply chain complexity, thehigher the likelihood that an activity is outsourced (P4).

(2) Logistics activities at different levels are outsourced for different reasons.Evaluation of different activities requires insights in three theories: transactioncost, resource-based and SCM theory. There is a growing body of literaturediscussing that TCE and RBV are complementary and that each theoreticalperspective alone cannot fully explain a make-or-buy decision (Poppo and

Zenger, 1998; Arnold, 2000; Madhok, 2002; Holcomb and Hitt, 2007).Interestingly, our preliminary findings echo these expectations but add thatSCM theory especially supply chain complexity should be taken into accountas well.

To conclude, a conceptual decision-making framework is created for interpretingand analyzing outsourcing considerations of different levels of logistics activities.The framework identifies three determinant factors for food industry: asset specificity,core closeness and supply chain complexity. Besides, our outsourcing framework alsoindicates that logistics activities at different levels are outsourced for different reasons.Performance measurement uncertainty and the logistics strategy might also have aninfluence; however, this could not be statistically proven via the survey.

There are some limitations in this research. First, we did not test on the Level 4decision making. It would be interesting to survey companies using 4PLs to establishwhy and how they decide on outsourcing this activity. Probably, another samplingtechnique, for instance snowball sampling, should be used to be sure that enoughcompanies are selected that outsource the 4PL-activities. Second, our study focuses oncompanies in the Dutch food industry. It would be interesting to enlarge the researchsetting for instance to other countries or industries to see whether our results aresupported in this larger setting.

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Appendix. Survey measurements

(1) Make-or-buy choices. The outsourcing status was assessed using a two-point scales withtwo anchors (have outsourced, and have not and will not outsource).

(2) Asset specificity. To measure this variable, we use We have invested in specialequipments to conduct this activity (Poppo and Zenger, 1998). This item is measuredusing ten-point scales anchored by strongly disagree and strongly agree.

(3) Performance measurement uncertainty. To measure this variable, we use the following

statement: We specify precise measures for evaluating the performance of this activity(Robertson and Gatignon, 1998). This item is measured using ten-point scales anchoredby strongly disagree and strongly agree.

(4) Core closeness. To measure this variable, we use This activity contributes highly to ourcompetitive advantage. This item is measured using ten-point scales anchored bystrongly disagree and strongly agree.

(5) Supply chain complexity. Four measurement items are obtained from cases results tomeasure this variable. These items are number of stock keeping units, demanduncertainty, number of international customers, and distribution channel varietyRespondents were asked to rank 1 to 7 scales indicating to what extent they agree if thesefactors complicate the management of logistics processes (1 strongly disagree; 7 strongly agree).

(6) Logistics strategy. We measure this variable using two scales anchored by cost, flexibilityand food quality. Respondents were asked to rank the importance of each of theobjectives in percentage with overall sum of 100.

About the authorsH.I. Hsiao (1976) is a post-doctoral researcher in Institute of Management, National TaiwanNormal University. She obtained her Master degree in Food Science at National Taiwan Ocean


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University in Taiwan in 2000; and in 2002, she obtained another Master degree in MaritimeEconomic and Logistics at Erasmus University in The Netherlands. In 2009, she obtained herDoctor degree in Business Administration at Wageningen University. Her current researchinterest focuses on SCM and innovation in agri-food industry. H.I. Hsiao is the corresponding

author and can be contacted at: [email protected]. van der Vorst is a Professor of Logistics and Operations Research at WageningenUniversity in The Netherlands. He publishes regularly in international journals on topics as foodSCM, performance measurement and traceability in food and agribusiness. His current researchfocuses on the development of innovative logistics concepts in food supply chain networks andthe quantitative modelling and evaluation of such concepts, especially via simulation modelling.

R.G.M. Kemp is a Senior Researcher at the Bureau of the Chief Economist of the NetherlandsCompetition Authority and an Assistant Professor at Wageningen University and ResearchCentre, The Netherlands. His research focuses on competition issues, growth of SMEs andinnovation.

S.W.F. (Onno) Omta is Chaired Professor of Management Studies Group at WageningenUniversity in The Netherlands, and the Editor-in-Chief of The Journal on Chain and NetworkScience. He graduated in biochemistry and defended his PhD thesis on the management of

biomedical research and pharmaceutical innovation at the University of Groningen. He is theauthor of many articles on innovation management and the author of different books in this area.He has been active as a management consultant for a large variety of (multinational) companiesin the area of innovation management. His current research interest encompasses innovation inchains and networks in the agri-food industry.

To purchase reprints of this article please e-mail: [email protected] visit our web site for further details: www.emeraldinsight.com/reprints

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