World Review of Intermodal Transportation Research, Vol. 1, No. 1, 2006
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Benchmarking usage of Third Party Logistics: a comparison of practices between firms in Malaysia and Saudi Arabia M. Sadiq Sohail Department of Management and Marketing, College of Industrial Management, King Fahd University of Petroleum and Minerals, P.O. Box 210, Dhahran-31261, Saudi Arabia E-mail:
[email protected] Abstract: This paper presents a comparative analysis on the outsourcing of logistics services by manufacturing organisations in the Malaysia and Saudi Arabia. The study addresses key issues relating to extent of usage of third party logistics services, implementation issues, obstacles and plans of current users of contract logistics services. Results based on a survey shows that there are some differences on the use of contract logistics services in Malaysia and Saudi Arabia. Firms in Malaysia have a longer history of logistics outsourcing as compared to Saudi Arabia. The paper presents a report of these differences and similarities and makes a comparative analysis. Keywords: outsourcing; logistics; Malaysia; Saudi Arabia. Reference to this paper should be made as follows: Sohail, M.S. (2006) ‘Benchmarking usage of Third Party Logistics: a comparison of practices between firms in Malaysia and Saudi Arabia’, World Review of Intermodal Transportation Research, Vol. 1, No. 1, pp.69–81. Biographical notes: Sadiq Sohail is presently an Associate Professor of Marketing at King Fahd University of Petroleum and Minerals, Saudi Arabia. He has earned a string of academic credentials that include a BS and an MS Degree in Commerce, a Law Degree and a PhD. He is the coauthor of a casebook in the field of marketing. He has published over 50 scholarly papers in internationally refereed journals. He currently serves as the Managing Editor of a Journal, as well as a Regional Editor of another. He also serves in the Editorial Board of a number of other international journals.
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Introduction
A number of studies have examined the issue of logistics services outsourcing in different countries and undertaken comparative studies as well. Firms are increasingly seeking to treat logistics operations strategically to gain competitive advantage but often lack the competency to run efficient logistics operations themselves. Hence, there is a trend to outsource logistics activities (Sohail et al., 2004). Another important trend that is making a significant impact on the organisation is the increased emphasis on time-based competition (Bhatnagar et al., 1999). Logistics outsourcing has given birth to a huge TPL industry, which are currently competing in a highly fragmented but growing market Copyright © 2006 Inderscience Enterprises Ltd.
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(Gordon, 2003). Given the growing significance of the industry, a recent study focuses on examining the organisational dynamics of this industry in the USA (Aoyama et al., 2006). In a study, it was observed that while TPL industry has relatively become stable in the USA and Europe, while it is rapidly growing and emerging industry in Asia (Wang and Regan, 2002). Given the importance of TPL in USA and Europe, there have been studies undertaking comparative analyses, in the US–Europe context. A comparative analysis of the experiences of US and European manufacturers in using third party logistic services was undertaken by Lieb et al. (1993), and the following factors were tested in defining the extent of usage levels of commitment; budget allocation; geographical coverage; services utilised and nature and length of third party contracts. The study concluded that European organisations were significantly more committed and allocated a larger share of the overall logistics budget to their outsourcing company, as compared to their US counterparts. Turning to the Asian region, there have been studies undertaken to examine the usage of TPL services, for example, Singapore (Bhatnagar et al., 1999), Malaysia (Sohail and Sohal, 2003) and Saudi Arabia (Sohail and Abdali, 2005). While the usage of TPL services has been increasing in the Asian region, it has not been at an even pace and no studies have been to make a comparison. To address this issue, the objective of this paper is to compare logistics outsourcing activities by organisations in Malaysia and Saudi Arabia. In this respect, this study is modelled on an earlier study undertaking a comparison of Australian, US and Western European firms’ practices of logistics outsourcing (Millen et al., 1997). We believe that this research adds to the growing body of literature in the area. Given the growing body of literature in this area, we consider this specific study to be an important from international business perspective given that Malaysia and Saudi Arabia are significantly apart on the development continuum – Malaysia being considered more developed than Saudi Arabia. Malaysia and Saudi Arabia are both members of the World Trade Organisation and Organisation of Islamic Conference (OIC). Member countries within the OIC have been making efforts to collaborate and share experiences between them. With relatively a high degree of complementarity in the economies of both these countries, findings of this study could help in a comparative analysis and identify the linkages that could be established in the area of shipping and logistics. Presently these are the fields in which there are little alliances between the two countries.
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Literature review
From a review of extant literature, the origin of TPL can be traced back to the 1970s, when the concept of public warehousing emerged (Aghazadeh, 2003). By the 1980s, activity of such service providers expanded not only selling warehouse but also to providing distribution managers services related to improving customer service with their current customers (Tompkins, 1999). However, the 1990s witnessed dramatic changes, with logistics function no more restricted to merely lifting and shifting but rather to ensure that a firm gains competitive advantage (Christopher, 1993). Fuller et al. (1993) suggests that an important reason for the growth of TPL services is that companies compete in a number of businesses that are logistically distinct owing to varied customer needs. Through differentiation, most providers have managed to specialise their services by providing a variety of alternatives ranging from limited
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services (for example transportation) to broad activities covering the supply chain. With the dynamics of change and innovation issues associated with supply chain management, more recent studies in TPL have focused on the strategy development by TPL service providers (for example Hertz and Alfredson, 2003) and the process of TPL integration with customer relationship management (Knemeyer et al., 2003). Existing literature on TPL has identified a number of factors that affect the usage of TPL services. Empirical studies suggest a number of reasons on why organisations outsource. Sheffi (1990) identified the reasons in making a final decision on outsourcing in USA. These include the need to focus on core businesses, better transportation solutions, cost savings and improved services, development of necessary technological expertise and computerised systems and need for more professional and better-equipped logistics services. Sink and Langley (1997) found that the most important criterion for the selection of third party providers was core competencies. Many other studies have reported a number of other reasons as drivers of the decision to outsource logistics functions (See for example, Dapiran et al., 1996; Bhatnagar et al., 1999; Gordon, 2003; Sohail et al., 2004). Most research has focused on evaluating the results of outsourcing (for example, Peters et al., 1998; Murphy and Poist, 2000; Laarhoven et al., 2000). Sink and Langley (1997) propose a sequence of five steps for effective logistics outsourcing, which concludes with a conduct of ongoing service assessment of the TPL provider. From a review of literature, we can make out the major factors that have been used in previous studies to evaluate performance of the TPL providers include benefit or advantage realised by the company, satisfaction level with the performance of TPL provider and probability of increasing usage of the service of the TPL provider in the short-term future. It is also interesting to note that managers from the developed nations of the Asian region have reported reservations when the possible utilisation of contract logistics companies was first discussed. Thirty percent of the respondents in Australia had such concerns (Dapiran et al., 1996). The most commonly expressed concerns in this study were that of potential loss of direct control of logistics activities, uncertainties about the capabilities of the contract logistics firms, the costs of outsourcing and the deployment of company personnel. Similar reservations were reported in another study by senior managers when the possible utilisation of contract logistics was first discussed (Sohail and Sohal, 2003).
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Methodology
In this paper, we compare the results from two studies of logistics outsourcing. The first study to investigate logistics outsourcing was conducted by Sohail and Sohal (2003) in Malaysia. The questionnaire survey focused in the following areas: •
extent to which organisations use the services of contract logistics companies
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specific contract logistics services used and the benefits which have emerged for the user organisations
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obstacles encountered in implementing contract logistics relationships
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impact of the use of contract logistics services on logistics costs, customer satisfaction and employees of the user organisation
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future plans of current users of contract logistics services.
A sample population of 800 firms was randomly picked from two sources. Firstly, samples were picked at random from a list of all registered companies listed under the Kuala Lumpur Stock Exchange. Secondly, a sample was drawn from a list of manufacturing and resource-based industries. Financial, banking, real estate and insurance organisations were eliminated from the group, as they were less likely to have significant logistics needs. A total of 124 questionnaires were received, representing a response rate of about 16%, which compares favourably to response rates for other recent studies of the use of contract logistics services. The second study investigated logistics outsourcing in Saudi Arabia (Sohail and Abdali, 2005). For this study, the survey instrument employed by Sohail and Sohal (2003) was used with minor modifications to suit local needs. The target population included all firms that had significant logistics requirements. As a current and comprehensive database of companies was not available, a decision was made to randomly select firms from listing of companies registered with Chambers of Commerce in the cities of Riyadh and Dammam, where most of the nation’s economic activities are carried out. Out of a randomly generated sample of 2000 firms who were contacted, 496 completed questionnaires were received giving a response rate of 24.8%, which was in line with expectations. In the next section, we present our analysis of the responses.
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Data analysis and discussion of results
4.1 Extent of use and profile of respondents Out of a total of 124 responses from Malaysia, 40 firms did not use the services of logistics companies. These were screened out and further analyses relate to the remaining 84 firms who reported usage of logistics services. As for responses from Saudi Arabia, of the 496 received, 181 did not use contract logistics services, leaving the remaining 315 responses for further analyses. Results from the Saudi Arabian survey reveal that out of a total of 315 usable responses, 111 respondents (36.7%) indicated that their firms utilised the services of one or more contract logistics companies, which is close to half of the response from the Malaysian survey, in which 84 out of 124 respondents (67.7%) indicated that the organisations employ similar services. Among the users of contract logistics, 73.7% of organisations in Saudi Arabia utilised more than one outsourcing organisation while 63% of the Malaysian organisations indicated that they do so. These figures are similar to the numbers reported by US organisation (65%, see Lieb and Randall, 2000). A comparison of organisations that do not use contract logistics reveals that 45% of firms in both Malaysia and Saudi Arabia are considering the possibility of using this service in the future. Table 1 provides the data that relates to the length of experience with contract logistics services in Saudi Arabia and Malaysia. We observe that Malaysian firms have a significantly longer history of logistics outsourcing.
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Period for which third-party logistics services have been utilised Percentage of respondents
Duration in which contract logistics has been used
Malaysia
Saudi Arabia
5 years
46
30
Table 2 exhibits information on the size of the surveyed organisations. An independent t-test did not uncover a significant difference in size between users and non-users in Malaysia and Saudi Arabia individually as well as comparatively (t-value 0.087 at 95% confidence level). At an individual level, there is a significant difference among Saudi Arabian users based on the employment size, but in Malaysia, there were not significant differences among firms with more than 500 employees (9% and 6%) even though firms with less than 500 employees did differ at large from the rest of the group. Over 50% of the organisations outsourcing logistics in Saudi Arabia were small firms, employing fewer than 200 people, as compared to 43% of the users in Malaysia. About two out of five firms (42%) of the users in Malaysia were medium sized, employing between 200–500 employees as compared to approximately one in five (26%) of respondents from Saudi Arabia. Overall, the samples were fewer representatives of firms with higher levels of employment from both countries as compared to firms with lower levels of employment (less than 500). Table 2
Number of users and non-users in each category of organisational size Malaysian respondents
Approximate current employment
Saudi Arabian respondents
Users
Non-users
Users
Non-users
