Third-party purchase: An empirical study of third-party logistics ...

Int. J. Production Economics 171 (2016) 189–200

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Int. J. Production Economics journal homepage: www.elsevier.com/locate/ijpe

Third-party purchase: An empirical study of third-party logistics providers in China Yangyan Shi a,b,1,2, Abraham Zhang c,3, Tiru Arthanari d,2, Yanping Liu e,n, T.C.E. Cheng f,4 a

Centre for Operations and Supply Chain Management, Business School, Changzhou University, Jiangsu 213164, China Centre for Supply Chain Management, University of Auckland Business School, Auckland 1142, New Zealand c Department of Management Systems, University of Waikato Management School, Private Bag 3105, Hamilton 3240, New Zealand d Department of Information Systems and Operations Management, University of Auckland Business School, Auckland 1142, New Zealand e Department of Logistics Management, Business School, Nankai University, Tianjin, 300071, China f Department of Logistics and Maritime Studies, The Hong Kong Polytechnic University, Hong Kong, China b

art ic l e i nf o

a b s t r a c t

Article history: Received 3 September 2014 Accepted 29 August 2015 Available online 9 September 2015

Third-party purchase (3PP) is an emerging value-added service offered by third-party logistics (3PL) providers. In this paper we first present a real-life 3PP service model to illustrate 3PP’s innovative aspect. We then develop a conceptual model grounded in multiple theories to probe the value propositions of 3PP. We apply structural equation modeling to test the conceptual model based on the survey data from 245 Chinese 3PL providers. We find that, from the perspective of 3PL providers, uncertainty, order frequency, and transaction size, but not asset specificity, are significantly associated with 3PP service, which in turn is significantly associated with value-to-client and benefit-to-3PL provider. Existing studies have focused on investigating the basic services offered by 3PL providers using transaction cost analysis. This study provides evidence that 3PP is a new value-added service that will generate mutual benefits for both 3PL providers and users. & 2015 Elsevier B.V. All rights reserved.

Keywords: Third-party logistics Third-party purchase Structural equation modeling Supply chain management Supply chain innovation China

1. Introduction Third-party logistics (3PL) now plays a crucial role in many supply chains. With the growing trend of outsourcing, many organizations have outsourced their logistics activities to 3PL providers to focus on their core competencies, which reduces operating costs and improves service level (Langley, 2013). The growth of 3PL in the past three decades coincides with the unprecedented globalization of supply chains. When firms conduct international business, they often collaborate with 3PL providers in foreign markets in order to reduce the risks of investing in logistics assets. Lacking of local knowledge, they are more likely to depend on 3PL providers to overcome supply chain operational challenges (Wilson and Roy, 2009).

n

Corresponding author. Tel./fax: þ 86 22 66229205. E-mail addresses: [email protected], [email protected] (Y. Shi), [email protected] (A. Zhang), [email protected] (T. Arthanari), [email protected] (Y. Liu), [email protected] (T.C.E. Cheng). 1 Tel.: þ86 519 86330316; fax: þ 86 519 86330550. 2 Tel.: þ64 9 923 4857; fax: þ 64 9 3737430. 3 Tel.: þ64 7 838 4233; fax: þ64 9 3737430. 4 Tel.: þ852 2766 5216; fax: þ 852 2364 5245. http://dx.doi.org/10.1016/j.ijpe.2015.08.028 0925-5273/& 2015 Elsevier B.V. All rights reserved.

The services offered by 3PL providers have been growing. Transportation and warehousing are the two basic logistics functions. They remain important in the service portfolios of 3PL providers (Langley, 2013). However, leading 3PL providers differentiate themselves by offering new value-added services and comprehensive supply chain solutions. It is widely acknowledged that the 3PL market has become very competitive (Salleh et al., 2009). As a result, many 3PL providers have to bear a low profit margin if they mainly provide non-differentiated basic services. Leading 3PL providers have been continually developing new value-added services, e.g., freight consolidation, cross-docking, logistics IT solutions, supply chain financing (Carleton, 2010) etc. These value-added services help 3PL providers create new revenue sources and deliver much higher financial returns. They also enable leading 3PL providers to manage larger portions of their clients’ supply chains, yielding competitive advantage in the face of stiff competition. The primary focus of this research is on the potential of thirdparty purchase (3PP) as a new value-added service offered by 3PL providers. Since the early 2000s, many organizations have outsourced their non-core procurement activities to specialized procurement service providers as a means to achieve substantial cost reductions (Duffie and Toste, 2005). Procurement outsourcing

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Y. Shi et al. / Int. J. Production Economics 171 (2016) 189–200

implies the involvement of a third party other than the buyer and supplier. In this paper we define 3PP as a special case of procurement outsourcing in which the involved third party is also a 3PL provider. Because many 3PL providers have already been orchestrating their clients' supply chains (Zacharia et al., 2011), they are in an advantageous position to synergize a procurement service for value creation. Partly motivated by the higher profit margins, some of the world's largest 3PL providers, e.g., DHL, have started to offer 3PP as a value-added service. Many 3PL providers attempt to follow, but they are not clear about the prospect of this new service. To the best of our knowledge, no research has probed the value propositions of the 3PP service offered by 3PL providers. We plug this research gap by empirically investigating 3PP as a value-added service offered by 3PL providers. We conduct the investigation in China, which has been a popular global sourcing destination (Zhang and Huang, 2012). Chinese 3PL providers are thus in an advantageous position to offer 3PP as a new valueadded service. In this paper we regard 3PL providers that have established operations in China, regardless whether they are local firms, foreign-held, or joint ventures, as Chinese 3PL providers. At present, most Chinese 3PL providers offer a narrow range of basic services (Zhou et al., 2008) and compete mainly on price. They are falling behind their US counterparts and need to improve their service portfolios to offer more value-added services (Hong and Liu, 2007). It is thus in their interest to evaluate if 3PP is of potential and beneficial to their business. We aim to address the following four research questions: (1) What is the innovative aspect of 3PP service? (2) What are the key factors affecting the likelihood of 3PL providers to offer 3PP service and what are their impacts? (3) What are the benefits to 3PL providers if they offer 3PP service? (4) What are the values to 3PL users if 3PL providers offer 3PP service? We answer the first question by presenting a real-life 3PP service model, contrasting it with a typical procurement outsourcing service. We describe the innovative aspect of 3PP service and illustrate how it transforms the whole supply chain to benefit all the parties involved. To answer the other three questions, we develop a conceptual model grounded in multiple theories to probe the value propositions of 3PP and test the model based on survey data using structural equation modeling. We organize the rest of the paper as follows: In Section 2 we present a real-life 3PP service case. In Section 3 we introduce the conceptual model and formulate the hypotheses. In Section 4 we explain the research methodology. In Section 5 we present the analysis and discuss the results. In Section 6 we conclude the paper and suggest topics for future research.

2. An innovative 3PP service model Procurement outsourcing is most widely employed for commodity-type products with cost saving being the primary objective. However, 3PP service, i.e., procurement outsourcing offered by a 3PL provider, could transform the traditional supply chain structure and bring much more value to higher value products than commodities. The following real-life case illustrates how this can be achieved because of the unique position of a 3PL provider in managing a client’s supply chain. For confidentiality reasons, we do not disclose the names of the companies involved in this case example. Company ABC is a leading 3PL provider in China. It has two major clients that use its logistics services as well as its 3PP service. One of these two clients is a leading automobile manufacturer. The other client is one of the world's largest consumer electronics manufacturers and the 3PP service involves its laptop computer business. The 3PP service model is similar to both clients

so we choose to offer explanations based on the car manufacturer only. The car manufacturer has hundreds of 4S (sales, spare parts, service, and surveys) dealers in China. They used to place service parts procurement orders (POs) directly to the car manufacturer. Due to the sporadic demand nature of service parts, it had been a huge administrative burden for the car manufacturer to process the numerous small-quantity orders from its hundreds of dealers. Also, the car manufacturer had challenges in collecting payments from these dealers. The car manufacturer kept about one month's spare parts inventory in its manufacturing plant in northern China to ensure a high service level. Upon the receipt of a PO, the car manufacturer immediately dispatched the service parts. A nextday courier service was often used to shorten the transportation lead time. However, many car users still complained about the long waits (at least two days) for repair and servicing. Recently the car manufacturer worked with its 3PL provider ABC to re-engineer its service parts supply chain. ABC now provides 3PP service for service parts in addition to the logistics service for automotive vehicles. The 3PP service integrates a purchasing service with an inventory financing service. In the 3PP service model, as depicted in Fig. 1, the dealers place POs to ABC and ABC fulfils the orders from its regional warehouses that are much closer to individual dealers. ABC takes ownership of the spare parts in all its regional warehouses and is responsible for their inventory management. As ABC has established daily milk run routes for the delivery of automotive vehicles to dealers, it incurs little extra cost to add in a daily delivery of spare parts. It is also in a better position to solve the spare parts payment issues with the dealers as its delivery crews interact frequently with them. ABC consolidates the spare parts demand from dealers and place POs of much larger quantities with the car manufacturer weekly. It uses full truck load to transport the spare parts from the manufacturing plant to the regional warehouses economically. The 3PP service model has proved to be beneficial to all the three parties, i.e., the manufacturer, dealers, and 3PL provider. The manufacturer saves substantial administrative cost as it now handles much fewer consolidated POs from the 3PL provider. It is also relieved from the cash flow pressure resulting from having working capital tied up in spare parts inventories. These benefits enable the car manufacturer to better focus on its core competencies of designing, producing, and selling automotive vehicles. The 3PL provider, acting as a group purchasing agent, gets a much lower purchase price from the manufacturer because of bulk purchase. It is able to guarantee the dealers lower than market prices. At the same time, the 3PL provider is able to make a profit after covering the costs of order processing and fulfillment, inventory financing, and administration. According to our interviews with ABC, “the current profit margin is around 5%, which is higher than offering traditional 3PL services such as warehousing and transportation. Because the total purchasing volume is very large, about $100 million Chinese renminbi (RMB) in a year, the total profits are very substantial. We are also certain that the dealers will use our transportation service when we help them purchase products. They pay us normal freight rates.” From the viewpoint of the dealers, they now receive spare parts faster, mostly within one day. They enjoy a reduced purchase price and no longer need to pay a much higher courier service fee routinely for delivery. Overall the new supply chain is more efficient, generates less carbon emissions, and also more responsive to achieve a higher service level. The only drawback of the 3PP service model is the increased total inventories at multiple regional warehouses and the associated risks. However, it is a move that the manufacturer has to make to catch up with its competitors. Competition in the automotive industry in China has been much intensified in the past decade. Some of the competing car manufacturers have already set


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Fig. 1. 3PP service model for automotive service parts.

up regional spare parts warehouses to reduce delivery lead times to improve their service levels. The manufacturer is confident in managing the risks of holding more inventories in the supply chain because the spare parts have a life cycle of many years and their values do not depreciate at a fast pace. As for the 3PL provider, it has signed two contracts with the manufacturer to mitigate its business risks. One of them minimizes the risk in providing the purchasing service by obtaining exclusive rights from the manufacturer to sell spare parts to dealers. The other one limits the risk in inventory financing by obligating the manufacturer to buy back the spare parts that are rejected or no longer ordered by the dealers under certain conditions. The 3PP service model is very innovative in several aspects. First, it adds much more value to the supply chain than a typical procurement outsourcing service. The latter is often motivated by cost reduction objectives; while 3PP service, as in the case described above, improves customer service level, reduces a client's administrative cost and cash flow pressure, enables a client to focus on its core competencies, and makes the whole supply chain more efficient and environmental friendly. As a result, 3PP is not only suitable for commodity-type products, but also for other products including but not limited to consumer electronics and automotive spare parts. Second, 3PP service has the option of integrating an inventory financing service, which essentially finances a client's supply chain. Note that supply chain financing is a relatively new and innovative method for supply chain improvement (Randall and Farris, 2009). A 3PL provider that has sufficient financial strength could offer it as part of its 3PP service. Last but not the least, 3PP offered by a 3PL provider has unique advantages to achieve higher levels of supply chain integration and synergy. A typical procurement outsourcing service is often performed by a specialized procurement service provider, which still has to engage a 3PL provider to handle the procurementrelated logistics activities in most instances. As mentioned earlier, most 3PL providers are now orchestrating their clients’ supply chains, so they are in the best position to streamline and seamlessly integrate the flows of materials, information, and financials that are associated with outsourced procurement. In summary, the 3PP service model described above is innovative in concept and operation. Currently most 3PL providers do not manage their clients' procurement activities. In providing 3PP

service, a 3PL provider plays the role of a group purchasing agent that helps to lower the procurement cost. It also has the option of integrating the 3PP service with the inventory financing service. It transforms the traditional supply chain structure to a more effective and environmental friendly one. The benefits of 3PP include not only cost saving, but more importantly improved service levels, shorter delivery lead times, reduced cash flow pressure, and fewer environmental footprints.

3. Conceptual model and hypotheses Fig. 2 depicts the conceptual model that we develop to guide this research. As mentioned earlier, we employ multiple theoretical viewpoints to examine the value propositions of 3PP service. This is in line with many scholars' belief that it is more appropriate to adopt multiple theories to explain organizational behaviors as each theory has its values and limitations (Halldorsson et al., 2007; Mclvor, 2009; Hofer et al., 2009). In this section we first present and justify the conceptual model, and then develop the hypotheses in three subsections. We apply the transaction cost perspective to evaluate the contract risk associated with offering 3PP service. Transaction cost theory suggests that a firm behaves to minimize transaction costs based on the assumptions that decision makers are opportunistic and have limited capabilities (bounded rationality) in understanding fully the complexities of all the possible decisions (Coase, 1937; Williamson, 1975, 1985, 1998, 2008). The theory is most noted for its use to account for “make” or “buy” decisions. However, it is applicable for analyzing other types of contracting problems as well (Williamson, 1998; Grover and Malhotra, 2003; Holcomb and Hitt, 2007). Researchers have applied transaction cost theory as a tool to analyze the basic services offered by 3PL providers (Hanna and Maltz, 1998; Bienstock and Mentzer, 1999; Maltz, 1993, 1994). In this study we focus on two key factors and their impacts, namely asset specificity and uncertainty, which are directly relevant to the assumptions of opportunism and bounded rationality. The second perspective we employ is to view a 3PL provider that offers 3PP service as a group purchasing agent. The effectiveness of group purchasing is largely dependent on the

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Fig. 2. A conceptual model of 3PP.

purchasing leverage it could obtain by consolidating demands from multiple users. We therefore consider the two important factors that affect purchasing leverage, namely order frequency and transaction size. The third perspective focuses on value creation, which is essential for an innovative service like 3PP as its benefits extend beyond cost saving. We consider both value-to-client and benefitto-provider. Underpinning the notion of value creation is the resource based view of the firm, which explains how firms could gain a competitive advantage from distinctive resources and capabilities (Barney, 1991; Halldorsson et al., 2007; Mclvor, 2009). The resource based view has led to the development of the core competence concept (Hamel and Prahalad, 1994), which has been instrumental in popularizing the theory and practice of outsourcing. We also incorporate insights from the social exchange theory, which has been widely recognized in the marketing literature for its ability to predict the exchange behaviors among different parties (Hofer et al., 2009). 3.1. Contract risk 3.1.1. Asset specificity Asset specificity is related to the level of customization needed to support an exchange. Specific assets refer to assets that cannot be easily redeployed in another application or transferred to another customer (Ellram et al., 2008). Transaction cost theory asserts that opportunistic behavior is most likely when an exchange requires one party to make significant investments in specific assets. Once such investments are made, the other party may take advantage of the hold-up issue (Klein et al., 1978; Bengt and Roberts, 1998) for its gains. If a 3PL provider is required to invest in specific assets (e.g., building a new warehouse for the purchasing service in a close geographic area in order to deal with suppliers) to support an activity, it may choose not to offer the service because the contract risk goes up. Therefore, we predict: H1:. The greater the required investments in non-redeployable assets are, the less likely are 3PL providers to offer 3PP service. 3.1.2. Uncertainty Uncertainty refers to the level of unpredictability related to future events (Williamson, 1985; Rindfleisch and Heide, 1997). Uncertainty makes it difficult for businesses to match supply and demand, and to accurately predict the financial returns and associated risks of offering a new service. There are two sources of

uncertainty, namely the market and the firm itself. External uncertainty could stem from volatility in product availability, key suppliers, purchasing prices, and other disruptions to the market (Ellram et al., 2008). Internal uncertainty is mainly due to a firm’s lack of capability to forecast the occurrences of changes in the external environment (Williamson, 1985). If the uncertainty level is high, 3PL providers may not be sure if they can fulfill the contract requirements at reasonable costs. We thus predict: H2. : The lower the level of uncertainty is, the more likely are 3PL providers to offer 3PP service. 3.2. Purchasing leverage 3.2.1. Order frequency Purchasing leverage is possible for recurrent transactions conducted with the same supplier (Ellram and Billington, 2001). Assuming 3PL providers have deployed resources for 3PP service, increasing the frequency of POs will reduce the fixed cost per transaction. Assuming the order sizes are comparable, a higher order frequency will lead to greater total purchasing volume and negotiation power. Under such circumstances, the 3PL providers will strengthen their role as a group purchasing agent in offering 3PP service. This is especially true if their 3PL users do not have a core competence in procurement, so they will find it less cost efficient in managing the purchasing activities when the order frequency increases. Therefore, we predict: H3. : The higher the frequency of users using the purchasing service is, the more likely are 3PL providers to offer 3PP service. 3.2.2. Transaction size Transaction size largely determines the scale economy of transactions. Larger transaction sizes can increase a firm's purchasing power (Ramsay, 1994). Through consolidating orders, 3PL providers are able to secure lower purchasing prices. A large order size gives 3PL providers an edge in negotiation with suppliers and they may pass some of the benefits to their 3PL users. Therefore, we predict: H4. : The larger the transaction size is, the more bargaining power 3PL providers have to reduce the purchasing cost. 3.3. Value creation 3.3.1. Value-to-client In a long-term collaborative relationship, 3PP service may bring some benefits to 3PL users in the form of a new governance


structure. 3PL users can focus on their core competencies and outsource the purchasing functions for non-critical items. They may aggregate their purchasing power via 3PL providers, since most 3PL users, such as SMEs, struggle with the purchasing price due to their low levels of purchasing power (Hudson and McArthur, 1994). In particular, it is hard for 3PL users to check product quality, exchange information with suppliers, and bear high operation costs due to the long distance involved when they source overseas (Wilson and Roy, 2009). 3PL providers could alleviate the pain and reduce the risks borne by 3PL users by offering 3PP service. Therefore, we predict: H5. 3PL providers perceive that 3PP service is positively associated with bringing more value to their clients. 3.3.2. Benefit-to-provider 3PP brings some obvious benefits to 3PL providers. 3PL providers can play the role of a group purchasing organization in consolidating the procurement orders of 3PL users. Relevant procurement activities can be transferred to 3PL providers, which include negotiation, contract management, and supplier evaluation (Nollet and Beaulieu, 2005). Furthermore, as 3PL providers manage a large portion of their clients' supply chain, they can better integrate their logistics with procurement activities to deliver more reliable and consistent services. This can help 3PL users achieve a higher service level and greater cost saving. Consequently, 3PL providers could enjoy improved customer satisfaction, higher capacity utilization of the warehousing and transportation assets, the development of a new profit source, and higher employee morale. The relationship between a 3PL provider and a 3PL user is more likely to become strategic, in contrast to many 3PL relationships that are transactional and less enjoyable. Therefore, we predict: H6. : 3PL providers perceive that 3PP service is positively associated with receiving more benefits for themselves.

4. Research methodology 4.1. Survey instrument We design a questionnaire to identify whether 3PL providers want to offer 3PP service from the transaction cost perspective. While we administered the questionnaire in Chinese, we developed the original measurement items in English and the questionnaire in several stages. First, we formulated the questions based on an extensive literature review. Second, we discussed both the paper-based English and Chinese versions of the draft questionnaire with academic colleagues. We compared the Chinese version with the original English version to ensure equivalency of both versions. After making some minor changes, we discussed the questionnaire with senior- and middle-level logistics/purchasing managers in the logistics industry. We revised the questionnaire based on their suggestions. Reviews by both academics and practitioners confirmed the questionnaire's face validity (Cook and Campbell, 1979) while its content validity was established by making reference to pertinent examples in the literature and by academics and managers.

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and working procedures (Larsen, 2000; Rabinovich et al., 2007). We adapt the uncertainty measures from Rabinovich et al. (2007) and Reeves et al. (2010) to capture uncertainty based on ability of demand forecasting, returning value to the organization, levels of evaluating purchasing performance, and duration of outsourcing purchasing services. We measure frequency by the variables of cost and level of negotiation power to reduce purchasing cost (Goldsby and Eckert, 2003; Maltz, 1993; Hanna and Maltz, 1998; Ellram and Billington, 2001). We measure transaction size by ability to combine purchasing orders, degree of user consolidation, and benefits associated with the size of orders (Ernst and Bas, 2003; Ellram and Billington, 2001; Stump, 1995; Gattorna et al., 1991). We adapt the measures of 3PP service from Pring (2006) based on a classification of the purchasing function into the following activities: category management, supplier market research, supplier qualification and selection, request for proposal management, bid preparation and management, cost analysis, and supplier relationship management. We measure value-to-client by 3PP’s helping in core competencies, maintaining relationships with 3PL customers, and minimizing relevant purchasing risks (Hofer et al., 2009; Sink and Langley, 1997). The measures of benefit-to-provider focus on customer satisfaction, cost saving, employee morale, reliability of consistent service, and working comfortably with customers (Hofer et al., 2009; Salleh et al., 2009; Knemeyer and Murphy, 2005). 4.3. Data collection For data collection in China, we were supported by the Chartered Institute of Logistics and Transport (CILT China), China Federation of Logistics and Purchasing, and Tianjin Communication and Logistics Association. These associations' members have professional qualifications and practical work experience in logistics and purchasing. These associations did not allow us to collect information about survey respondents such as positions, qualifications etc. However, to ensure data quality, we were able to impose four requirements on the survey respondents to assure that they have adequate knowledge of purchasing, logistics, and their firms' operations: (1) they must be at the middle management level or above, preferably Chief Procurement Officer, Chief Operations Officer, or Chief Executive Officer; (2) they have at least three years of work experience related to purchasing and logistics; (3) they have at least a bachelor's degree related to purchasing and logistics; and (4) their firms must have been a member of one of the relevant professional associations for at least a year. An online survey link (including electronic documents) with a cover letter explaining the purpose of the research was put on the official association websites and the associations encouraged their members to complete the survey through their membership newsletters and e-mails. We received 245 usable responses from 3PL providers (a response rate of 17.1%). Although the response rate is relatively low, it is comparable to or slightly better than other studies conducted in China (Wang et al., 2010; Lai et al., 2009; Hong and Liu, 2007; Zhao et al., 2006). The typical response rate in China is 10–15% (Wang et al., 1998). “These low response rates are common in South–East Asia and are attributable to numerous structural and cultural factors” (Lai et al., 2009, p. 982). 4.4. Non-response bias and common methods bias

4.2. Measures We measure asset specificity by several items to capture specificity in terms of coordination with 3PL providers, investments in purchasing resources (e.g., time, effort etc), ability in leveraging the purchasing function, and transferring organization routines

We examine whether there is non-response bias and commonmethod variance in the response data. We assess non-response bias by following the procedure suggested by Armstrong and Overton (1977). In terms of demographic variables (years partnered with 3PL providers or customers, firm size, and annual gross

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sales), we compared the responses of the first 10% of the respondents with those of the last 10% of the respondents using a t-test. The test results show no significant statistical differences between the two groups in terms of the means of the items. Common method bias should be controlled as much as practically possible in survey studies. As mentioned in Section 4.1, our survey questionnaire was reviewed by senior- and middle-level logistics/purchasing managers in the logistics industry. We revised the questionnaire based on their feedback to remove ambiguity before the survey was administered. In addition, the survey respondents were assured of their anonymity and confidentiality of the study. We test potential common-method variance in the survey data by using the Harman one-factor test (Podsakoff and Organ, 1986). To conduct this test, we entered all the items making up the constructs into a principal components factor analysis with VARIMAX rotation (Gotzamani et al., 2010). The Kaiser-MeyerOlkin (KMO) measure of sampling adequacy is 0.761, higher than the required threshold of 0.5 (Kaiser, 1970). The Bartlett's Test of Sphericity is significant (p o0.001) (Barlett, 1950), suggesting suitability for factor analysis. Seven factors are extracted accounting for 69.41% of the variance while factor one accounts for 17.51% of the variance. We conclude that common-method variance is not a problem with the data.

5. Analysis and discussion 5.1. Respondent profiles Table 1 shows the demographics of the surveyed 3PL providers. 76.8% of the respondents indicate that they have been in the 3PL business for 2–15 years. 13.1% of the respondents employ no more than 100 full-time staff, while 24.9% of them employ more than 1000 full-time staff. More than 50% of the respondents indicate that their annual gross sales are more than RMB$50 million. This shows that the majority of the respondents are medium-sized enterprises. However, the sample also has a good coverage of small- and large-sized enterprises. Table 2 shows that the importance of purchasing services perceived by 3PL providers is high, just slightly lower than that of transportation and warehousing services, which are the two essential logistics functions. 3PL providers regard purchasing services as important as consolidation and distribution services.

5.2. The measurement model After data collection, we perform a series of analyzes to test the reliability and validity of the constructs. We use SPSS and AMOS 19 for the statistical analysis. 5.2.1. Unidimensionality and reliability We employ a rigorous process for scale development because the scales are being used in a different national culture than the Western culture for which they were developed. Based on Narasimhan and Jayaram (1998), we follow the two-step method to test construct reliability. First, we conducted exploratory factor analysis (EFA) to ensure unidimensionality of the scales (Zhao et al., 2008). Second, we applied Cronbach's Alpha (α) to assess reliability. We performed EFA with principal components analysis for data reduction and determining the main constructs measured by the items. We used Varimax rotation with Kaiser normalization to clarify the factors (Loehlin, 1998). We computed the Cronbach's Alpha (α) for each construct in order to test for internal consistency. Table 3 shows that each construct in the sample of 3PL providers has at least three measured variables to explain it. All the factor loadings are above the suggested threshold of 0.5 (Hair et al., 2010). We performed confirmatory factor analysis (CFA) using maximum-likelihood estimation to further justify the factor structure. Reporting the χ2 value and degrees of freedom, the comparative fit index (CFI), and the root mean square error of approximation (RMSEA) usually provides sufficient information to evaluate a model (Hair et al., 2010). In addition, we calculated the incremental fit index (IFI) and Tucker-Lewis Index (TLI) as well. Table 2 Perceived level of importance of logistics activities performed by 3PL providers.

Activity

Percentage 3PL providers

Transportation Warehousing Purchasing Consolidation and distribution Inventory management Product returns Order management Cross docking Packaging

90.61 83.27 81.22 81.22 70.61 47.35 70.61 67.76 69.8

Table 1 Company profile. Firm characteristics

Firm Group

Percentage 3PL providers

Age of firms partnered with 3PL providers or customers

Less than or equal to 2 years More than 2 years but less than or equal to 5 years More than 5 years, but less than or equal to 10 years More than 10 years, but less than or equal to 15 years More than 15 years Less than 50 51–100 101–500 501–1000 1001–2000 Over 2000 Less than or equal to RMB 25 million More than RMB 25 million, but less than or equal to RMB 50 million More than RMB 50 million, but less than or equal to RMB 75 million More than RMB 75 million, but less than or equal to RMB 100 million More than RMB 100 million

6.9 11.4 27.8 37.6 16.3 3.3 9.8 33.1 29 15.1 9.8 6.9 14.7 12.7 22.9 42.9

Number of employees

Annual gross sales


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Table 3 Exploratory factor analysis for Chinese 3PL providers. 3PL providers

CL-Cord CL-Inves CL-Leve CL-Rout CL-Demo CL-Conf CL-Eva CL-Period CL-Fix CL-Moni CL-FreInc CL-PurcOrd CL-Conso CL-OrdLag CL-PA-Cat CL-PA-Mgk CL-PA-Qua CL-PA-Pro CL-PA-Bid CL-PA-Cos CL-PA-Sup CL-Risk CL-MaiRel CL-CorBus CL-OP-Sat CL-OP-Cost CL-OP-Mora CL-OP-Rel CL-Comfor Total variance explained

Procurement

Benefit-to-3PL provider

Asset specificity

Uncertainty

Value-to-client

Frequency

Transaction Size

.061 .004 .000 .048 .015 .083 .027 .065 .038 .123 .091 .107 .003 .011 .768 .874 .822 .889 .885 .854 .816 .073 .042 .085 .006 .060 .053 .065 .019

.047 .091 .031 .139 .007 .031 .085 .008 .041 .103 .039 .014 .075 .020 .096 .032 .023 .014 .025 .030 .083 .038 .063 .078 .752 .785 .862 .836 .827

.863 .811 .767 .735 .032 .049 .149 .112 .025 .026 .042 .013 .119 .049 .079 .011 .056 .021 .092 .019 .029 .064 .007 .026 .060 .030 .105 .093 .073

.062 .010 .140 .036 .810 .861 .793 .685 .019 .052 .066 .070 .085 .228 .051 .021 .117 .027 .002 .095 .049 .009 .035 .033 .053 .106 .002 .023 .028 69.41%

.005 .081 .060 .034 .035 .008 .012 .020 .133 .055 .069 .119 .363 .163 .006 .035 .020 .047 .024 .122 .056 .803 .814 .837 .331 .240 .267 .239 .049

.062 .171 .034 .195 .016 .040 .017 .141 .776 .765 .772 .075 .152 .022 .089 .110 .020 .065 .077 .017 .141 .010 .153 .026 .151 .138 .078 .052 .087

.021 .020 .009 .064 .029 .090 .039 .060 .103 .100 .159 .791 .692 .746 .080 .050 .144 .065 .017 .014 .038 .080 .088 .000 .040 .061 .032 .031 .082

The values of CFI, TLI, and IFI between 0.80 and 0.89 represent a reasonable fit (Segars and Grover, 1998; Shevlin et al., 2000) and scores of 0.90 or higher provide evidence of good fit (Byrne, 1989; Papke-Shields et al., 2002; Hooper et al., 2008; Wiengarten et al., 2010). The scores of RMSEA below 0.08 indicate a good fit (MacCallum et al., 1996). The Chi-Square value would provide an insignificant result at less than 0.05 (Barrett, 2007), so the ChiSquare statistic is usually referred to as either a “badness of fit” (Kline, 2005) or a “lack of fit” (Mulaik et al., 1989). Byrne (2001) indicates that the Chi-Square fit index has been demonstrated to be unrealistic in most structural equation modeling research. Due to the limitations of the Chi-Square fit index, researchers choose alternative indices to evaluate model fit, such as the normed (relative) Chi-Square (χ2/df). A value of the normed Chi-Square less than 3.0 means a reasonable fit and a value less than 2.0 illustrates a good fit (Segars and Grover, 1998; Papke-Shields et al., 2002; Bollen, 1989). The model fit indices are χ2(345) ¼ 520.535, po 0.001; CFI¼0.96; IFI¼0.96; TLI ¼0.95; and RMSEA ¼0.046. Although the χ2-value is significant, the normed Chi-Square score for the sample is below the recommended value of 1.509, indicating that the model is acceptable. Hair et al. (2010) point out that standardized factor loadings should be at least 0.50. All the factor loadings are greater than 0.50 and significant at p-values less than 0.001. We use the Cronbach’s Alpha (α) reliability estimate to measure the internal consistency of the multivariate scales (Nunnally, 1978). In this study, the Cronbach's Alpha (α) values are greater than 0.70, which show that there is good reliability of the survey instrument (Nunnally, 1978). The composite reliability and variance are greater than 0.70 and 0.50, respectively (Hair et al, 1998). Thus, convergent validity is established (Table 4).

5.2.2. Validity Fornell and Larcker (1981) proposed a rigorous validity test that compares the average variance-extracted values for any two constructs with the square of the correlation estimate between these two constructs. The idea is based on the notion that a latent construct should explain more of the variance in its item measures that it shares with another construct. In Table 5, the numbers on the diagonal are the average variance-extracted values. In each column, the values are the correlation estimates between every two constructs. Based on the results, inter-correlations between the constructs are moderate, suggesting that items assigned to one construct are not significantly loading highly on the others. Thus, discriminant validity is established. 5.3. Structural equation modeling results Given the validity of the measurement model, this section focuses on the structural model and testing of the hypothesized relationships. We use AMOS 19 for the SEM analysis. We assess individual hypotheses by reviewing the direction and significance in the AMOS output. We analyze the proposed structural model with AMOS 19 to test the hypothesized relationships. The fit statistics indicate that the hypothesized structural model achieves acceptable fit (χ2(367)¼810.903, po 0.001; the normed Chi-Square¼2.210; CFI¼0.92; IFI ¼0.92; TLI ¼0.91; and RMSEA ¼0.054). We then examine the AMOS outputs on the hypothesized paths' standardized regression weights with relevant critical ratios (CR) and pvalues to test the individual hypotheses. Table 6 reports the results of the structural model test. Uncertainty, frequency, and transaction size all have a significant impact on procurement (b¼0.163, 0.176, 0.19, respectively; p o0.01).

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Table 4 Cronbach’s Alpha (α) and composite reliability for Chinese 3PL providers. Construct

Indicator

Standardized weight

Cronbach's alpha

Composite reliability

Variance extracted

AS

CLRout CLLeve CLInves CLCord CLPeriod CLEva CLConf CLDemo CLFreInc CLMoni CLFix CLOrdlag CLConso CLPurcOrd CLPAQua CLPAMgk CLPACat CLPAPro CLPABid CLPACos CLPASup CLCorbus CLMaiRel CLRisk CLOPMora CLOPCost CLOPSat CLOPRel CLComfor

0.635 0.666 0.729 0.878 0.51 0.659 0.89 0.754 0.679 0.537 0.751 0.501 0.694 0.681 0.816 0.894 0.583 0.955 0.741 0.768 0.791 0.786 0.754 0.754 0.969 0.508 0.516 0.923 0.736

0.816

0.820

0.537

0.809

0.829

0.558

0.802

0.794

0.567

0.813

0.813

0.596

0.934

0.947

0.722

0.803

0.912

0.775

0.876

0.928

0.734

UN

FR

SZ

Procu

VTC

BT3PL

Notes: χ2(345) ¼520.535, χ2/df ¼1.509, CFI ¼ 0.96, RMSEA ¼0.046. All are significant (p o 0.001).

Table 5 Discriminant validity for Chinese 3PL providers.

AS UN FR SZ PROCU VTC BT3PL

AS

UN

FR

SZ

PROCU

VTC

BT3PL

0.537 0.41* 0.033 0.232** 0.063* 0.001** 0.182*

0.558 0.44* 0.163* 0.117** 0.003* 0.025**

0.567 0.302** 0.039* 0.186* 0.053*

0.596 0.152** 0.362*** 0.005*

0.722 0.17** 0.041*

0.775 0.233**

0.734

Note: *

p o 0.05. po 0.01. *** p o 0.001. **

These results confirm our theoretical expectation and provide support for H2–H4. However, the path loading (b ¼ 0.092; ns) from asset specificity to procurement is not significant, so H1 is rejected. The path from procurement to value-to-client is highly significant (b¼ 0.385; p o0.001). This is consistent with our theoretical prediction that procurement significantly influences value-to-client, supporting H5. The impact of procurement on benefit-to-provider is also significant (b ¼0.209; p o0.001), suggesting support for H6. 5.4. Discussion We focus on 3PP as a value-added service offered by 3PL providers in this study. Most importantly, we provide theoretical reasoning and empirical evidence to show that the majority of 3PL providers perceiving that 3PP as a value-added service is quite important to their businesses although most of them may not offer this service at present.

Based on survey data from 3PL providers, we find no significant relationship between asset specificity and 3PP service. This contradicts Hanna and Maltz’s (1998) findings from a study of less than truckload (LTL) providers expanding into warehousing services. This is probably because warehousing services require warehousing and material handling assets that are often redeployable in 3PL operations. 3PL providers do not need to make large investments in recruiting and cultivating purchasing professionals since they can be hired from the job market. They are redeployable assets. More investments in improving and upgrading hardware and software facilities would not be necessary since their current infrastructure can meet the purchasing needs of 3PL users. In particular, large 3PL providers are in an advantageous position to offer 3PP service because of their well-established transport networks, warehousing and distribution facilities, advanced logistics technologies, and high credibility that is recognized in the logistics industry. This implies that the entry barrier is low for 3PL providers to venture into the 3PP market. Furthermore, most 3PL providers believe that they have close relationships with their clients. A few 3PL providers have built strategic partnerships with their clients. Continuously offering new services would strengthen the relationships between 3PL users and providers. Thus, 3PL providers should focus on introducing and promoting 3PP service to 3PL users. The low requirement for investing in specific (non-redeployable) assets gives 3PL providers more flexibility in bargaining for the best prices on behalf of their clients (Williamson, 1985). The “hold-up” issue (Klein et al., 1978; Bengt and Roberts, 1998) is not a significant obstacle to prevent 3PL providers from offering the value-added 3PP service. We find a significant relationship between uncertainty and 3PP service. This is similar to Reeves et al. (2010) and Bienstock and Mentzer’s (1999) findings concerning outsourcing distribution and logistics services in the automotive supplier industry. Most 3PL providers believe that they can manage the demand volatility in the type and volume of products outsourced to them. Large 3PL


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Table 6 Hypothesized paths testing for China 3PL providers. Path H1 H2 H3 H4 H5 H6

Asset specificity-Procurement Uncertainty-Procurement Frequency-Procurement Size-Procurement Procurement-Value-to-client Procurement-Benefit-to-provider

Standardized weight

CR

p

Note

0.092 0.163 0.176 0.19 0.385 0.209

1.674 2.875 2.866 3.285 7.014 3.823

0.094 0.004 o 0.01 0.004 o 0.01 0.001o 0.01 o0.001 o0.001

Not significant Supported Supported Supported Supported Supported

providers, which have strong financial ability and a worldwide logistics network, are more confident about the financial returns in offering 3PP service, although they will still be inevitably affected by uncertainty. With differentiated services, 3PL providers that are specialized in a niche market or a particular region are also confident about securing good financial returns from offering 3PP service. We find that there is a significant relationship between order frequency and 3PP service. This is similar to Hanna and Maltz’s (1998) findings concerning LTL providers expanding into warehousing services. 3PL providers expect weekly orders from their clients. Consolidating similar orders helps 3PL providers reduce the fixed cost per transaction and improve their asset efficiency. They also suggest that increasing the order frequency from their clients enables them to aggregate more orders and obtain more bargaining power. Such a leverage achieved by 3PL providers is stronger when they deal with the same suppliers in recurrent transactions (Ellram and Billington, 2001). We find a significant relationship between transaction size and 3PP service. 3PL providers believe that large transaction sizes give them more clout in purchase price negotiations. They want to become “price maker” rather than “price taker”. Also, 3PL providers are able to solve unpredicted issues through securing large transaction sizes, such as obtaining bank loans to cope with their financial constraints. Using aggregated orders increases the possibilities of negotiating better purchasing prices by 3PL providers. Quickly consolidating small and similar orders can increase the flexibility of 3PL providers in meeting uncertain market demand. Thus, large transaction sizes improve the economies of scale of transactions for 3PL providers and enable them to seek more benefits for their customers. 3PL users are able to receive more benefits in the hybrid context that combines the structure of market and hierarchy (Williamson, 1975, 2008). The survey results suggest a significant relationship between 3PP service and value-to-client. 3PL providers perceive that 3PP would help their customers focus on their core business and minimize the purchasing risks. Since 3PL providers have already been offering logistics services to their clients, using the same information exchange platform for the added 3PP service would help their customers reduce the transaction cost. In addition, the manpower cost, negotiation cost, decision cost, and other related costs to the 3PL users can be reduced. We also find a significant relationship between 3PP service and benefit-to-provider. Providing 3PP service helps 3PL providers to keep customers’ loyalty, increase market share, obtain additional profits, and maximize the capacity utilization of their warehousing and transportation assets. It is thus beneficial for 3PL providers to take over some of the purchasing activities of 3PL users, as suggested by Nollet and Beaulieu (2005).

pressure. It can also enable 3PL users focus on their core competencies and reduce the purchasing risk. Second, it is able to benefit 3PL providers by enhancing their role as a supply chain manager and improving their financial returns. With the support of advanced information technologies, 3PL providers can integrate 3PP service into their existing system platforms to reduce the overall transaction cost and attain better supply chain integration. Last but not the least, 3PP is capable of transforming the structure of the traditional supply chain to a more effective one that simultaneously improves operations efficiency, achieves higher service levels, and reduces carbon footprints. 3PP is relevant to 3PL providers that seek to differentiate themselves in the face of stiff competition. In view of the rapid growth of procurement outsourcing in the past two decades, 3PP service is likely to become a major trend in the 3PL market. 3PL providers should seriously consider offering 3PP service if they have not done so. Our survey results show that the hold-up issue associated with specific assets is not a significant factor in offering 3PP service. Most 3PL providers are confident about the financial returns from offering 3PP service to 3PL users because this new service would bring mutual benefits to both parties and help them maintain their competitive edge in their markets. Large 3PL providers, which often have extensive logistics networks, financial strengths, large customer bases, and integrated and advanced information technologies, are the ideal initiators to launch 3PP service. The underlying science of 3PP is embedded in the new role that 3PL providers play in offering the service. The traditional role of 3PL providers is a logistics service provider. In recent years, leading 3PL providers have emerged as supply chain orchestrators (Zacharia et al., 2011). In the 3PP service model, 3PL providers play the new role as a group purchasing agent. 3PL providers' effectiveness in this new role is largely determined by the leverage that it obtains through order consolidation, which is essential for achieving substantial cost saving. Furthermore, acting as a group purchasing agent strengthens 3PL providers' traditional role and competitive position as they manage larger portions of their clients' supply chains. The 3PP market has just emerged. 3PL providers are likely to succeed by starting with a client that has a large number of regular customers, e.g., an automotive manufacturer that meets the demands of hundreds of dealers as the one presented in Section 2. The first moving 3PL providers are likely to secure a competitive edge once they have won some customers. Further market growth will benefit from a virtuous cycle in order consolidation, i.e., the more 3PP customers a 3PL provider has, the more benefits it could reap in order consolidation. Venturing into the 3PP market does not yield a high risk to 3PL providers since it is not a prerequisite to make large investments in specific assets. Therefore, interested 3PL providers may consider promoting the new service aggressively.

5.5. Managerial implications 6. Conclusions Based on the analysis of empirical data presented above and the real-life 3PP service case presented in Section 2, we may conclude that 3PP offers several major benefits. First, it can help 3PL users substantially reduce the purchasing cost and cash flow

This research studies 3PP as an emerging value-added service offered by 3PL providers. The 3PL market has become increasingly competitive. Leading 3PL providers have been continually

198


developing new value-added services to differentiate themselves. Procurement outsourcing has been a growing sector since the early 2000s. 3PL providers are in an advantageous position to offer their own procurement outsourcing service, i.e., 3PP. However, few 3PL providers have seized the opportunity. While the 3PP market has great potential, to the best of our knowledge, no research has probed the value propositions of 3PP service and ascertained the pros of cons of 3PL providers offering the service. This research makes several key contributions. First, it is a pioneering work on 3PP service offered by 3PL providers. Procurement outsourcing has been growing rapidly. 3PL providers are playing an increasingly important role in global supply chains. This research topic thus warrants in-depth study. Second, this research establishes the innovative aspect of 3PP. So far the implementation of the new service is still in infancy. Third, this research applies multiple theoretical viewpoints to investigate the value propositions of 3PP service. Such an approach is believed to be more appropriate for analyzing organizational behaviors as individual theories have their own limitations. Last but not least, the research results establish that 3PP service is a promising value-added service. It has the potential to transform the traditional supply chain to a more effective one that benefits to all the parties involved and the environment in which it operates.

This research has some limitations. We consider only four key factors (asset specificity, uncertainty, order frequency, and transaction size) that affect the likelihood of 3PL providers offering 3PP service. Future studies may explore other pertinent factors such as firm size, trust, global economy, seasonal factors, and so forth. In addition, we focus on 3PP as a value-added service. Future research may investigate other value-added services offered by 3PL providers.

Acknowledgments We thank the anonymous referees for their helpful comments on earlier versions of our paper. Our survey was supported by the Chartered Institute of Logistics and Transport (CILT China), China Federation of Logistics and Purchasing, and Tianjin Communication and Logistics Association. We appreciate the kind helps offered by these organizations and all the survey respondents. Cheng was also supported in part by The Hong Kong Polytechnic University under the Fung Yiu King-Wing Hang Bank Endowed Professorship in Business Administration.

Appendix. SEM measures included in the questionnaire

1. Asset specificity measures: The purchasing of each order requires close coordination with your organisation’s customers. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree) You have made significant investments in purchasing function resources dedicated to your customers. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree) Your organisation could leverage the purchasing function to build relationships with the customers. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree) On average, your customer’s routines and working procedures are difficult processes to be transferred to your organisation. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree)

2. Uncertainty measures: Demand forecasting for purchasing outsourced to your organisation is: □1 (Very Difficult) □2 (Difficult) □3 (Neutral) □4 (Easy) □5 (Very Easy) Your organisation is confident that outsourcing purchasing services would return value to your organisation. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree) Evaluating the current purchasing performance offered by your organisation is: □1 (Very Difficult) □2 (Difficult) □3 (Neutral) □4 (Easy) □5 (Very Easy) You expect to offer purchasing services for a relatively long period. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree)

3. Order frequency measures: Increased frequency of purchasing orders could reduce the fixed cost per transaction. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree)


199

As transaction frequency increases, the costs for your customers to monitor purchasing activities will increase. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree) As transaction frequency increases, your organisation will increase the negotiation power to reduce purchasing costs for your customers. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree)

4. Transaction size measures: Combining purchasing orders together may reduce the purchasing costs. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree) You could have more power in the negotiation with suppliers when using consolidation in real procurement practice. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree) You receive more benefits if your purchase orders are large. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree)

5. 3PP service measures: Which of the following purchasing activities can be offered by your organization? S/N

Purchasing activity

A B C D E F G

Category management Supplier market research Supplier qualification and selection Request for proposal management Bid preparation and management Cost analysis Supplier relationship management

Very Unlikely

Unlikely

Neutral

Likely

Very Likely

6. Value-to-client measures: You would intend to help your customers minimise purchasing risks if you are providing or willing to offer this service. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree) You would intend to maintain a long-term relationship with your customers. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree) You would intend to help your customers focus on their own core business. □1 (Strongly Disagree) □ (Disagree) □ (Neutral) □ (Agree) □5 (Strongly Agree)

7. Benefit-to-provider measures: To what extent do you consider the following factors contribute to successful outsourcing of purchasing functions? S/N Factor

Least Important Less Important Neutral Somewhat Important Very Important

A 3PL Customer satisfaction B 3PL Cost savings C Your employee morale D High reliability and consistency of service You are comfortable in working with your customers. □1 (Very Uncomfortable) □2 (Uncomfortable) □3 (Neutral) □4 (Comfortable) □5 (Very Comfortable)

200


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