The Business Review, Cambridge * Vol. 13 * Num.

1 * Summer * 2009 264

Third Party Logistics Service Providers and
Logistics Outsourcing in Malaysia

Abdul Latif Salleh, Ph.D., Prince Sultan University, Saudi Arabia
Azri Dali, University of Malaya, Malaysia


ABSTRACT

In todays business environment characterized by the globalization of markets and intensification of
competition, business firms have been compelled to find ways to exploit the opportunities and neutralize the
potential threats. One of the strategic moves taken by many firms has been to mount a concerted effort to penetrate
and develop products for a global market. In turn this has led to impressive growth in external trades and dramatic
increase in the demand for logistics services. Thus, many firms today source components for their products globally.
The need to have an efficient logistics services and the increasing emphasis on time-based competition have, in turn,
called for improved performance on the part of logistics service providers. This paper is based on an empirical study
carried out to study the practice of logistics outsourcing in Malaysia and reports part of the study, which examines
the usage of third party logistics services in Malaysia from the perspective of logistics service providers. This
exploratory study looks at the perception of logistics service providers on the extent to which Malaysian firms use
the services of logistics companies, the decision making process involved in choosing logistics providers, and the
impacts of such services on the firms involved

INTRODUCTION

Globalization has emerged in recent years as a major force shaping business policy and strategy. To
effectively compete in todays increasingly challenging globalized market, companies must find ways to position
themselves in ways that would allow them to take advantage of the emerging opportunities and neutralize the
potential impending threats. In order to penetrate the evolving global market, these firms must develop specific
strategies tailored to meet the needs of the expanding market. One of the discernible impacts of the pursuit of for
global market has been the dramatic growth in external trades and the increasing demand for logistics services.
Since competing in the global market requires companies to develop or acquire competitive advantages, many
businesses have been forced to seek different ways to enhance their competencies and capabilities. For many firms,
the search for competitive advantages and the increasing emphasis on time-based competition call for improved
performance of logistic activities. This is the context in which the use of third party logistics service providers has
gained prominence. Third party logistics refers to firms employing an outside company to perform some or all of
their logistics activities.

According to Knemeyer et al (2003), logistics outsourcing has attracted considerable attention of many
logistics scholars. While outsourcing of logistics activities to third parties has been widely prevalent in Europe and
North America and it has only been gaining importance in Malaysia during the last decade. Not surprisingly, to
date, there were no comprehensive studies reported in the literature that have focused on the linkages between
manufacturing firms and third party logistics service providers in Malaysia. This paper examines the usage of third
party logistics services in Malaysia to determine the extent to which Malaysian firms use the services of logistics
companies, the decision making process involved in choosing logistics providers, and the impacts of such services
on the firms involved.

SIGNIFICANCE OF LOGISTICS OUTSOURCING

During the last two decades, the region of Asia has shown a marked increase in international trades. The
imperative of globalization has compelled many companies from the United States, Europe, and Japan to use Asia as
the manufacturing center for products that are to be exported to markets in the developed economies. They chose
Asia to take advantage of the relatively low wages, the improved physical infrastructure, and the semi-skilled and
skilled labor. At the same time local Asian companies have also taken the opportunities to take part and to develop
products designed for a global market. Spurred in a large measure by these developments, external trade has grown
dramatically in many Asian countries. As suggested by Fig. 1, exports have been growing within the region and such
increase in external trade would increase the demand for logistics services.


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For many companies participating in the global market may necessitate not only producing for the global
market but also to source for components and parts globally. This would mean the increasing needs for logistics
services and logistic service providers. Another important development in the logistics industry is the increased
emphasis on time-based competition (Arnold and Scheuing, 1998). The most successful firms are those that can
deliver the most value for the least cost in the fastest time (Hise, 1995). Time based competition is driven by the
speed with which products can be manufactured, delivered to market, and serviced. As technology matures and
become more mobile across firms and countries, companies may quickly achieve technological parity on the various
aspects of product processing. Therefore, a new source of competency has to be explored and the ability to compete
on time has now become one of the sources of firms competitive advantage. Schoenberger (1994) argues that time
has become part of firms competitive strategy in the market.

The quest for time based competence led initially to a rapid adoption of new manufacturing methods such
as just-in-time, flexible manufacturing system and computer aided manufacturing. These methods have brought
about significant improvements in supply chain performance through their focus on compressed manufacturing lead
times and improved quality. More recently, firms have given more emphasis to marketing issues, in particular
customer retention, and organizational restructuring particularly with respect to resource linking by integrating
selected suppliers into value-creation process (Hise, 1995; Arnold and Scheuing, 1998).

Fig. 1: Asia merchandise exports 1993-2003 (USD billion)
1993 1995 1997 1999 2001 2003
China 92 149 183 195 266 438
Singapore 74 118 125 115 122 144
Malaysia 47 74 79 84 88 99
Thailand 37 56 57 58 65 81
Indonesia 37 45 53 49 56 61
Source: WTO International Trade Statistics (2005)

THIRD PARTY LOGISTICS SERVICES: THE EXTENT OF USE, REASONS, AND IMPACTS

Third party logistics (3PL) refers to the outsourcing of some or all of the firm's logistics activities to
external companies. The main rationale for outsourcing is the need for firms to focus their energies on core activities
critical to their survival in the intensely competitive global market, and leaving the rest to specialist firms. The fact
that companies have to compete in a number of businesses that are logistically distinct due to varied customer needs
may have also contributed to the growth of 3PL services (Fuller et al., 1993). Specialist integrated services
providers are more efficient in providing logistics services largely due to the investments made in dedicated assets,
technologies and methods of organization.

There are a variety of options in the working relationships established between the manufacturing firms and
logistics services providers (LSPs). The relationships may range from narrow (limited to specific activities like
transportation) to very broad (covering substantive activities in the entire supply chain). Some of the important areas
likely to be outsourced have been identified by a survey conducted in the United States by Sink et al. (1996). They
include transportation, warehousing, inventory management, order processing, information systems and packaging.
How do firms decide which activities to outsource? And what factors determine the overall use of 3PL services?
Several studies (see Ballou, 1993; Lieb et al., 1993a, 1993b) have identified some key factors: (1) extent of use of
third party logistics services; (2) decision making process for choosing contract logistics services provider; and (3)
impact of the usage of contract logistics services on the organization.

Extent of Use of the Third Party Logistics Services
A study conducted by Lieb et al. (1993b) that compared the experience of the US and European
manufacturers in using third party logistics services may shed some light on the nature and extent of outsourcing
practices. They discovered that the longer the relationship between manufacturing firms and the third party services
providers, the more extensive would be the use of third party logistics services, the higher the level of commitment
to the relationship on either side, and the more likely firms would be willing to invest in contract logistics.

The study found a consensus on ``what'' services to contract out: warehousing, shipment consolidation, and
fleet management were the three services most frequently outsourced. Almost all respondent companies in the study
were found to have negotiated specific 3PL contracts of periods ranging from one to three years. The main
difference observed was that a significantly higher proportion of the European firms included performance
incentives in their contracts. McMullan (1996) found that transportation, maintenance, and warehousing were


The Business Review, Cambridge * Vol. 13 * Num. 1 * Summer * 2009 266
among the most outsourced functions among the clients of the consulting group, KPMG, in the Asia-Pacific region.
Bardi and Tracey (1991), in a survey of the transportation practices of US manufacturers, found that freight bill
auditing and payment, and transportation reports were among the most frequently outsourced transportation
functions.

Reasons for Outsourcing Logistics Functions
What could be the reasons for firms to outsource their logistics functions? The following reasons were
given to explain for the growth of logistics outsourcing in USA: the need to focus on core businesses; better
transportation solutions (e.g. consolidation); cost savings and improved services; development of necessary
technological expertise and computerized systems which is beyond the scope of many companies; and the need for
more professional and better-equipped logistics services (Sheffi, 1990).

Additionally, Gooley (1992) offers another reason for the growth of logistics outsourcing in Europe:
flexibility. According to Gooley, flexibility is another important reason for contracting out logistics functions
primarily because of the uncertainty over the European Union and possible changes in the regulatory framework. As
observed by Dapiran et al. (1996), a mixed system of outsourcing, i.e. partial outsourcing of the logistics functions,
can help a company to gain leadership in logistics cost and value. This arrangement can also provide a balanced and
controlled operation, thus ensuring both consistency and flexibility

The decision to outsource is complex and may involve a variety of reasons. Lieb et al. (1993b) and Dapiran
et al. (1996) have identified the following important factors that define the decision making process governing the
usage of contract logistics services: (1) organizational level at which the outsourcing decision was made; (2)
functional areas included in the process; (3) sources of information; (4) reservations within the firm to outsourcing;
and (5) selection criteria.

With respect to the main motivation to outsource, Sink et al. (1996) discovered that the most important
criterion for the selection of third party providers was core competencies. For firms with readily identifiable core
strengths and operational expertise, they seem to be able to instill a level of comfort in the buyers that firms with
undefined competence and superficial experience could not provide. Suppliers with experience, focus and expertise
will be regarded as more competent, compared to those who profess to be an expert in all things they do. Issues of
expertise, reputation, experience and reliability were often mentioned in relation to the emphasis on supplier core
competencies. Price was used as a tie-breaker, or considered a secondary issue to service, in the evaluation of
potential providers. Roberts (1994) reported that the level of service provided, quality of the people, and cost are the
three most used evaluation criteria when choosing a qualified logistics contractor. While cost and service are the
major issues, quality of people, particularly in the operational area, is crucial. Thus, to provide the high level of
customer service, suppliers must employ the best people with the relevant expertise (Dapiran et al. (1996) and Lieb
et al. (1993b).

Impacts of Use of Contract Logistics Services on The Organization
Third party logistics service is a strategic partnership between the firm and the logistics company. Before
making the decision to outsource, the impacts on the organization should be considered carefully. As observed by
Bowersox (1990), a necessary condition for the relationship to succeed is a match between the cultures of the two
organizations. According to (Lieb et al., 1993b), a particular concern regarding the use of third party logistics
providers (3PL) is its impacts on both the organization and its customers. They suggest that the user firms consider
the response of their customers with respect to the use of third party logistics providers. They believe that customers
should play a part in the decision-making, especially if the user firm plans to have close contact with its customers.
A complete understanding of customer requirements must be developed, as that will determine the needs of the firm,
such as type of facilities required by the customers (Gooley, 1992).

RESEARCH METHODS

This study on logistics outsourcing practice among Malaysian firms is based on a mail survey conducted
using questionnaire adapted from an earlier study carried out by Bhatnagar, Sohal, and Millen (1999). The 10-page
self-administered questionnaire is divided into four parts containing 25 questions relating to: (1) the extent of use of
3PL; (2) decision making process; (3) impacts of logistics outsourcing on user firm, and (4) organizational profile.
Questions pertaining to logistics activities were modeled with response categories on a five-point Likert scale range.
The study targets a population of Malaysian companies that provide considerable logistics services. A sample of 191


The Business Review, Cambridge * Vol. 13 * Num. 1 * Summer * 2009 267
logistic companies that advertised in Malaysian Yellow Pages was selected for the study, and a total of 36
questionnaires were returned. The following reports the results of the study concerning six major issues in logistics
outsourcing.

RESULTS

1. Extent of Outsourcing of Logistics Activities
In order to evaluate the types of logistics activities performed by LSPs, respondents were asked to rate the
extent to which their customers outsource a list of logistics activities. As shown in Table 1, transportation is rated
highest, followed by logistics technology, inventory replenishment and warehousing, repackaging, and logistics
information systems. This is not a surprising finding and corresponds with earlier findings on outsourcing practice
(McMullan 1996; Wilding & Juriado, 2004). Given that over half of the respondents have less than 500 employees,
the findings suggest that for smaller firms their transportation needs are mostly met through outsourcing.

Table 1: Logistics Activities Outsourced to LSPs
Rank Mean SD
1 Transportation 4.11 0.26
2 Logistics technology 3.89 0.99
3 Inventory replenishment & warehousing 3.71 0.83
4 Repackaging 3.49 1.02
5 Logistics information systems 3.37 1.19
6 Product returns 3.26 0.86
7 Carrier selection 3.23 1.03
8 Rate negotiation 3.09 1.04
9 Coordination of LSPs 3.00 1.21
10 Product assembly /installation 2.94 0.92
11 Fleet management/ operations 2.71 0.79
12 Marketing & promotional services 2.66 0.99
13 Freight payment 2.41 0.99
14 Customer spare parts 2.51 1.01

2. Reasons for Outsourcing Activities to a Logistics Service Provider
Why do the customers outsource logistics needs to LSPs? When asked to rate the importance of a list of
reasons for outsourcing, the LSPs believe that customer satisfaction is foremost in their clients mind, followed by
cost savings, productivity improvement, and customers ability to focus on their core business (see Table 2). Given
the imperative of time-based competition and the increased intensity of competition, the results are not surprising.

The results suggest that the imperative of time-based competition and the intensification of competition,
have led companies to focus on satisfying their customers and cutting operational costs. The primary importance
attached to customer satisfaction and costs seems to support earlier findings (Szymankiewicz, 1994; Boyson et al.,
1999; van Laarhooven et al., 2000). The fact that customer satisfaction is deemed more important than costs may
not be too surprising since, as observed by Wilding & Juriado (2004), companies tend to assume low costs from
3PLs and make outsourcing decisions based on other grounds, such as service.

Table 2: Reasons for customers to outsource logistics activities
Rank Mean SD
1 customer satisfaction 4.34 0.64
2 cost savings 4.29 0.67
3 productivity improvement 4.20 0.58
4 focus on core business 4.00 0.77
5 flexibility 3.80 0.90
6 access to up-to-date techniques & expertise 3.71 0.57
7 employee morale 2.89 0.96

3. Reasons for Selecting Logistics Partner(s)
Respondents were also asked to rank the reasons that their customers might have in selecting logistics
partners(s). Again the importance attached to customers surfaces as they rate highest the ability of LSPs to support
the clients efforts to provide customer service. The issues of integrity, reliability and trustworthiness of LSPs are
also high in the list of reasons (see Table 3).



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Empirical evidence suggests that carefully crafted outsourcing strategies increase the overall performance
of the firm (Gilley and Rasheed, 2000). Since customer satisfaction is central to firms performance, the high
importance attached by LSPs in this study to the ability of logistics providers to support users customer service is
understandable. However, successful outsourcing strategies also depends on the ability of the users to identify the
right vendors, in particular those that display integrity, reliability, and trustworthiness (Barthelemy, 2002). This
concern is certainly reflected in the reasons given by respondents in this study.

Table 3: Customers Reasons for Selecting Your Company as Logistics Partner
Rank Mean SD
1 reliable and consistent in dealing with them 4.46 0.57
2 committed to them 4.43 0.50
3 trustworthy 4.37 0.49
4 strong reputation 4.31 0.47
5 high degree of integrity 4.29 0.52
5 offers economic benefit 4.29 0.52
7 improves their market position 4.17 0.62
7 supports the importance they give to customer service 4.17 0.67
9 knows their business 3.83 0.79
10 has potential synergy with them 3.80 0.87

4. Importance of Benefits Contributed by Logistics Service Providers (LSPs)
Table 4 reports the ranking of the different ways that LSPs believe they can help improve their customers'
overall logistics performance. It appears that from the perspective of LSPs the most important way they can help
customers' improve their overall logistics performance is by increasing the reliability and consistency of their
services to the customers. They can also help customers by reducing customers' costs, which is ranked second. The
third most important way is helping customers focus on their own core business.

Other ways include increasing customers' productivity, shortening their delivery lead time, and enhancing
their flexibility. Again, the primary importance attached to reliable and consistent service provided echoes the
findings of Wilding & Juriado (2004) in their study of consumer good companies. And, as suggested by Gattorna et
al. (2004), to users of logistics services, the main measures of value creation were cost reduction and improved
operational efficiency. Not surprisingly, such an emphasis is clearly evident and well reflected in the ranking of
different types of benefits that the LSPS believe are sought by their customers.

5. Nature of Working Relationships with Logistics Services Provider
Respondents were also asked to describe the nature of their relationships with their customers or shippers
(Table 5).

Table 4: Benefits Offered by Logistics Service Provider to improve customers overall logistics performance
Rank Mean SD
1 Increase reliability and consistency of service 4.49 0.49
2 Reduce costs 4.38 0.55
3 Help customers focus on their own core business 4.16 0.60
4 Increase productivity 4.14 0.58
5 Shorten delivery lead time 4.05 0.67
6 Enhance flexibility 4.03 0.48
7 Improve space and capacity utilization 3.68 0.76
7 Improve visibility across logistics and supply chains 3.68 0.90
9 Provide access to techniques and expertise 3.57 0.59
10 Provide access to up-to-date technology 3.38 0.57
11 Enable customers to offer new services 3.14 0.81

Table 5 Nature of Working Relationships with Customers/Shippers
Rank Mean SD
1 Collaborative relationship with most of our customers 4.17 0.62
1 Adversarial relationship with most of our customers 4.17 0.45
3 Negotiate on factors other than price 3.97 0.64
4 Improve our services according to customers' requirements 3.94 0.94
4 Capability to coordinate multiple LSPs for our customers 3.94 0.94
6 Negotiate based on price 3.77 0.65
7 Standard policy in dealing with customers 3.74 0.78



The Business Review, Cambridge * Vol. 13 * Num. 1 * Summer * 2009 269
The results suggest that LSPs seem to have an ambivalent relationship with their customers. They score
equal first for "collaborative" and "adversarial" when asked to describe their relationships. The LSPs also give high
importance to the facts that their relationships with customers are driven by the need to negotiate with their
customers based on factors other than price, the need to improve their services according to the requirements of the
customers, and their ability to coordinate multiple LSPs to meet the needs of their customers.

6. Concerns in relation to outsourced logistics services provision
In this study, one of the major issues that need to be highlighted concerns the ability of Malaysian logistics
providers to develop certain level of competency that would meet the expectation of their customers or shippers.
Thus, their views as to how they perceive their customers concern about their own ability needs to be explored. In
order to gauge the perspective of LSPs on the major concerns that their customers have with respect to outsourced
activities, respondents were asked to rank the issues of concern with respect to their performance. It seems that as far
they are concerned their customers' major worries are: uncertainty about LSP's quality of service, the costs of
outsourcing, and uncertainty about LSP's service capability (Table 6). Again, the findings accentuate the overall
inclination of companies in Malaysia to stress on quality and costs.

Table 6: Issues of Concern about LSPs
Rank Mean SD
1 uncertainty about service quality offered by LSP 4.32 0.67
2 cost of outsourcing 4.16 0.69
3 uncertainty about service capability of LSP 3.89 0.61
4 uncertainty about cultural fit between customer's
organization and LSP's
3.30 0.78
5 potential loss of direct control of logistics activities 3.22 0.75


DISCUSSION

Findings from this study indicate that transportation, logistics technology, and inventory replenishment and
warehousing are the most important functions outsourced by Malaysian companies to LSPs. These are consistent
with findings from other studies carried out in the U.S., Europe, and Australia. With regard to reasons for
outsourcing, the study suggests that, from the perspective of LSPs, Malaysian companies look to them for help to
increase customer satisfaction and costs savings; rather than as an instrument that would allow them focus on their
core competency, which is the most important motivation of U.S. and European companies.

The importance attached to customer satisfaction by Malaysian companies is again reflected in the findings
on the reason for selecting a particular LSP. According to LSPs in the study, Malaysian companies rank support by
LSPs to their effort to provide customer service highest, while they also look for integrity, reliability, and
consistency of service of the providers, as next in importance. Malaysian companies again emphasize reliability and
consistency of service highly when seeking for contribution by LSPs, and as expected cost reduction comes in
second. On the nature of their relationships with their customers, the Malaysian LSPs indicate that their relationship
can be best described as ambivalent, i.e. both collaborative and adversarial. collaborative efforts and negotiating
based on factors other than price. Lastly, the study indicates that Malaysian companies are concerned about the
uncertainty of services provided by LSPs and by the costs of outsourcing.

The overall results of the study suggest that, in general, Malaysian LSPs are employed by their customers
to perform basic logistics functions such as transportation and warehousing. And Malaysian companies look for
assistance from LSPs in terms of delivering quality customer service and cutting costs. Issues such as access to new
markets, new technologies, and expertise, and behavioral issues such as employee morale, cultural fit, and
organizational synergy, have not come out prominently, in terms of emphasis and concerns among Malaysian firms.
It would be interesting to discover whether these factors remain in terms of their importance as Malaysian
companies progress to compete more extensively in global market.

LIMITATION OF THE STUDY AND FUTURE STUDIES
This exploratory study on logistics activities of Malaysian LSPs highlights some preliminary findings about
the practice of logistics outsourcing in the country. Given the growing importance of the logistics industry, this
study is the first step toward developing a better understanding about the practice and issues surrounding the


The Business Review, Cambridge * Vol. 13 * Num. 1 * Summer * 2009 270
industry. One of the main limitations of this study is that the results are derived from a small sample of 36
responding firms. The small number of respondents reflects the relatively small number of logistics providers in
operation in Malaysia, as well as the major problem faced by researchers conducting a study in a developing
country: very low response rate. Future studies should attempt to access a representative sample size to allow for
generalization and variability across different industries. Future studies should also incorporate new issues arising in
the industry such as mergers and acquisitions, branding activities, and human resource management.

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