The influence of organizational capability on outsourcing performance: an empirical study of the 3PL industry.

• Author: Lewis, Angela Tidwell

1. INTRODUCTION

   The global marketplace has placed a tremendous amount of pressure on companies to improve outsourcing performance. Firms must improve performance to remain cost competitive. Outsourcing has been viewed as one way for producers to reduce costs. Outsourcing is defined as the substitution of external purchases for internal activities (Lieb and Randall, 1996). Cost reductions due to outsourcing result from focusing on core activities and key differentiators; reducing and controlling operating costs; releasing capacity and resources for core projects; gaining access to world-class capabilities; reducing time-to-market and cycle time; sharing operational risk; and improving management of functions that are difficult to manage or functions that are out of control.

   Manufacturers and service providers must often make the decision to outsource when internal capabilities are not cost efficient. The outsourcing of support functions, such as logistics, is one way to reduce costs. The contracting of logistics functions to an external supplier is referred to as third-party logistics (3PL). Partnering with a 3PL is a viable approach to develop, collaborate on, and leverage the capabilities that lead to enhanced performance (Stank et al. 2003). The advantages and disadvantages of outsourcing logistics functions has long been debated but hard, quantifiable evidence on third-party logistics development is elusive (Peters et al. 1998).

   Approximately sixty percent of Fortune 500 companies report having at least one contract with a third-party logistics provider (Lieb and Bentz, 2004). Outsourcing has evolved through deregulation and controversy. Logistics outsourcing has grown considerably over several years, largely due to transport deregulation (Spencer et al., 1994). The potential impact on employees when firms consider the use of outside contractors for logistics services is often debated. Maloni and Carter (2006) suggest that examining the effect on worker morale and productivity is a viable research stream for the future. In many instances, one of the motivating factors for considering such action is the desire to reduce headcount; nevertheless, the potential negative impact on company morale cannot be ignored (Lieb and Randall, 1996). This concern for employees must be balanced against a firm's ability to compete in the market. Limited empirical research has appeared on the information sharing- outsourcing performance relationship, despite its apparent practical importance. For example, previous research has examined the relationship between information exchange and logistics supplier performance (Stank et al 1996), as well as knowledge sharing and outsourcing success in the information technology industry (Lee 2001). This research examines the relationship between information sharing, organizational capability and outsourcing performance in the 3PL supply chain. The review of literature is included, followed by the methodology and hypotheses. The statistical results are provided, followed by the conclusion.

2. LITERATURE REVIEW

   2.1 Information Sharing

   Information sharing is defined as the exchange of pertinent data that directly or indirectly influences the outcomes between suppliers and customers (Rhea and Shrock 2000). Information sharing has been shown to be one of the keys to successful supply chains (Whipple et al. 2002). There are various definitions of information sharing. Lee and Whang (2000) defined it as the transfer of information regarding inventory levels and position, sales data and forecasts, order status, production and delivery schedules and capacity, and performance metrics. Sanders and Premus (2005) view information sharing as "providing firms with forward visibility, improved production planning, inventory management, and distribution" in their study of IT capabilities, collaboration, and firm performance.

   Information sharing includes, but is not limited to, the transfer of information in shipment tracing, billing transactions, and complaint resolutions (Rhea and Shrock 2000). Suppliers, manufacturers and customers acknowledge that the exchange of information among them results in a benefit greater than withholding information. For example, firms may experience excess inventory when they do not share product demand forecasts. However, when customers are willing to provide changing forecasts, manufacturers and suppliers can plan accordingly therefore minimizing the bullwhip effect (Lee and Kim, 1999).

   In general, information is required to help logistics management make a variety of decisions ranging from choice of carriers to desired inventory levels to the appropriate number of warehouses (Deeter-Schmelz 1997). Information systems play an integral role in information sharing. "As a support mechanism, the information system is critical in facilitating effective and efficient interactions between the logistics team and potential sources of information" (Deeter-Schmelz 1997). However, previous research shows that the information exchange, not the technology used to exchange the data, is most important (Mackay and Rosier 1996; Williams et al. 1998; Clinton and Closs 1997; Germain and Droge 1995; Droge et al. 1991; Forza 1996; Semeijn 1995; Stank and Crum 1997).

   2.2 Organizational capability

   Organizational capability is defined as a firm's ability to acquire and use inimitable, unsubstitutable, and durable resources for competitive advantage (Barney 1991). The resource-based view (RBV) suggests that a firm develops organizational resources into capabilities (Barney 1991) that enhance the organization's performance. The firm's resources include tangible and intangible factors such as physical assets, human capital, and intra-interorganizational routines and procedures. "If efforts are focused on developing the 'right' capabilities, performance will be enhanced" (Sinkovics and Roath 2004); their study found that organizational capability was related to logistics performance of 3PLs both in a direct relationship and as a mediator.

   Sinkovics and Roath (2004) in their investigation of relationships between strategy and performance within a manufacturer-3PL context noted that organizational capabilities may impact performance as well as mediate the strategy-performance relationship. A mediating variable is the generative mechanism through which the focal independent variable (in this case, strategy) is able to influence the dependent variable (performance) of interest (Holmbeck, 1997); the independent variable influences the mediator which then influences the outcomes. Capabilities in this context were defined in terms of operational flexibility and level of collaboration. Operational flexibility referred to the ability of both partners to make adjustments in the relationship to cope with the changing environment and developing processes to increase flexibility to respond to customer requests. Operational flexibility was directly related to logistics performance but level of collaboration was not. Operational flexibility also mediated the relationship between the competitor orientation part of strategy and logistics performance. In addition to organizational capabilities, increasing attention has been paid to building a successful relationship between the customer and the provider of outsourcing services (Lee 2001).

   2.3 Outsourcing Performance

   One of the challenges in trying to evaluate the growing body of empirical studies is that researchers often employ different terms and definitions of third-party logistics (Skjoett-Larson 2000). Another challenge is the methods used to measure outsourcing performance. The literature explores how outsourcing has been measured from both the customer and the provider perspectives.

   Stank et al. (1996) surveyed export managers to find the significance between the flow of information and supplier performance. While the Stank et al. work focused on logistics service providers, the current study surveys both customers and providers of logistics services. In addition, the...