THE ROLES OF THIRD PARTY LOGISTICS IN SMALL AND MEDIUM SCALE ENTERPRISE DEVELOPMENTIN NIGERIA.
1.1 Background of the Study
One of the strategic decisions to be made by many organizations today, and a subject of many a boardroom discussion is the decision to outsource among other things, logistics. What do we outsource and why? Organizations have realized that in order to survive in today’s highly competitive environment they must decide which activities to undertake in house and which ones to entrust to other SMEs in order to get maximum benefits.
Logistics is defined as the detailed coordination of a complex operation involving many people, facilities or supplies (Mangan, and Lalwani, 2016). It is also the process of planning, implementing and controlling procedures for the efficient and effective transportation and storage of goods and services including information from point of origin to the point of consumption. This definition originated in the late 19th century with the army where they had to move troops and equipment. This has since influenced the scope and influence of logistics in subsequent years. In the 1950’s and 60’s, the military was still the only organization using logistics (Papadopoulou, 2001). However, since then, it has been used beyond the army and it has been recognized as one of the tools for developing competitiveness. In today’s process driven organizations, where focus has shifted from functions to process, logistics has become an essential part of the process (Bowersox and Closs, 2000). When a company gains competitive advantage it means that it has the ability to differentiate itself, in the eyes of the customer, as well as lowering its operating costs and hence increase its profitability. Large organizations have used logistics outsourcing as a major strategy aimed at achieving significant cost and differentiation advantages (Jiang and Qureshi, 2006)
Logistics outsourcing aims at meeting core objectives which are at the heart of an organization profitability and success. Chase et al. (2004) defines outsourcing as an act of moving some of a SME’s internal activities and decision responsibilities to outside providers. Activities such as order processing, inventory and planning management, warehousing, transportation and freight management, security, packaging and marketing form some of the key functions that both SMEs are outsourcing in today’s competitive environment (Edward Frazelle, 2004). Logistics competency is one of the key tools developed under the global Logistics Performance Index (LPI) by the World Bank to bench mark a continued overall performance and access the quality of an organization’s connectivity to the global markets. This is because the world has become a global village whereby, due to liberalization and globalization, both SMEs are forced to supply products beyond their national boundaries in order to provide a meaningful return on investment to their investors. It is in recognition of this fact that the most successful SMEs have taken to outsourcing their functional areas to experts who can do the job at a lower cost and hence add value to their operations while leaving them to concentrate on their core functions of production, innovation and research. The focus of competition in organizations has shifted from production to that of effectiveness of the supply chain (Mohanty and Deshmukh, 2006).
Traditionally, SMEs found it beneficial to vertically integrate supplier functions and distribution activities to maximize production and logistical control. However, today, many modern companies rely heavily on outsourced services and suppliers that contribute to the production process in one or more ways. Magutu, Chirchir and Mulama (2013) point out that distribution logistics plays a large part in the decision making process related to who controls operations and how goods and services are shipped, received and stored after production. All these decisions are based on accurate demand forecasts while the delivery schemes and mode of transport used must be agreed upon by all members of a supply chain. This has become the new norm across the manufacturing industry in an effort to reduce cost and enhance value while distributing and transporting products. Marasco (2008) highlighted the fact that the modern market is highly competitive characterized with a significant increase in customer demand for tailored products and services. This has forced companies to continuously evaluate, re-engineer and improve their transport operations. Indeed, these companies have found it beneficial so much so that they have, to a large extent, met customer expectations as far as customer service is concerned. It is prudent for both SMEs therefore to bridge the gap between transportation and customer service.
Third Party Logistics (3PL) is independent companies providing single or multiple logistics services to a purchase company. While 3PL providers do not hold ownership of the products or services they distribute, they are legally bound and responsible to perform the contracted for logistics activities of the purchasing company as if they were the purchasing company itself (Hertz and Alfredsson, 2003). The relationship between the two parties is long and mutually beneficial to both companies. According to Lynch, (2000), 3PL is defined as the strategic use of third parties to handle activities that were traditionally handled internally. Logistics not only involves warehousing, transportation, inventory, material handling, packing, distribution and security, but it also includes the process of planning and managing the flow of information between the points of production to the point of use or customer end. This therefore means that logistics outsourcing impacts the activities of manufacturing industries. The concept of logistics outsourcing is largely about inbound logistics. Inbound logistics concentrates on purchasing materials, parts, finished inventory from suppliers as well as goods and services. The practices involved include transport, information, warehouse, material handling as well as inventory management. Knemeyer and Murphy (2004) also defined 3PLs as a relationship between a supplier and a third party which when compared with basic services providers have more customized offerings, encompasses a broad number of service functions and is characterized by a long term and more beneficial relationship. On the other hand, Mortensen and Lemoine (2008) defined third party as simply the use of an outside company to perform all or part of the SME’s material management and product distribution.
An annual study on the state of 3PL conducted by John and Capgemini (2016) indicated that organizations and their 3PL providers are moving towards meaningful partnerships as opposed to traditional transactional relationships. This research also concludes that there is a significant improvement in the strategic nature of relationships between organizations and logistic outsourcing companies. Additionally, Abraham and Taylor (2006) also reported a rise in the outsourcing business provision in 13 US industries. All this can be attributed to the fact that these companies face an increase in competition in the emerging global economy.
Hertz and Alfredson (2003) identified various advantages of 3PL services. Outsourcing saves money and time. It allows a SME to relieve its employees the burden of daily logistical tasks allowing them to spend more time focusing on growing the SME. It is also cost efficient, relieving the SME the hustle of establishing warehousing space, technology and transportation for its products. Additionally, outsourcing results to accountability since it involves putting an aspect of the SME’s operations into someone else’s hands who is responsible for getting the tasks done. It also results to the integration of experts who bring innovative technology that would otherwise be unavailable without outsourcing. It is also important to note that outsourcing logistical services allows 3PL providers to adjust to the needs of the SME accordingly. They also have the capability to provide a vast network of resources as well as establish relationships with providers that offer the most cost-efficient service possible.
Components of Third Party Logistics
Third Party Logistic service (3PL) providers are involved with specific components that contracting organizations can seek. These components are derived from the activities that organizations want to outsource. Njagi and Ogutu (2014) argues that integrating operations allows customer information to be utilized in demand management. They include integrating operation, warehousing, transportation operations, inventory operations and material handling (Göl, and Çatay, 2007). 3PL providers will often customize these components depending on the contractor’s specific needs and also based on the market conditions for those services. On the other hand, organizations contract 3PL providers because they help develop and implement successful supply chain relationships, enhance collaboration to achieve supply chain objectives and also add value to the goods and services they offer (Christopher, 2016).
The first component of 3PL is integrating operations. It brings about a real time communication effect that makes it easier to manage customer relationships and create room for quick and reliable customer response. It is defined as the process in which multiple enterprises within a shared market cooperatively plan, implement and manage the flow of goods, services and information from a point of origin to a point of consumption. This process can be done electronically or physically and often results to increased customer-perceived value and optimizes the efficiency of the supply chain thereby creating competitive advantage for all stakeholders involved. Organizations that outsource integration operation services stand to improve the performance of their supply chain management, thus improving the overall performance of the SME (Hertz and Alfredsson, 2003).
The second component of 3PL is warehousing. Warehousing operations involves the inbound functions of storing and outbound functions of packing and shipping goods, services and information (Jonsson, 2008). Efficient warehouse operations ensures that a company orders and receives vital stock in time for replenishment on store shelves or in manufacturing facilities. Several factors are key to ensuring a successful warehousing operations. For instance, the storage location for the goods and services needs to be the center distribution and has to be well served by distribution networks. It also includes the identification of the products according to the categories as well as sorting and dispatching to the concerned areas for easy shipment. This is a very critical component that can be outsourced to 3PL providers (Lai, Li, Wang and Zhao, 2008).
Transportation operations is another component of 3PLs and is very vital within logistics. These are services that make the movement of goods and services from one point to another possible. A responsive transportation network begins with end-to-end network visibility. Visibility allows the contracting organization to centralize production operations and to lower cost without impacting customer service levels. This is because any uncertainty within the network can be monitored and appropriately managed to keep inventory levels up to date with the demand. The main motivation behind outsourcing to 3PLs providers that offer transportation services is therefore to reduce costs, maintain low levels of inventory, and increase customer satisfaction levels in the end (Lieb and Kendrick, 2002).
Inventory management is also crucial to the success of Logistics in an organization and is thus considered in this study as a key component of 3PLs. This involves the supervision of non-capitalized assets and stock items acquired by an organization. Through this component, organizations are able to supervise the flow of goods and services from production through to warehousing and finally to the points of sale. Inventory management practices often leads to maintaining lean inventory. Maintaining lean means that inventory should not be too much or too little. This component also allows for the organization to review inventory periodically and revise stocking patterns and norms (Mulama, 2012).
Material Handling Management is the fifth component of 3PL. This involved mainly packaging and warehousing. Industries from pharmaceuticals to food manufacturing require controlled-temperature transport to keep their products in top shape (Heragu, and Ekren, 2015). On the other hand, constant improvements in forklift, stacker and loader design ensure safer materials handling and better use of warehouse space. This component also leads to great success especially to organizations where all high quality goods and products are made. It also determines the appearance and looks of the product which ultimately affect customer’s tastes and preferences. Some items such as flammable material, chemicals and acids require more care and attention than other items. The characteristics of the material being stored therefore will dictate the care and attention necessary to avoid risks and potential hazards. Contracting these services to 3PL providers will see a significant improvement in productivity and labor costs by automation if the transit time from receiving areas to storage zones is considerable short , or when the product are moved and stored in case-size lots (Heragu, and Ekren, 2015).
1.2 Statement of the Problem
Despite the fact that modern manufacturing SMEs are able to internally perform most production and service provision activities, many still choose to outsource these activities to 3PL service providers. Several factors come into play to influence the use of 3PLs. Third Party Logistic providers have a vast network of resources available that provide advantages over in-house supply chains. Additionally, outsourcing logistics saves a wealth of time and money that would otherwise be spent sourcing internally. Manufacturing SMEs that chose to use 3PLs providers are able to eliminate the need to invest in warehouse space, technology, transportation and staff to execute the logistics internally. Using 3PL providers also keeps the organization up to date as far as the ongoing trends in the industry is concerned. A 3PL provider is knowledgeable of industry best practices, and stays up to date with the latest developments in technology, manufacturing, and logistics. Finally, organizations choose to use 3PL providers due to their ability to scale space, labor, and transportation according to inventory needs, that is scalability and flexibility. However, despite all these advantages, the use and effectiveness of 3PL providers is assessed through the impact it has on the overall performance of the organization. Organizations will only choose to adopt a 3PL provider if they provide the necessary components that add value to it. Due to this fact, this study intends to illustrate how SMEs can be able to determine the specific components of 3PLs that they can outsource in an effort to maximize SME performance.
Various studies have been conducted to establish a link between outsourcing logistics and SME performance. Kogoh, (2015) conducted a study to explore the extent of outsourcing of the logistics function within the manufacturing industry. The research was carried out on the effect of order processing, warehousing, packaging and transport logistics outsourcing on the performance of the logistics in Nigeria. On the other hand, Kyusya (2015) conducted a study on the effect of logistics outsourcing on the operational performance of shipping industry in Nigeria. The objective of the study was to determine logistics outsourcing effect on operational performance of shipping industries in Nigeria. Contracting out provision of logistics services to a SME with competitive advantages in terms of reliability, quality and cost was found be the main driver of outsourcing. It concluded that shipping companies opted to outsource their services due to its advantages and its possible influence on operational performance, as it enables the SMEs to focus on its core competencies. Magutu, Chirchir and Mulama, (2013) researched the effect of logistic outsourcing practices among large manufacturing SMEs in Nigeria by targeting large scale manufacturing companies that are based in Lagos. These SMEs opted to outsource their services due to its advantages and its possible influence on organizational performance, as it enables the SMEs to focus on its core competencies.
The researcher gathered various areas of further study recommended by the studies above and identified the main gap that this study intends to pursue. This was identified as the effect of outsourcing logistics services to 3PL providers on the general performance of manufacturing SMEs. Studies such as the ones conducted by Kogoh (2015) have identified the various 3PL services sought by manufacturing SMEs. On the other hand, Magutu, Chirchir and Mulama (2013) only studied the effect of outsourcing logistic services on large manufacturing SMEs.
1.3 Research Objectives
The following were the specific objectives;
- To investigate the effect of integrating operations on SME performance of manufacturing SMEs in Nigeria.
- To determine the effect of outsourcing warehousing operations on SME performance of manufacturing SMEs in Nigeria.
- To investigate the effect of outsourcing transport operations on the performance of manufacturing SMEs in Nigeria.
- To investigate the effect of outsourcing inventory operations on the performance manufacturing SMEs in Nigeria.
1.4 Research Questions
- How does integrating operations affect SME performance of manufacturing SMEs in Nigeria?
- What is the effect of outsourcing warehousing operations on SME performance of manufacturing SMEs in Nigeria?
- How does outsourcing transport operations affect the performance of manufacturing SMEs in Nigeria?
- Does outsourcing inventory operations affect the performance of manufacturing SMEs in Nigeria?
1.5 Significance of the Study
This study has been conducted to elaborate the effectiveness of 3PL in manufacturing SMEs in Lagos, Nigeria. The study is significant to the owners of the SMEs, customers associated with the respective SMEs as well as logistic companies associated with the SMEs.
The current dynamic and competitive manufacturing industry requires its players to fully understand the changes in operation. Contracting 3PL providers brings about numerous advantages to any manufacturing SME. These advantages include but are not limited to having a vast resource network that provides advantages over in-house supply chains as far as cost reduction is concerned. Additionally, outsourcing logistics saves time and money that would otherwise be invested in warehousing, technology or transportation. Logistic outsourcing also provides knowledge of the best industry practices, meaning that the organization will be up to date with the latest technological developments, manufacturing and logistics. It is therefore very important for these SMEs to understand how they would successfully contract 3PL providers in order to enjoy these advantages. The study provides this information.
The study also adds up to the vast body of knowledge regarding the implementation of 3PL to manufacturing industry. It is important to note that this study illustrates the effect of third party logistic practices on SME performance of manufacturing SMEs. Results obtained through this study will be used as reference by future studies conducted by academicians.
THE ROLES OF THIRD PARTY LOGISTICS IN SMALL AND MEDIUM SCALE ENTERPRISE DEVELOPMENTIN NIGERIA.