The objective of the value research project is to
• define the concept of value within the context of service supplier and customer relationships, and
• determine how firms can effectively measure value of their supply chain relationships on an ongoing, real-time basis.
During the 1990's, business consultants suggested to firms that they should “focus on their core competencies. ” The implication was that companies should quit trying to do everything, and move functions that are not part of the critical heart of the business outside of the firm. This led to many firms transferring functions out of their companies and outsourcing more services. Logistics and supply chain management have often been among the first functions to be outsourced.
The usage of outsourced logistics is growing. For the tenth consecutive year, U.S. growth in third party contract logistics services exceeded U.S. economic growth . The decision to outsource has become a strategic variable in many companies.
The stock market drives the behavior of public company executives including those that are customers of the 3PL industry. These executives tend to have an obsession with monthly and quarterly earnings because of this focus on their firm's stock price. This gives them the dilemma of having to choose between short-term results of their firms and building long-term value in their company. This often forces them to aggressively cut costs without paying attention to the impact that cutting costs will have on their organization and their supply chains.
Managers need to focus less on pure cost-cutting and more on what they are doing to create a healthy company and supply chains that will create value over the long term. This means understanding the economics of their partnerships and the industry and setting in which the industry operates. Once they understand the value creation that is possible what they understand how value is created, they have to be able to move that understanding to their internal organization and to their external supply chain partners. They need to build performance metrics that encourage real value creation, not merely short-term accounting results. This means that a large amount of education is required.
Managers that focus on building real shareholder value create healthier companies which in turn provide trickle-down benefits such as better supply chains, stronger economies, higher living standards, and more employment opportunities. Companies thrive when they create real the economic value for their shareholders and do not just focus on short-term value.
Value creation plans must always be rooted in realistic assessments of market opportunities and the competitive environment. This goes right to the heart of important decisions such as corporate strategy, mergers, acquisitions, supply chain development, consolidation, and capital structure. Value creation and the measurement of value should be part of a firm's culture.
The purpose of this project is to develop and test a model that evaluates the value of outsourcing logistics in the third party logistics service industry. Firms making decisions about outsourcing focus primarily on costs. An important part of this research will include the development of a model that firms can use to measure the value of outsourcing logistics functions. It is hoped that this tool will assist firms to make more informed decisions about how they so and distribute product. .
In Figure 1 below, an initial attempt at developing this tool is displayed. This figure is adapted from a model describing the impact of logistics on profitability developed by Lambert and Burdoglu. The figure depicted below is only a preliminary model used so that the idea can be discussed with potential research participants. The idea presented here is that there are other important elements of outsourced logistics relationships that need to be evaluated in addition to tightly managing the supply chain cost. Many companies are often “penny wise and pound foolish” when it comes to working with third party logistics service companies.
In figure 2 below, an evolved model is presented. This model is simplified and contains three primary elements: 1) Operating cost impact, 2) Revenue impact, and 3) asset impact. This model was developed in conjunction with Herb Shear and Steven South.
Dale S. Rogers . IWLA Third-Party Trends and Practices Study . International Warehouse and Logistics Association. Park Ridge , IL., 2004, p.3.
Rosalyn Wilson, 16th Annual State of Logistics Report , Council of Supply Chain Management Professionals. Chicago , IL , 2005, p. 10.
Dale S. Rogers . IWLA Third-Party Trends and Practices Study . International Warehouse and Logistics Association. Park Ridge , IL., 2004, p. 19.
Douglas M. Lambert and Renan Burdoglu. “Measuring and Selling the Value of Logistics,” The International Journal of Logistics Management , 2000, 11 no. 1, p. 9.
Robert Burton, Anatomy of Melancholy. edited by Thomas C. Faulkner, Nicolas K. Kiessling, Rhonda L. Blair ; with an introduction by J.B. Bamborough, Oxford [ England ]: Clarendon Press, 1989