How to manage a third party logistics in a price
sensitive environment?
Master thesis MSc. Supply Chain Management
University of Groningen, Faculty of Economics and Business
Student Supervisor / university
Robin Vaartjes dr. H. (Manda) Broekhuis
Student number: 2585669 Co-assessor / university
Tel: +31 (0)649800127 dr. S.A. (Carolien) de Blok
robinvaartjes@gmail.com
r.i.vaartjes@student.rug.nl
January 31, 2016
Acknowledgements:
I would like to thank my supervisor, dr. Manda Broekhuis for providing me feedback and the valuable advices during the process of doing my thesis research. Also dr. Carolien de Blok, for challenging me with her feedback on the research proposal. Next to that, I would like to thank the focal company (outsourcer) and especially the manager front office customer service/logistics and the procurement manager who provided me with the opportunity to gather data at the company and its third party logistics. The openness, enthusiasm, time and willingness to participate from all participants made it possible to create a rich data set.
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1. Introduction ... 4
2. Theory ... 6
2.1 The rise of third party logistics ... 6
2.2 Contract management ... 7
2.2.1 Transactional governance and 3PL´s ... 7
2.2.2 Relational governance and 3PL´s ... 9
2.3 The 3PL’s governance interplay within contract management ... 10
2.4 Research questions ... 12 3. Methodology ... 13 3.1 Research design ... 13 3.2 Case descriptions ... 13 3.3 Data collection ... 14 3.4 Data analyses ... 18
4. Findings and analysis ... 20
4.1 Within case analysis ... 20
4.1.1 Case A ... 20
4.1.2 Case B ... 23
4.1.3 Case C ... 26
4.3 Cross-case analysis ... 29
5. Discussion and conclusion... 34
Theoretical contributions and managerial implications ... 35
Limitations and future research ... 36
6. References ... 37
7. Appendices ... 41
7.1 Appendix: Case study protocol ... 41
7.2 Coding tree excerpt ... 50
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Abstract
Purpose – This thesis aims to answer the research question on how outsourcers should manage their
contract with third party logistics (3PL) in a price-competitive environment to ensure a long-term and trustful relationship. Contract management is divided into transactional governance (the actual contract) and relational governance (trust, flexibility, information sharing).
Design / methodology / approach – Three cases have been executed in an explorative case study
design. The case study is conducted at a large Fast Mover Consumer Goods company that makes use of 3PLs to transport their goods to their customers. Data was gathered through interviews and documents analysis (contracts and operations manuals).
Findings – The results of this research show that cost and price perspective, an existing relationship,
performance in delivery, performance in order picking, trust, flexibility in changes and improvement, the knowhow of the business and cooperative thinking are important drivers in contract management. Although most outsourcers and 3PL prefer a high detailed contract, this could also encourage credible behavior.
Practical implications – The research provides insights in the main drivers of contract management in
in the price competitive environment with a third party logistics.
Originality / value – Literature points out that relationships with 3PL are evolving to strategic
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1. Introduction
Driven by international trade and increasing competition, the global usage and importance of logistics outsourcing have grown intensely in the last two decades (Wallenburg, Cahill, Knemeyer & Goldsby, 2011). Clearly, firms recognize that third party logistics (3PL) can potentially provide many advantages such as cost efficient service delivery, added value and enhanced end customer relations with the outsourcer (Sinkovics & Roath, 2004). However in doing so, the service and performance of the outsourcer towards the customer becomes more dependent on the third party (Tate, Ellram & Brown, 2009; Lindgreen, Van Hamme, Raaij & Johnston, 2013), which makes organizing and managing the interorganizational relationship between the outsourcer and 3PL effectively of great importance (Fryxell, Dooley & Vryza, 2002).
Managing the 3PL and its contract is important since appropriate governance can increase overall satisfaction of both parties (Cao & Lumineau, 2015) and enhance performance in terms of quality, cost and timeliness (Cao & Lumineau, 2015). The basis of this relationship are often formed by formal governance mechanisms such as contracts, procedures and prescribed processes (Roxenhall & Ghauri, 2004), in which muscular behavior based on cost and a short-term interaction is present (Williamson, 1996). However, the relational governance, such as information sharing or social structures might be neglected in a 3PL relationship as cost reduction often is the primary reason for outsourcering within a muscular short term relation (Leuschner, Carter, Goldsby & Rogers, 2014). Price determination is the economic heart of the contract between the outsourcer and 3PL (Lukassen & Wallenburg, 2010).
Nowadays, however, the operation of outsourcing can encompass larger logistical processes (Marasco, 2008), from simple logistical functions to more sophisticated value added services such as warehousing or inventory management (Lieb & Randall, 1999; Ojala, Andersson & Naula, 2006; Mello, Stank & Esper, 2008). With this development in outsourcing, relationships with 3PL’s are also evolving and in the last few years have shifted more towards strategic partnerships (Zacharia, Sanders & Nix, 2011; Leuschner et al., 2014). This also implies that the logistical outsourcing has become more difficult through increasing scope and complexity (Leuschner et al., 2014).
5 of understanding of each other’s motivation, a lack of adequate expertise in specific products and markets, unrealistic expectations or descriptions of services and service levels, and a lack of logistics cost awareness (Ackerman, 1996; Ellram & Cooper, 1990; Wilding & Juriado, 2004; Selviaridis & Spring, 2007). The market’s increasing competitive intensity reduces the profitability and makes price and costs discussion more important for the 3PL (Lieb & Lieb, 2015). With this more intense pressure on prices, there is a gap on how to manage the contract with a 3PL. Therefore, the aim of this study is to explore the following research question: In a price-competitive environment, how can companies manage the contracts with their logistic service providers to ensure a long-term and trustful relationship between the outsourcing company and its 3PL?
This study makes two key contributions. First, the literature is enriched with the knowledge of how to manage a contract within the price competitive 3PL environment with a focus on keeping long-term and trustful relations. It is important to show the drivers in contract management, because as discussed prior, with the wrong incentives, outsourcers and 3PL’s often fail to govern this long term relationship properly. Second, we provide (logistics) managers on both sides of the dyad with important insights into how their relationship (outsourcer and 3PL) can be more effective and result in achieving the agreed outcome. This is important as discussions based purely on price and service failures might reduce the motivation to address improvements and win-win situations, which might lead to negative effects on logistics performance or on the relationship itself (Halldórsson & Skjøtt-Larsen, 2006).
This thesis is organized as follows. Section two will discuss the available literature on third party logistics and effectively managing the contract. This is followed by the methodology of this study in section three, its findings and analysis in section four and a discussion of the findings in light of the literature together with the conclusion in section 5. Finally, in section 6, the study’s limitations and some suggestions for future research are provided.
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2. Theory
2.1 The rise of third party logistics
Outsourcing non-core processes to third parties, such as logistics, can result in offering higher value, more flexibility and a more integrated service to customers (Quinn, 1999; Solakivi, Töyli & Ojala, 2013; Boguslauskas & Kvedaraviciene, 2015). Besides, it allows companies to focus more on their core processes which can make them more productive and efficient, and gives them competitive gains (Vaidyanathan, 2005; Hofenk, Schipper, Semeijn & Gelderman, 2011; Liu & Lyons, 2011; Lai, Tian & Huo, 2012). These advantages speak for themselves as more than 50% of all logistics expenses in Western Europe and the United States flow to partners in logistics (Langley & Capgemini, 2009). In the last two decades, third party logistics service provides (3PL’s) have been able to grow 5-10% annually (Ashenbaum, Maltz & Rabinovich, 2005), and they have extended their scale and scope of operations, which makes them more attractive (Selviaridis & Spring, 2007; Hofenk et al., 2011; Liu & Lyons, 2011). Their services have evolved over time from simple logistics such as material handling and product distribution functions towards service offerings of greater complexity (Ojala et al., 2006; Mello et al., 2008) including warehousing, inventory management, freight forwarding, manufacturing, import and export assistance, procurement and sub-assembly (Lieb & Randall, 1999).
The use of a 3PL is seen more and more as a creative strategic solution to manage and mitigate the risk of operating in today’s dynamic marketplace (Mello et al., 2008). A benefit is that through collaboration the risks and rewards can be shared and strengths can be combined to achieve an overall higher performance (Hofenk et al., 2011). Furthermore, forming a relationship with a 3PL is an effective way of obtaining a required service without heavy investment in resources or new capabilities (Selviaridis & Spring, 2007). This more intensive outsourcing of activities reflects the growing complexity between outsourcers and their 3PL, in that those relationships were formerly more arm’s-length transactional arrangements, where the emphasis is now shifting towards (strategic) longer-term commitments with multiple services (Zacharia et al., 2011; Leuschner et al., 2014). This comes with challenges and opportunities, as the increasing complexity of operations (Hofenk et al., 2011) could cause problems with respect to service performance, disruption to inbound flows, inadequate 3PL expertise, inadequate employee quality, sustained time and effort spent on logistics, loss of customer feedback and an inability by 3PL´s to deal with special product needs and emergency circumstances (Selviaridis & Spring, 2007). So in spite of the benefits of outsourcing, also negative aspects can arise if the relationship is not managed properly.
7 of a contract between the outsourcer and a 3PL is often found to be problematic (Selviaridis & Spring, 2007), since the services that a 3PL delivers are intangible and thus more challenging to visualize and to measure (Fitzsimmons & Fitzsimmons, 2006; Maull, Geraldi & Johnston, 2012). Selviaridis and Spring (2007) argue that the nature of the contract, and also the method of managing the contract depend on a number of factors such as the service offering (activities that are outsourced), the contract duration, and the outsourcer’s motivation for outsourcing. Next to that, other researchers (Boyson, Corsi, Dresner & Rabinovich, 1999; Logan, 2000; Andersson & Norman, 2002) outlined crucial aspects that should be covered in a 3PL contract for effective contract management, which are shown in table 1.
2.2 Contract management
As early as the late nineties, it became clear that a successful 3PL relationship is based on a motivation for outsourcing and the particular type of governance chosen (Leuschner et al., 2014). Firstly, it is important to set up a good contract and secondly to manage the contract with good governance. Outsourcers use different governance mechanisms to manage their relationship with a 3PL. Contract management is defined by Trent (2007: p. 135) as ‘’the process of ensuring that the reality of an agreement matches or exceeds the expectations in the agreement’’. Contract management embraces all activities that make sure the agreements in the contract are met. Activities such as monitoring and measuring performance with the right indicators are essential (Sundtoft Hald & Ellegaard, 2011). To ensure that performance is to the right standard, control mechanisms can be put in place to attain desired goals (Srivastava & Teo, 2012). Literature states that the most well-known and -used practices in contract management are (formal) transactional governance mechanisms and relational governance mechanisms. These two mechanisms will be elaborated below.
2.2.1 Transactional governance and 3PL´s
It is important to practise appropriate management in an inter-organizational relationship (IOR), since it affects the motivation to continue or terminate the relationship (Ring & Van de Ven, 1994). This starts with a (formal) contract in the IOR to specify the terms of the agreement, including the transaction, and the parties’ obligations and roles (Roehrich & Lewis, 2010; Schepker, Oh,
- Contract term or duration (i.e. number of years); - Costs per activity;
- Service and activities description; - Service levels;
- Bonus payment for excellent performance; - Penalty clauses for service failures;
- Allocation of roles and responsibilities, risks and insurance costs; and - Contract termination clause.
8 Martynov & Poppo, 2014). Both parties in the IOR promise to comply with the terms, conditions and written rules of the established contract (Reid, 2010; Abdi & Aulakh, 2012; Cao, Mohan, Ramesh & Sarkar, 2013). The contract is used for multiple objectives, such as to communicate, reduce perceived uncertainty and as a symbol that proves the existence of a relationship (Roehrich & Lewis, 2010). To define (formal) transactional governance mechanisms, we use the following definition: “Formal governance mechanisms are generally understood as formal (written and standardized) procedures and statements used by managers to monitor and influence the behaviour and activities in an inter-organizational exchange” (Sánchez, Vélez & Álvarez‐Dardet, 2013: p. 302).
Traditionally, the contract is used as a legal tool to protect the firm in the relationship (Williamson, 1996; Deeds & Hill, 1999; Contractor & Ra, 2002). This safeguarding function of a contract mitigates the perceived risk of opportunistic behaviour (Deeds & Hill, 1998; Roehrich & Lewis, 2010) and minimizes exchange hazards that could increase transaction costs (Zhou & Poppo, 2010). Besides a safeguarding function, the contract acts as monitoring and coordination function (Faems, Janssens, Madhok & Van Looy, 2008; Schepker et al., 2014), or adaptation (Schepker et al., 2014). The monitoring and coordination function simplifies decision-making as it prevents disputes about how to achieve tasks (Reuer & Arino, 2007) and assigns roles and responsibilities, sets milestones and provides monitoring for processes (Bijlsma-Frankema & Costa, 2005; Schepker et al., 2014). For this purpose, codification is important to make sure the outcomes ex ante are predictable, codifiable and eventually measurable (Bijlsma-Frankema & Costa, 2005). Contracts are arguably suitable for adaptation during unforeseen events (Schepker et al., 2014). If provisions for problems are described in the contract, it would allow contract partners to more easily adapt (more quickly and more flexible) to disruptions in their regular flow (Schepker et al., 2014).
9 Moving towards a more strategic partnership with a 3PL includes a number of aspects such as a long-term relationship, joint efforts to establish cooperation, customization of the logistics solution and fairly sharing the benefits and risks (Skjoett-Larsen, 2000). Often, this development creates an atmosphere in which the traditional transaction-by-transaction contracts are no longer satisfactory (Marasco, 2008; Wallenburg et al., 2011). In addition, contractual management with its rigid character may negatively influence the flexibility that is required in a collaborative long-term relationship and might cause a deterioration of trust (Faems et al., 2008). This tension between the rigidity and transactional-based payments of contractual agreements and the intention to build long-term, trustful and innovation-oriented relationships is distinctive of recent outsourcer- 3PL relationships (Marasco, 2008). Also, if the underlying reason for the outsourcer is to save costs, the role of the 3PL is limited, and this inhibits the focus on longer commitment or building a relationship (Selviaridis & Spring, 2007; Wallenburg et al., 2011). For these reasons not only outsourcers but also 3PL’s are showing a tendency to focus more on relational factors as opposed to transactional factors in their relationships (Knemeyer & Murphy, 2004): becoming more collaborative seems important as it facilitates growth and expansion (Langley et al., 2007).
2.2.2 Relational governance and 3PL´s
Relational governance works over time as the outsourcer and its 3PL are building, testing and emphasizing the existence of a mutual relationship (Srivastava & Teo, 2012). Creating a longer commitment and a contract managed by relational factors provide benefits such as reduced uncertainty, increased resource utilization efficiency and value for both the outsourcer and the 3PL (Wallenburg et al., 2011). Within this mutual relationship, there is a focus on trust to address issues of safeguarding, monitoring, coordination and adaptation (Faems et al., 2008). In this research the definition of relational governance as developed by Cao and Lumineau is followed (2015: p. 24) ‘’The extent to which the relationship is governed by trust, flexibility, solidarity, information exchange, fairness, and informal rules and procedures.’’
Trust is an effective monitoring and control mechanism for maintaining close, long-term relationships in which relationship commitment and cooperation are active (Morgan & Hunt 1994, Zhao, Huo,
– the lack of understanding of the outsourcer’s supply chain needs; – the lack of adequate expertise in specific goods and markets; – non-realistic expectations of the outsourcer;
– insufficient descriptions of the expectations (and service levels); – the lack of distribution cost awareness by the outsourcer or – the lack of innovation by the logistic service provider.
10 Flynn &Yeung, 2008) and opportunism is discouraged (Lai et al., 2012). This orientation towards relationships is known to have a positive influence on supply chain effectiveness (Panayides & So, 2005). Besides, the relational factors of trust and commitment lead to successful and stable relationships (Morris, Barnes & Lynch, 1999), in which both parties are less inclined to display unwanted behaviour (Srivastava & Teo, 2012). In particular, trust can mitigate exchange hazards that are often difficult to capture within formal agreements (Cao & Lumineau, 2015).
As a part of the definition, flexibility is a key success factor in the relational aspect (Panayides, 2007; Selviaridis & Spring, 2007), as it facilitates adaptation to unforeseeable events (Poppo & Zenger, 2002). Panayides and So (2005) state that the development of relational governance should be characterized by willingness (flexibility) to share and receive information and work in a collaborative manner. Also in knowledge sharing and innovative logistical processes, flexibility is seen as a relational measure (Panayides & So, 2005; Grawe, Daugherty & Roath, 2011).
Also other studies have pointed out the importance of the relational aspects such as communication and information sharing in contract management (Boyson et al., 1991; Selviaridis & Spring, 2007). Besides their importance in contract management, communication and information sharing are known to enhance the ability of firms to meet outsourcers ever-changing expectations and can be used to quickly understand and adjust actions (Eisenhardt & Martin, 2000; Gosain, Malhotra & El Sawy, 2004). This is relevant for the 3PL market as it is evolving in its activities and relationships (Wallenburg et al., 2011). Joint relationship building (Lindgreen, Vanhamme, Van Raaij & Johnston, 2013) and joint problem solving are also determents of informal and relational governance (Vandaele & Gemmel, 2007).
2.3 The 3PL’s governance interplay within contract management
Because of the growth of complexities in governing 3PL, a deeper understanding is needed of the mix between transactional and relational governance management (Marasco, 2008). In this research, transaction cost economics (TCE) of Williamson (1996) was used as a relevant lens to display the 3PL relationship, as it examines interfirm contracting by applying the lens of the contract / governance to the make-or-buy decision in outsourcing. It is also emphasized on efficient alignment of transactions with alternative modes of governance, which fits the 3PL contracting good. Last, it displays the type of governance structure that firms can use when they make the decision to outsource (muscular, benign and credible).
11 structure. Muscular relations are mostly based on the lowest price, and there is low short-term collaboration. This aspect is also seen in earlier transactional contracting, as 3PL relations were based on arm’s-length and cost driven contracts (Leuschner et al., 2014). However, this seems to be contrary to the trend in logistical outsourcing in which outsourcers and their 3PL’s aim for a longer relationship (Leuschner et al., 2014). With a benign governance structure, the opposite of muscular is addressed: there is a long time horizon, relational governance and outsourcers aim for mutual gain with their 3PL. In this relationship, both parties implicitly rely on collaboration to mitigate unforeseen contingencies. However, in between these two, Williamson (2008) describes the credible governance structure which also has a long-term focus, but where trust is tempered by the fact that either party might act opportunistically. Leuschner et al. (2014) describe in their work that 3PL’s might perceive the outsourcer in a muscular relationship as taking advantage of the 3PL by using customer power to ask for higher service levels or to force down the price. A 3PL may then react negatively by focusing on lowering customer service facets that are not prescribed in the contract (Leuschner et al., 2014). Also, the price sensitive environment might damage trust and encourage opportunistic behaviour (Lai et al., 2012).
A mix of a muscular (purely transactional) and benign (purely relational) relationship is better than relying on one single mechanism (Olsen, Haugland, Karlsen & Husøy, 2005). Also, focusing solely on either pure transactional practice or pure relational practice is a too simple view and it is important to find a proper configuration between these two, because companies always use a mix of these two (Lindgreen et al., 2013). If the mechanisms are balanced, this has a positive effect on the relationship and outsourcing performance (Cao et al., 2013; Lindgreen et al., 2013). The transactional and relational mechanisms can each compensate for the other’s weaknesses and enable conditions that facilitate the other mechanism. However, a question that remains is what the right balance between the two is. According to Cao et al. (2013), a process of adjustment is a helpful instrument. This would mean going back and forth between the two types of governance with ongoing evaluations (conforming a contingency approach (Huber, Fischer, Dibbern & Hirschheim, 2013). Finding a balance eventually led to increased visibility, standardized processes that enhanced efficiency and thus reduced operational costs.
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2.4 Research questions
The decision to outsource to a 3PL is seen more and more as a creative strategic solution to mitigate operations risks or to focus on core business (Mello, Stank & Esper, 2008). In outsourcing activities to a third party, managing the contract is important to ensure that the reality of an agreement matches or exceeds the expectations in the agreement (Trent, 2010). In the setting of logistics, price and costs remain key criteria in the selection of a third party (Cahill, Goldsby & Knemeyer, 2010). Besides, price is also known for playing a decisive role in the decision to maintain a relationship because it is an important driver of the perception of value, which has an direct effect on satisfaction in contract management (Cahill et al., 2010). However, operating in a price sensitive environment also has its downsides, as it is known to possibly damage trust and encourage opportunistic behaviour (Lai et al., 2012). Managing a 3PL contract requires a balance between transactional and relational governance mechanisms (Cao et al., 2013). This balance could be influenced by the motivation for outsourcing (i.e. improving service or reducing costs) and the associated TCE structure as mentioned in 2.3. Each type of mechanism might enable, or compensate for, the other. Appropriate governance can increase overall satisfaction of both parties (Cao & Lumineau, 2015).
Having described this, the existing literature falls short on the significance of the intertwined cost and service-related motivations for outsourcing in providing a proper mix for contract management in a price competitive environment. This leads to the following research question:
In a price-competitive environment, how can companies manage the contracts with their logistics service providers to ensure a long-term and trustful relationship between the outsourcing company and its 3PL?
Based on this research question and the examined literature, we derived three sub-questions:
1. What is the role of transactional and relational governance in contract management between an outsourcing company and its 3PL in a price competitive environment?
2. What are the main drivers for developing a specific transactional-relational governance configuration in contract management between an outsourcing company and its 3PL?
3. In what way does the pressure of costs and low prices influence contract management practices between outsourcing companies and their 3PLs?
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3. Methodology
3.1 Research design
With this multiple case study, we aimed to answer the research question: In a price-competitive environment, how can companies manage the contracts with their logistics service providers to ensure a long-term and trustful relationship between the outsourcing company and its 3PL? We chose a multiple case study setting for this research question since it provides a stronger base for explanation and eventually, theory building (Eisenhardt, 1989). A case study methodology is preferred, as case studies are useful to explain complex phenomena, such as contract management (Voss, Tsikriktsis & Frohlich, 2002; Yin, 2009). Contract management in a 3PL setting is a complex phenomenon because of the increase in (strategic) activities and multifaceted operations, and the shift towards longer-term and intensified relationships. This development makes contract management with its price sensitive nature complex, as it is known to possibly cause problems in service performance or sustained time and effort to be spent on logistics. As we studied the cases in their real life context, we were able to provide in-depth insights (Voss et al., 2009; Yin, 2009). This provided the opportunity to discover underlying mechanisms of the competitive price environment when taking the context wherein the governance structures develop into account. We gathered rich data by means of interviews and document analysis to obtain insights into how a contract should be managed in the dyad between the outsourcer and its 3PL. Therefore, the unit of analysis is defined as the management of a contract between an outsourcer and its 3PL. This is in line with the main research question, which focuses on how the price sensitivity between outsourcer and the 3PL influences the management of the contract in which they are embedded.
3.2 Case descriptions
The research involved a multinational in food manufacturing (referred to as the outsourcer), which produces all kinds of consumer and professional food and health products for both humans and pets. The outsourcer uses national and international distribution (3PL) options throughout the whole world. According to the company’s best practice, every few years, a new tender should be put out to find a partner in distribution. The procurement manager takes the lead in the tender process and then advises the customer service & logistics manager in deciding on the most appropriate 3PL party. The customer service & logistics manager, together with the operations manager eventually decides on the choice of a specific 3PL. Within the Benelux we chose three cases, as it represents three contract management processes between an outsourcer and a 3PL party. The cases were selected based on the following criteria (see also table 3):
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Variety/in level of detail of the contract, which is required to compare cases as the degree of price competitiveness differs between the a high and low detailed contract.
Different results regarding price sensitivity are expected between the cases, as they are not the same in length (short term relationship / long term relationship). However, between a 3 year and 5 year contract, there are more similarities in results expected than between a 1 year and a 3 or 5 year contract. Another case criteria were the contracts that differ in the level of detail. Contracts with a higher level of detail are expected to be more focussing on costs than contracts with little detail.
Case selection criteria
Case 1;Retail, non-retail
Case 2;
Retail
Case 3;
Non-retail
Level of detail contract Medium High Low
Years of current contract 5 years 3 years 1 year
Table 3 case selection criteria
The case selection process took place as follows. During the study, there were two principal informants in place who guided the researcher through the organization and provided valuable information about the cases and setting. In informal meetings, the options for cases were discussed. For the research, the key case criteria are displayed in table 3. Other descriptive data, such as the country, the duration of the total relationship and performance are displayed in table 4.
Descriptive data of the
research sample
Case 1; Retail, non-retail Case 2; Retail Case 3; Non-retailCountry of 3PL Netherlands Belgium Belgium
Start of the current contract 2013 2013 1999
Design of the current contract 2008 2013 1999
Year of contract termination on current information
2018 2016, September 2016, September
Performance in previous contract
Medium – high Low High
Table 4 descriptive data case study
3.3 Data collection
15 Interviews
Case Party Function Length interview
Case 1 Outsourcer Manager customer service and customer logistics 57 Minutes Outsourcer Manager front office customer service and customer logistics 42 Minutes Outsourcer Procurement manager 51 Minutes
3PL Account manager 59 Minutes
3PL Customer service manager 63 Minutes
Case 2 Outsourcer Logistics manager 36 Minutes
Outsourcer Customer service retain manager 60 Minutes Outsourcer Procurement manager 46 Minutes 3PL case 2 Till December ’15 branch manager / started from Dec. 1 as
project manager
55 Minutes
Case 3 Outsourcer Logistics manager 48 Minutes
Outsourcer Customer service manager 61 Minutes Outsourcer Procurement manager 14 Minutes 3PL Key account manager / business developer 54 Minutes
Studied documents
Number of documents Studied documents
Case 1 4 Logistic service agreement for food, Logistic service agreement for non-food, combined logistic service agreement, operations manual including KPI’s, tariffs. Case 2 2 Logistic service agreement, operations manual including KPI’s, tariffs
Case 3 1 Service contract agreement
Table 5
16 were asked to recall examples of problems and issues that occurred within contract management, and to describe these events and the concrete actions and solutions that were taken at the time to overcome the problem. If an issue was described, the interviewee was also asked to describe to what extent the prices were discussed and to what extent this had an impact on contract management.
We used semi-structured interview questions, which is a flexible way to obtain information from the field and improves the reliability of the study by allowing for comparability of answers (Yin, 2009). During the interview, we asked direct questions to find out to what extent a situation or mechanism existed. Thereafter we asked the interviewee to describe a situation and give an overall rating based on a 5 point Likert scale. The interview questions that were used to collect data are derived from literature. In collecting the data, we first operationalized the variables mentioned in table 6, which are derived from the theory section. The operationalization is to be found in table 6. The interview questions are to be found in appendix 7.1.2.
17 Table 6 Operationalization of variables used in the research
Variable Sub variable Definition Contract
management
The process of ensuring that the reality of an agreement matches or exceeds the expectations in the agreement (Trent, 2007: p. 135).
Transactional governance
The extent to which roles, obligations, responsibilities, contingency adaption and legal penalty have been written down in formal agreements in detail (Hofenk et al., 2011; Cao & Lumineau, 2015). This is an overarching term for different ways of formal governance that will be defined below
Completeness Although the ways of formal governance are defined, it all starts with the matter of how complete the contract is specified. In here, the degree to which contract clauses and regulations on specific aspects: an extensive overview of the requirements from both parties (Klein Woolthuis et al., 2005).
Detailedness What is the level of detail for the clauses and terms if they are specified in detail (Klein Woolthuis et al., 2005). And what is the specification that specifies what exactly is required from the other party (Van Weele, 2010).
Contractual safeguarding safeguarding contains detailed descriptions on how disagreements will be resolved (Schepker et al., 2014). Besides, also defines to which degree clauses are included in the contract, and how (and to what degree) parties are able to ‘escape’ the contract (Lusch & Brown, 1996).
Contractual coordination coordination specifies how the outsourcer and the 3PL have defined the roles and responsibilities and how they should perform (Zhou & Poppo, 2010). The contract may be used to specify what goals parties aim for and how they want to achieve these goals (Klein Woolthuis et al., 2005).
Contractual monitoring monitoring is the activity that is an integral part of organizations current relationship management strategies to control the other party (Van der Valk & Van Iwaarden, 2011). Contractual adaption Adaption as what is defined in the contract about subsequent actions when an unplanned
event takes place (Schepker et al., 2014). It is to adapt to the unforeseen, and to know what participation is expected from the different party (Luo, 2002).
The intensity of the cooperation (willingness)
The intensity is important in defining to what degree the other party is willing to accept suggestions from the other party (Wong, 2000). A possible strategic partnership is identified in the of way that outsourcers and their 3PL’s have the tendency of doing this the last decade (Zacharia, Sanders & Nix, 2011). Whetten (1989) defined the intensity of the cooperation as the level of commitments of organizational resources to relationship, which can be observed from the amount and frequency of resource exchange.
Relational governance
We measured relational governance by the degree of how the relation is governed by trust, flexibility, solidarity, information exchange, fairness, and informal rules and procedures (Cao & Lumineau, 2015). This definition includes several sub variables that are defined below.
Trust can be defined as the willingness of a party (trustor) to be vulnerable to the actions of another party (trustee) based on the expectation that the other will perform a particular action that is important to the trustor, irrespective of its ability to monitor or control that other party (Mayer et al. 1995). Trust is an effective monitoring and control mechanism for maintaining close, long-term relationships in which relationship commitment and cooperation are active (Morgan and Hunt 1994, Zhao et al. 2008) and opportunism is discouraged.
Flexibility Within relational governance, we defined flexibility as the degree in willingness of both parties outside the contractual terms (Macneil, 2000). Flexibility is an important enabler of a successful 3PL relationship.
Information exchange is defined as the degree in willingness to share information with the 3PL or the outsourcer, including the sharing of short- and longer term goals and plans (Poppo & Zenger, 2002). Joint problem solving &
joint innovation
Joint problem solving is defined as the degree of the ability to recognize and to solve problems with joint responsibility (Vandaele & Gemmel, 2007), and the degree to facilitate joint innovation (Singh & Power, 2014).
Benign structure The benign approach assumes that the requisite cooperation to deal with unforeseen contingencies, thereby to promote continuity and realize mutual gains, will reliably be forthcoming. Trust supplants power as the key concept. But while most people will do what they say and some will do more most of the time, the concept of contract as reliably cooperative framework cannot be stretched indefinitely (Williamson, 2008).
Interplay in governance
Transaction Cost Theory (TCE)
Transaction cost economics (TCE) is concerned with the allocation of economic activity across alternative modes of organization (markets, firms, bureaus, etc.), employs discrete structural analysis, and describes the firm as a governance structure (which is an organizational construction) (Williamson, 2005).
Muscular structure A muscular structure is characterized in where one of the parties, usually the large buyer, deals with smaller suppliers in a peremptory way. Muscular buyers not only use their suppliers, but they often ‘‘use up’’ their suppliers and discard them. That implies that the assets in question cannot be easily redeployed to alternative uses and users if unexpected developments arise (Williamson, 2008).
Price focussing (arm-length-contract)
A competing environment, in where the buyer (outsourcer) is focussed on keeping down transaction costs. The duration of the trading (outsourcing contract) is projected and is based on short term. For the project (outsourcing to 3PL) a bidding takes place. Prices are negotiated and agreed before the contract is commissioned. Terms and conditions are written, detailed and substantive. Contingencies are written out and followed strictly (Sako, 1992).
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3.4 Data analyses
After interviewing, the next step in our research was transcribing the recordings. For this we used the Inqscribe program as with this program it was possible to easily adjust speed and sound in order to avoid acoustic mistakes. After transcribing, the data was organized and structurally analyzed by means of coding (Miles & Huberman, 1994). The stages we applied to the coding in our research were descriptive, interpretive and pattern coding (Miles & Huberman, 1994).
For this coding approach we used Microsoft Excel to reduce the data, ranging in length, from a few words up to paragraphs using first order codes. We used the descriptive and interpretive codes that we derived from the variables in section 2 (see also table 6). The variables are related to the context of our research with the themes ‘transactional governance’, ‘relational governance’, but also the balance and mix between these two. Next to these themes, we coded variables regarding issues, price tensions and the credible governance structure. This credible structure is characterized by opportunism and tempered trust. If the codes could not be assigned directly, they were put in the category ‘other’, from which more codes emerged later on. These codes were mainly based on earlier experiences in the relationship. From this point the codes were established and the interpretive codes emerged to describe the coded quotations. This was the second step in the coding. This formed the basis of our coding tree and in appendix 7.2 an excerpt can be found. From this coding tree, we could write our case narratives A, B and C. As the interviews were hold in Dutch, we translated the codes from the coding tree into English for analysis. The case narratives were put in a table based on their first and second order codes. With this table as showed in appendix 7.3, we derived our within case analysis. Based on our within cases, we performed our cross case analysis. We started these cross-case analyses by displaying table 8 in which we identified patterns across the cases (with similarities and differences).
The answers from the questions that were asked on a 5-point Likert scale, were analysed by taking the average of the scores assigned to the constructs representing within relational (e.g. trust, flexibility, collaboration) and transactional (e.g. satisfaction of content of the contract) governance. This resulted in terms of low-, medium- or high ratings on the governance structures as we transformed the data as following: (see findings and analysis sections)
1 = low; 2 = low – medium
3 = medium 4 = medium – high
5= high
19 Table 7 trustworthiness of the research displayed in relevant fields
Indicator Phase Practices
Construct validity Data collection Data triangulation by the use of
multiple methods to collect and analyze data (interviews, document analysis). Asking participants for feedback on transcripts of interviews.
Internal validity Data analysis The coding process of the data;
reducing data using descriptive and interpretive codes. Establishing a coding as input for the case narratives and cross case comparison.
External validity Case selection As displayed in the case selection
criteria table, the possibility for theoretical replication (see table 3).
Reliability Data collection The use of the case study protocol (see
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4. Findings and analysis
In this section, each case was first individually examined before a cross case analysis was performed. Main drivers in management of the contract will be addressed per case, since it is investigated whether these drivers have an influence on the mix of transactional and relational governance. Moreover, we look at how the outsourcer, in or without consultation with its 3PL designed the contract and the relation around it. Finally, we look at the influence of the drivers on contract management and to what extend specifically the pricing pressure has an effect on this.
4.1 Within case analysis
4.1.1 Case A
Main drivers in contract management between outsourcer and its 3PL
Although costs are considered more important by the outsourcer than any other driver (goal), the cost
perspective can be seen as a common main driver in the contracting and contract management for
21 Both parties indicated that the performance of the deliveries should be guaranteed in any case. Therefore, we found delivery performance a main driver in the contracting and contract management. The outsourcer showed the importance of performance in servicing quality to their customers the procurement manager stated that ‘’ the performance of the deliveries should be guaranteed in any case.’’ The 3PL´s customer service manager agreed with this by the statement that the outsourcer chose for them ‘’because they know we deliver quality.’’
Contract management in the relationship between the outsourcer and its 3PL
Looking at transactional contract management, the current contract is certainly outdated, for it was designed 8 years ago (a couple of years before it came into operation). The outsourcer’s manager customer service/logistics gives an example: ‘’Because of the annual audit, I took a look at the current safety issues, and I found out that they completely do not reflect guidelines’’. Both the outsourcer and the 3PL rate the contract itself with medium satisfaction and think it is ready for an update. Within the contract, the things that appear well managed are safeguarding issues and the tariffs for daily operational work. The safeguarding issues are addressed so that the parties don’t have to worry about legal issues (in case of liquidity, payments, mergers). The tariffs are specified and updated yearly to prevent misinterpretation.
Besides the contract, many items are described in the appendix of the contract: the operation manual, which contains descriptions of processes. Although functions, roles, responsibilities and the weekly meeting schedule are not specifically mentioned, according to 3PL’s account manager ‘’All the items that have to be described are defined in the contract or in the operations manual, and misinterpretations should barely be possible.´´ Contrary to this, the outsourcer stated that ´´“The contract is high level and there is not so much written detail´´ (manager front office [FO] customer service/logistics), “which definitely creates opportunities for misinterpretation for which we have to make separate pricing agreements” (manager customer service/logistics).
22 very slow in responding to our request for changing procedures” (manager customer service/logistics). However, the procurement manager stated that “They’ve shown themselves to be very flexible in the case of a large unforeseen event, a recall, that happened”. A critical view on own performance and proactive (project) participation in the partnership by the 3PL is necessary according to the outsourcer. The 3PL does seem to be willing and flexible, however, they also seem somewhat re-active and reticent, for which they have been assessed to be less trustworthy. The 3PL finds it most important to act in a fair, open and honest way and to find the most suitable solution, but with reasonable costs.
The influence of the drivers (goals) on contract management
Although both parties rarely have to revert to the contract itself, there seem to be price-related difficulties in building a partnership as stated by the outsourcer’s manager customer service/logistics: ‘We try to build a partnership, but this is difficult as it is still a business relationship”. This shows that there is a belief that a partnership is difficult to achieve, as each party wants to optimize profits and cut down costs. This belief is emphasized as “The model isn’t always win-win. When we make a deal about budget cuts, it is almost always at the expense of our 3PL” (manager customer service/logistics, outsourcer). As there is high focus on price within a long-term contract, it refers to a credible structure. This structure would create opportunity for opportunistic behaviour which somewhat resembles the ambiguities in the method of working, e.g. both parties do not agree on the way the warehouse should be designed to function in the most effective way. This was discovered as both parties shared their thoughts about the warehouse design when they discussed a most efficient way of working.
23 manager stated: “We are a flexible partner and what we try to do is to answer the request with an appropriate solution, so we could put a price tag on it to make it work for us”.
Besides price as a main driver, the outsourcer’s manager of customer service and logistics also showed a certain degree of dependency as the contracts in the dyad are temporarily: “If the 3PL would stick too rigid to the contract, the 3PL does not enlarge their chances of contract extension”. and, as the outsourcer’s manager FO customer service/logistics stated that “The 3PL shows a lot of willingness to improve their performance in delivery. However, if they would not show this, they would dig their own grave”. The dependency in contract extension creates an imbalance in power that is more in favour of the outsourcer and influences contract management. In this way, this dependency of the 3PL creates relational flexibility.
Still, the current collaboration is rated between 3 and 4 on a scale of 5, which is relatively positive compared to the statements of the outsourcer. Satisfaction in relation to content is rated lower, between 2 and 3 on a scale of 5. In the 3PL’s view, the collaboration within the current contract is a 4, on a scale of 5, because there is always room for improvement. It also rates the contract content lower, with a 2 on a scale of 5.
4.1.2 Case B
Main drivers in contract management between outsourcer and its 3PL
The current contract between the outsourcer and the 3PL in case B is an extension of a collaboration that has lasted for over 15 years. This existing relationship with the 3PL and their knowledge of the market are seen as important factors in extension of the contract. The 3PL knows the business in which they are operating, as stated by the outsourcer’s logistics manager: “we chose this 3PL as they were a partner already, and because the prices and the conditions were sufficient” and the procurement manager stated: “Our collaborative history played a part in choosing this partner, perhaps a little laziness as well. Why should we look for another party if you would have to invest heavily and the current 3PL is doing well?”.
24 Besides, the 3PL stated that their cooperative thinking and their input in making improvements made a difference compared to the rest of the market. This cooperative thinking is also recognized by the outsourcer as a main driver in contract management: “ The collaboration in terms of improvements and new technologies is what we think very important”. (customer service retain manager, outsourcer).
Since the last six months, also the performance of delivery and order picking played a central role. A downfall in performance of delivery and of order picking made trust decrease to ‘low-medium’. Besides, there have been issues in the last year, but in the last couple of months the 3PL is improving: “There were all kinds of problems, ranging from wrong deliveries of products to wrong customers to large incorrect calculations on the invoices. It took a long time for us to figure out what went wrong” (logistics manager, outsourcer).
Contract management in the relationship between the outsourcer and its 3PL
The contract was designed in 2013, so it is fairly new. The outsourcer designed the contract and the clauses written by the 3PL were later added. The KPI’s, processes and work around procedures are described in the operational manual. The contract is well defined and both parties seem to be satisfied with the level of detail specified in the contract. The outsourcer logistics manager stated that “A lot of things are explicitly mentioned in the contract. Having that in mind, I don’t miss anything in the contract. “This feeling is complemented by the statement of the 3PL, “The outsourcer has perfectly described the working flows and the ways of working, so as 3PL we have to make sure we follow it in a perfect way”. Also regarding safeguarding both parties have sub-clauses covering any kind of event. Based on the terms of the contract, the outsourcer and 3PL indicate that there is always possibility for misinterpretation in relation to the contract. As the contract is used for coordinating and monitoring, it does sometimes occur that the 3PL doesn’t meet the KPI standard. The current contract that the parties use seems to be more detailed and monitored than before, and also price plays a larger role: “There is much more stipulated in the current contract. Also price became more important, as we now have more subsequent costings. For example, the contract is designed so that if there is less stock, we have to keep paying a certain price” (outsourcer, logistics manager).
25 for a future contract, because I think it is not that explicitly described in the contract” (customer service retain manager, outsourcer).
Both parties seem to act more rigid as the contract is described in much detail, e.g. the 3PL’s branch manager described: “Within the contract, they are not that flexible. In there is written what is agreed upon, you can deviate a little from that, but not on a continuous basis”.
Regarding relational contract management, the outsourcer stated that trust between the parties is currently recovering after a downfall. Based on these escalating events, and the long time before processes were properly operational again, the 3PL is rated medium on trust. The outsourcer wishes to have a party with more reliability. This also illustrated by the outsourcer’s procurement manager who stated: “I don´t fully trust the 3P, however, they try to stick to the agreements”. The decreasing trust in the 3PL by the outsourcer was caused by several (myriad) incidents. It seemed that the outsourcer continuously had to remind the 3PL of earlier requests and the lack of resolving small issues regarding the procedures and process. “They are not as trustful as we wished. It has been the case that they promise things and that you have to email them and talk to them about it 3 months later”. The 3PL does not specifically refer to a period in which trust was damaged or lower. Although this had a large impact on the trust feelings of the outsourcer, the 3PL described the outsourcer to be a very reliable and 100% trustful partner, as they collaborate in business towards improvements.
In practice, both parties act quite willing and open to suggestions. However, the 3PL described that they noticed that suggestions from their side should fit into the corporate structure of the outsourcer company. If these do not fit, the outsourcer is not implementing these suggestions and demonstrates no flexibility in this at all. There seem also to be other restrictions outside the contract that determine the flexibility of the outsourcer “Outside the contract they are pretty flexible. But it has to be in line with the legal aspects of food and safety”. The outsourcer’s customer service retain manager stated that extra flexibility could be involved with extra costs. “The 3PL could be flexible and willing in some things, and for some things, they will calculate prices, but that depends on the complexity”. As the transactional governance shows to be quite inflexible because of the highly detailed contract, both parties of the dyad are more flexible when flexibility is expected outside the transactional agreements. However, a certain price calculation aspect is mentioned.
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The influence of the drivers (goals) on contract management
The primary focus on cost has led to a decrease in performance in delivery and order picking. The outsourcer’s procurement manager stated that: “Last year, the price played a role in the trend that the 3PL’s performance decreased. As the 3PL and I both know that the tariffs are very low, they possibly set us back to second priority”. The decrease in performance in delivery and order picking led to a decrease in trust and information sharing. Besides, the outsourcer’s customer service retain manager added that the 3PL is not very trustful as he stated: “The 3PL has not always been correct in their calculations. And afterwards, when a certain solution has been chosen, the question still remains whether the 3PL can bring it into practise effectively”. Also, the focus on price made both parties put emphasis on the transactional governance. The outsourcer’s logistics manager stated: ‘’the contract is used effectively in arguments and that the contract has been optimized since these discussions.’’ This focus seems to go hand in hand with a highly detailed contract in where as much as possible is specified about the price, as it should cover contingency costs. Although the detailed contract, according to both parties in the dyad there still is room for misinterpretation and the 3PL or outsourcer can perform opportunistic behaviour (credible structure).
The 3PL acted very rigid in flexibility discussions about changes and improvement in processes, as the procurement manager stated that: “We used the contract in several discussions, as the procedure was written in the contract. However, it sometimes took us multiple meetings to convince the 3PL of certain agreements” and “They are pretty rigid in the relationship and will just refer to the contract. We Dutch are used to handling this more flexible, while the Belgians are more straight in the agreements in the contract”. Except for the extra calculations, the outsourcer, but also the 3PL are satisfied with the contract that is established and rate it a 4 out of 5. However, both parties consider that the processes and procedures agreed upon (including prices) should be better guarded. 4.1.3 Case C
Main drivers in contract management between outsourcer and its 3PL
27 stating: “We look for partner that is able to provide efficient solutions for us. Because there are many other 3PL’s on the market, we make a decision based on the cheapest offer’ We don’t expect the 3PL to come up with very innovative and high-end solutions to accelerate the processes. We are not looking for a highly strategic solution”.
Contract management in the relationship between the outsourcer and its 3PL
Regarding transactional contract management, both parties find there is not much specified in the contract. Agreements regarding e.g. roles or functions are not detailed in contrary to the pricing details. The current contract lasts now for just one year, which according to the 3PL is a very limited time that makes it difficult to invest innovative projects and processes. The 3PL’s key account manager stated that: “Due time, processes and procedures have changed and need an update. The things that can be found in the contract are described too briefly”. Also the 3PL’s key account manager stated: “An operational manual is missed in where the processes and procedures are accurately described”, both parties agree on this matter.
There is always room for misinterpretation within a contract. In this particular case is not only because the level of detail is low but also because of personnel changes, resulting in efficiency loss in procedures and processes. Although there are discussions, the outsourcer logistics manager stated: “Although there is room for misinterpretation, so far as I can remember it was all solved in a proper way”. The 3PL’s key account manager reflects on this by adding: “The KPI’s are currently used during service meetings to analyse how we perform in the business. However, these KPI’s have never been written down in a sort of contract to determine to what degree they should be respected. So it would be manageable in a better way if these processes were defined in the contract”. The outsourcer’s customer service manager stated that things like a roadmap for innovation are missing in the contract. The 3PL is not expected to meet strategic advancements , as they are not addressed or mentioned within the contract. The contract is in little detail, and there are not so much agreements within the contract that guarantee delivery performance. This gives outsourcer a certain fear that delivery performance could suddenly decrease.
28 build up a relationship”. Because of these personnel changes, improved procedures and processes (and knowledge) got lost and some issues aroused. This made the relationship a little more rigid than before in information sharing and flexibility towards changes in procedures.
In their relationship, furthermore, the outsourcer finds that the 3PL is sometimes late in responding to their recurring complaints and outsourcer’s logistics manager stated: “In sharing the operational information, I think they could definitely improve by being more pro-active. In these things I find them sometimes reticent”. The level of pro-activity is determined on both sides of the dyad to be insufficient. From the perspective of the 3PL, there is little collaboration and room for improvement regarding processes and procedures that are not archived. The outsourcer reacts to this with the statement that “the adjustments (the flexibility) are actually a small problem nowadays. This is because the contract is short term and the 3PL would not be willing to make short term investments”. It is worth mentioning that despite the critical comments of both parties, the parties are relatively positive about each other.
The performance of and collaboration within the contract are rated 4 on a scale of 5 by the 3PL, although the content of the contract is rated lower with a 2 out of 5. The outsourcer also rates the collaboration within the current contract as 4 out of 5, but rates the contract a little better with a medium, 3 out of 5, as: “The content of the current contract, I’m less satisfied about it because I cannot revert to contractual agreements we made. We always have to go into discussion about things” (logistics manager, outsourcer). A 3 to 5 year contract would influence investment making and thereby also have a positive effect on collaborative improvement projects.
The influence of the drivers (goals) on the current contract management
The costs are substantive to contract extension and not complementing or revising in the contract. However, as the tariffs are to be found in a separated appendix, these receive a yearly extended update. Because of the one year contract the focus on costs, these tariffs are followed rigidly in daily processes and procedures. According to the outsourcer´s logistics manager: “There is no discussion about prices mentioned in the contract ”, and according to the outsourcer’s customer service manager: “When cost related processes that are not managed properly in the contract have caused an issue, we see that fewer exceptions are accepted”. Because of the focus on reducing costs, a one year (short term) arm-length contract is chosen. As to the outsourcer´s customer service manager: “They will say ‘no’ more easily to our requests”.
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4.3 Cross-case analysis
This section will provide an answer to the sub-questions presented in the theoretical section, by conducting a cross-case analysis based on the within-case analyses and table 8 with the summary of the findings. Following to this, multiple propositions will be given. These are related to literature in section 5.
Case A Case B Case C
Main drivers in contract management
- Focus on cost (cost competitive environment)
High High High
- Focus on delivery performance High Medium High
- Focus on partnership Medium Medium Low
Transactional governance
- Status of contract - Contract completeness
Semi-outdated contract Recent contract Outdated contract
- Level of detail of the contract Medium High Low
- Contractual safeguarding Yes Yes Yes
- Contractual monitoring Intense monitoring Intense monitoring Less intense monitoring - Contractual adaption Medium, but dealt with
in a good way
Medium, not always dealt with in a good way
Low, but dealt with in a good way - Specification (of the contract terms) Mostly by outsourcer Mostly by outsourcer No information
Relational governance mechanisms
- Trust Medium Low to medium Medium to high
- Willingness in flexibility Medium to high Medium Medium to high
- Information sharing Medium to high Medium Low to medium
- Proactivity Low Low Low
- Flexibility in negotiations Medium - high Medium Medium
- Cost/price involvement in negotiations Highly present Highly present Highly present
Evaluation of the contract (management)
- Collaboration in the current contract (relational)
Medium Medium Medium to high
- Satisfaction about the content (transactional)
Low Medium to high Low to medium
Performance in the current contract, by the purchase manager
Medium – high Low High
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The role of transactional and relational governance in contract management between an outsourcing company and its 3PL in a price competitive environment.
All cases (A, B and C) showed that the outsourcer-3PL relationship is situated in a price competitive environment, as there is a large focus on costs and the price of the (extra) activities the 3PL performs. 3PL A and 3PL C act more in a collaborative way as they are more flexible and have earned more trust than 3PL B. This can clearly be seen by looking how they speak about flexibility. Outsourcer A (procurement manager) said that its 3PL ‘’showed itself to be very flexible during a large recall’’ and outsourcer C (logistics manager) stated that its 3PL ‘’handled a project very well, they showed a lot of willingness in flexibility’’. Regarding 3PL B’s flexibility, the outsourcer’s procurement manager stated ‘’outside the contractual window, they act very rigidly.’’ On trust, 3PL B is rated lower than the other 3PLs, with a low-medium. The procurement manager illustrated this with ‘’It had been the case that they promised things and that I had to email and talk to them about it three months later.’’ 3PLs A and C were rated higher on trust. There is medium trust held by outsourcer A regarding its 3PL as ‘’the 3PL proved to be a slow reactor in the promises they made us.’’ (manager customer service/logistics) and medium-high trust by outsourcer C regarding its 3PL as ‘’they are a trusted party, we have a good relationship with them as they deliver on promises.’’ (customer service manager).
All parties in all cases indicated that there is room for misinterpretation, although the contracts range from ‘little detail’ to ‘highly detailed’. 3PLs A and B are strictly monitored. Outsourcer A strictly monitors its 3PL to guarantee delivery performance. However, sometimes the feeling of weariness plays a part, as the manager FO customer service/logistics stated ‘’when I trust the 3PL on their promises, I sometimes have the feeling that we suffer through the 3PL’s inability, while I expect them to be the expert.’’ Outsourcer B strictly monitors its 3PL due to past experience (significant decrease in delivery performance and order picking performance). 3PL C is less strictly monitored by the outsourcer as the delivery performance is rated to be good in the last few years. Although both cases A and B have a more detailed contract, there is a feeling that there is a higher need for transactional governance and specification of terms, conditions or penalties in more detail. Outsourcer
