Logistics contracting effectiveness: the perspective of Thai electronics

Abstract

The World Bank, which produces the Logistics Performance Index, has consistently ranked Thailand in the top tier but in a degrading order: ranked 31 in 2007; 35 in 2010; and 38 in 2012. When looked at the micro level, Thailand is still in the lowest level of logistics development—physical distribution—where firms focus mainly on the outbound flow of finished products, from the end of the production line to the consumers. The Thai government has taken an integrative approach to logistics development, encouraging Thai companies, particularly small- and medium-sized

enterprises, to invest in more advanced logistics management, i.e., internally- integrated or externally-integrated logistics. Accordingly, Thailand’s logistics

development strategy (2007 – 2011) set out five strategic agenda: (1) business logistics improvement; (2) transport and logistics network optimization; (3) logistics service internationalization; (4) trade facilitation enhancement; and (5) capacity building. The first agendum encourages firms to contract out logistics activities to LSPs, and this is the subject of this study.

Drawing from the literature and on the insights from customer managers—the ultimate judge of logistics service providers’ performance—the current study empirically developed a 30-item, six-factor model that explains logistics contracting effectiveness. The dependent variable—logistics contracting effectiveness—was defined as “a logistics service provider’s (LSP’s) performance on a contract and the various outcomes customer managers use to measure it” and was measured with five items borrowed from Knemeyer and Murphy’s (2004) third-party logistics performance scale: (1) this contract has improved our logistics operations performance; (2) this contract has provided us more specialized logistics expertise; (3) this contract has reduced our logistics cost; (4) this contract has reduced our level of owned assets; and (5) this contract has reduced our employee base.

Overall, the customers appeared to be satisfied with their logistics service experience. Contractual customers, however, reported significantly higher agreement than transactional customers on all items except cost. Both types of customers agreed highly that the logistics contract provided them with more specialized logistics expertise and improved their logistics operations performance. While they agreed that the contract helped lower their logistics costs, they did not seem to be able to reduce much of their owned assets or headcounts.

The six significant factors contributing to the level of logistics contracting effectiveness include: long-term orientation, information sharing, risk aversion, conflict handling, trust, and proactive improvement. Based upon the research results, the current study suggests that to enhance logistics contracting effectiveness, both customer managers and LSP managers should emphasize developing long-term relationships, sharing appropriate information, and managing conflict effectively. Apart from these, LSP managers should also emphasize building competence trust and trust in integrity. For policymakers, this study suggests that they should emphasize raising the awareness of Thai manufactures, particularly the small- and medium-sized firms, about the benefits of internally-integrated logistics. They should be encouraged to contract out their logistics activities to competent LSPs from whom they will gain almost instant access to sophisticated logistics expertise and technologies without incurring a substantial upfront investment.