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Weekly UpdatesComplexities of global trade, increased competition worldwide, and continued downward pressure on prices and margins are urging companies to develop better logistics systems in order to fulfill the need for a high service level at a lower cost (Sheffi 1990; Wilding and Juriado 2004; Lieb 2008). The use of third-party logistics (3PL) firms is a way to meet the challenges. Companies use 3PL firms for various reasons. Outsourcing non-strategic activities enables organizations to focus on core competencies and exploit external logistics expertise (Sink and Langley 1997). Firms can acquire the necessary resources, develop unique assets, and achieve superior logistics performance through 3PL relations (Sinkovics and Roath 2004). Forming relationships with 3PL firms is an efficient and effective way to achieve the required service without investing heavily in assets and new capabilities (Stank and Maltz 1996; Persson and Virum 2001).
Companies seek not only to control costs, but also to use logistics services as a means of differentiation in both domestic and international markets (Lieb and Bentz 2005). 3PL firms can contribute to providing access to international distribution networks and improving customer satisfaction (Bask 2001). Rapid progress in information processing and communication technology supports the outsourcing of logistics activities to 3PL firms as IT allows clients and providers of logistics services to communicate quickly, thereby reducing coordination costs and fostering strategic partnerships based on mutually agreed goals (Lewis and Talalayevsky 2000).
Ashenbaum et al. (2005) show that the usage of 3PL firms has kept increasing over the past decade. In addition, they point out that expenditures on using third-party logistics has been growing constantly and is estimated to grow in the future and that the use of third-party logistics firms is becoming a common practice. The growth of 3PL firms, both on the supply side and demand side, has made it necessary to treat such firms as a separate industry (Berglund et al. 1999). As a growing industry, 3PL firms account for a large portion of the logistics sector. Currently the outsourcing volume is growing at roughly_10 billion yearly (Rebitzer 2007).
In the 3PL industry, some service providers have high standardized service offerings. This enables the provider to benefit from increased economies of scale, risk sharing, and volatility smoothing. In addition, new resources from additional clients can be utilized to improve efficiency and to further improve margins and the delivered performance/cost ratio (Berglund et al. 1999). However, providing standardized services in a cheaper way is no longer sufficient for 3PL firms. First, with more entrants in the industry, price for standardized services become commoditized and the profit margin is smaller. Second, with the constant shift in client business, more customized and value-added services are required.
Therefore, it is argued that 3PL firms need to provide more than standardized services. Innovation and new service development are vital for 3PL firms. Because different clients have different needs, differentiating logistics services is essential for a 3PL provider's business (Veeken and Rutten 1998). Further, increasing client demands compels 3PL firms to concentrate on innovation and new service development (Chapman et al. 2003). Hence, 3PL firms are urged to target customized and innovative operations and develop new services. In essence, the expansion of service offerings is driven by strategies for adding value to the client and upgrading client relations (Van Hoek 2000). Thus, executives of 3PL firms are paying greater attention to conducting innovation and providing new value-adding services.
Increasing globalization implies moving production and sourcing to low-cost foreign countries as well as distributing to end consumers in other parts of the world. Companies are now building bridges to countries like China and India and to Eastern Europe while managing their pipelines all over the world (Murphy 2007). Clearly, 3PL users would prefer to work with a single 3PL provider (Lieb and Bentz 2004). But the extent of the volume involved and geographical coverage required has made it increasingly hard for one provider to meet these requirements (Lieb and Bentz 2005). Thus, many large shippers contract with two or more 3PLs for their global operations. This indicates that large, well-known firms, such as DHL, FedEx, UPS, and TNT, cannot handle all demands. In fact, strong, regional-based, medium-sized players do exist in major economic regions and they are playing an increasingly critical role in global supply chain management, thanks to their local expertise and strong regional presence. However, regional 3PL firms have not attracted great interest.
How do regional 3PL firms interact with their clients to generate innovation? There is limited research on innovation and new service development in the logistics sector. There has been even less research on innovation and new service development for regional 3PL firms to date. Thus, the purpose of this note is to explore innovation and new service development for regional third-party logistics firms. A cross-region study of innovation and new service development of 3PL firms in Taiwan, Hong Kong, and Sweden was conducted. Drawing on the innovation radar model of Sawhney et al. (2006), this note reports the empirical findings and discusses several directions for future research.
LITERATURE REVIEW
The Concept of a Third-Party Logistics Firm
Terms such as third-party logistics, logistics outsourcing, and contract logistics have been introduced in recent years, but the use of these terms is not consistent (Berglund 2000). Since there is no consensus on the definition of third-party logistics, the concept of a third-party logistics firm is somewhat blurred. According to Lieb (1992) and Lieb et al. (1993), a 3PL firm is an external company to perform logistics functions that have been traditionally been performed within an organization. In contrast, Virum (1993) defines a3PL firm as a middleman in the logistics channel that has specialized in providing by contract for a given time period all or a considerable number of logistics activities for other firms. A recent definition of a 3PL firm by Evangelista and Sweeney (2006) defines a 3PL firm as a logistics service provider carrying out service offerings on behalf of a shipper where the service offerings consist of at least transportation.
These definitions tend to emphasize the fact that a 3PL firm is an external company carrying out logistics activities as service offerings on behalf of the shipper. However, these definitions underestimate the problem-solving ability and customer adaptation of 3PL firms (Hertz and Alfredsson 2003). In fact, 3PL firms do not merely replace shippers to provide logistics solutions that are traditionally done in-house. They are customer oriented and are supposed to be innovative. They need to adapt and generate innovative solutions in the case of changes in the client's business.
In addition, these definitions do not consider the fact that 3PL firms can play different roles in supply chains. Certain elements of the client's strategy shape the outsourcing decision and requirements, which in turn influence the role of 3PL firms within the supply chain (Bolumole 2003). 3PL firms can provide value-added and virtual logistics in an integrated way, acting as supply chain logistics coordinators or logistics process integrators (Bolumole 2001). As "tools" used by their clients (Fabbe-Costes et al. 2009), 3PL firms can also contribute to supply chain integration and performance. In addition, 3PL firms can have a critical role in linking users to their major vendors and customers, thereby facilitating supply chain integration (Lieb and Bentz 2004). Finally, through the adoption of relational exchange, 3PL firm-client relationships can improve supply chain effectiveness and performance by promoting a positive climate for learning and innovation (Panayides and So 2005).
Service Innovation
Undoubtedly, innovation is an essential factor to the success of most firms. Innovation has been considered as product development, and many companies still entertain the mistaken view that innovation is merely synonymous with new physical product development (Sawhney et al. 2006). Such myopia is problematic since today innovation is not limited to product development but also includes many other areas. According to Schumpeter (1934), innovation can occur within manufacturing, services, processes, or social systems. In contrast, Drucker (1985) defines innovation as the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or service. Afuah (1998) proposes that innovation is the use of new technical and administrative knowledge offering a new product or service to clients. Last but not the least, according to Rogers (1995, 11), "Innovation is an idea, practice, or object that is perceived as new by an individual or other unit of adoption." For Rogers, innovation refers to "an idea" and therefore it does not have to be new to the world. It can be merely new in the eyes of the beholder, either a person or organization that is applying or interpreting it.
In the service literature, service innovation and new service development are often used interchangeably. Gadrey et al. (1995) define service innovation as innovations in processes and innovation in organizations for existing service products. Oke (2007) describes service innovation as new developments in activities undertaken to deliver core service products for various reasons. Service innovations are related to variations in product delivery or value-added services embellishing the service experience for the client (Oke 2007). Further, it has been stressed that innovation in services can be connected to changes in various dimensions, such as innovation in the service concept, new client interface, innovation in the delivery system, and innovation in technological options (Gadrey et al. 1995; Den Hertog 2000). Den Hertog (2000) emphasizes that in real life most services will involve a combination of simultaneous changes in multiple dimensions.
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