Impact of external integration capabilities of third-party logistics providers on their financial performance

• Date: 08 August 2016
• Pages: 263-283
• Published date: 08 August 2016
• DOI: https://doi.org/10.1108/IJLM-09-2014-0155
• Author: Chiung-Lin Liu,Pei-Yu Lai
• Subject Matter: Management science & operations,Logistics

Impact of external integration

capabilities of third-party

logistics providers on their

financial performance

Chiung-Lin Liu and Pei-Yu Lai

Department of Shipping and Transportation Management,

National Taiwan Ocean University, Keelung, Taiwan, ROC

Abstract

Purpose –Outsourcing by corporations is increasing the demand for complex services (such as

customization) from third-party logistics providers (3PLs). Effective integration between 3PLs and

their customers, known as the external integration of 3PLs, not only allows 3PLs to respond rapidly to

shippers’needs but also to increase customer satisfaction and the effective allocation of resources while

increasing operational efficiency (such as by proposing comprehensive plans for future logistics

services to meet shippers’demands). The purpose of this paper is to investigate the causal

relationships among the external integration capabilities, cost advantages, and the financial

performance of 3PLs.

Design/methodology/approach –A survey of 3PLs in Taiwan and China was performed.

The research model was tested using a structural equation modeling technique along with the partial

least square (PLS-SEM/PLS) approach.

Findings –The results herein demonstrated a positive relationship between 3PLs’external

integration capabilities and resource efficiency. The results also suggested that cost competitiveness

positively affected the financial performance of 3PLs. Although the external integration capabilities of

3PLs were not found to directly affect their financial performance, the results in this study indicated

that external integration capabilities enable a firm to improve financial performance by capturing cost

advantages.

Originality/value –This study provides useful information about the effects of external integration

capabilities on the financial performance of 3PLs in a bi-regional context. The sample in this study was

drawn from the 3PL industry in Taiwan and China, enabling a comparative analysis of these two

countries of similar cultural backgrounds but different degrees of development of their logistics

industry and different related demands.

Keywords Distribution management, Supply chain management

Paper type Research paper

1. Introduction

In recent years, many enterprises have begun outsourcing their logistics activities

(such as warehousing and distribution) to third-party logistics providers (3PLs).

This strategy not only reduces a company’s logistics costs (Coyle et al., 2013), but also

enables companies to focus their limited resources on their core capabilities, helping

them to maintain competitiveness (Porter, 1980). The outsourcing of logistics activities

is increasing demand for increasingly complex services (such as customization) from

3PLs (Stefansson, 2006). The effective integration between 3PLs and their customers,

The International Journal of

Logistics Management

Vol. 27 No. 2, 2016

pp. 263-283

©Emerald Group Publis hing Limited

0957-4093

DOI 10.1108/IJLM-09-2014-0155

Received 29 September 2014

Revised 1 February 2015

21 May 2015

Accepted 27 July 2015

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/0957-4093.htm

The authors would like to thank the National Science Council of the Republic of China, for

financially supporting this study under Contract No. NSC 102-2410-H-019-018. Ted Knoy is

appreciated for his editorial assistance.

263

Capabilities

of 3PLs

known as the external integration of 3PLs, allows 3PLs to respond rapidly to shippers’

needs, to increase customer satisfaction, and to reduce their operating costs by

effectively reallocating resources.

Although companies’logistics integration capabilities are already having important

effects on supply chain management systems (Huo, 2012), and previous studies have

elucidated the benefits of the integration of companies and 3PLs ( Jayaram and Tan,

2010), very few investigations have taken the perspective of 3PLs in studying the

relationship between 3PLs’external integration capabilities and their performance. In a

supply chain management system, integration capabilities are divided between those

inside companies and those outside companies. The latter involves cooperation

between companies and other members of the supply chain in the area of operations.

For manufacturers, external integration can be simply divided into upstream supplier

integration and downstream customer integration (Stank et al., 2001).

Only a limited amount of previous logistics integration research has investigated the

topic from the perspective of 3PLs, and most relevant studies have focussed on the

merge of each enterprise’s internal and external integration capabilities (Shang, 2009).

Accordingly, the effect of external integration on the performance of 3PLs has been

difficult to elucidate. The crucial issue concerning the sustainable development of 3PLs

is the improvement of their external integration capabilities to provide mutua l benefits

to multiple supply chain members ultimately to improve their performance (Lieb and

Lieb, 2012). However, although research has confirmed that the integration capabilities

of 3PLs can influence their financial performance by enhancing service performance

(Shang, 2009), very few empirical studies have examined the effects of external

integration capabilities on financial performance through the provision of cost

advantages. 3PLs belong to an industry with low opera ting profit margins.

For example, the operating profit margins of UPS (2014) from 2009 to 2013 ranged

from 8.2 to 13.1 percent. If 3PLs have poor resource efficiency, caused by poor

management of human resources or poor storage utilization rates, then increasing

profits will be difficult for them.

Most research on supply chains and logistics integration has focussed on a

single country (Halley and Beaulicu, 2010; Huo, 2012; Kim, 2009; Mendes Primo, 2010;

Saeed et al., 2011; Springinklee and Wallenburg, 2012; Wei et al., 2012) or provided an

overall analysis of samples from dozens of mostly developed countries (Danese and

Romano, 2011; So and Sun, 2010; Thun, 2010). Very few comparative studies

of two economies with similar cultural backgrounds and different levels of

development of, and demand for, their logistics industries, such as Taiwan and China,

have been published. In China, logistics costs represent about 18 percent of

the GDP, compared to 9.0 percent in Taiwan (Armstrong and Associates Inc., 2014;

Bureau of Economic Operations (China), 2013). China’s logistics market has recently

undergone astounding growth. For instance, the annual growth of China’s road

and rail freight sector reached 13 percent in 2012, while the corresponding

rate in neighboring Taiwan during the same period was only 2 percent (Bureau of

Economic Operations (China), 2013; Ministry of Transportation and Communication

(Taiwan), 2014). These differences may significantly influence the structures of

their logistics sectors.

This study aims to fill several gaps in the relevant literature and provide useful

policy-related information regarding the effect of external integration capabilities on

the financial performance of 3PLs within a bi-regional context. Here, “external

integration capabilities”include the integration of information, tasks, and financial

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