Integrating processes of logistics outsourcing risk management in e-business
JuanXu
School of Management,
Huazhong University of
Science ＆Technology, Wuhan,
China
whitecloudyxj@163.com
Zhixue Liu
School of Management,
Huazhong University of
Science ＆Technology, Wuhan,
China
Lsy868@sina.com
Abstract
Logistics outsourcing has been recognized to have
important potential benefits, including reduced costs,
improved quality, the ability to focus on core
competencies and access to new technologies. Most prior
studies have articulated the advantages of logistics
outsourcing and paid little attention to the risks in ebusiness environments. The main purpose of this study is
to present how the current logistics outsourcing risk
management process can be integrated and improved
through the use of new e-business applications.
1. Introduction
More sophisticated customer demand chain and ebusiness pose new changes to firms. In recent years, many
firms have turned to logistics outsourcing as a way to
restructure their distribution networks and gain
competitive advantages [1]. Although outsourcing has
become a widely accepted business practice, it is not
developing as quickly as its proponents would like [2].
Some organizations do not achieve the expected benefits
from outsourcing [3], and unsuccessful outsourcing
experiences are often reported in which suppliers have
failed to meet expected service and to deliver the expected
cost savings [4]. Now many enterprises have realized the
importance of risk management for logistics outsourcing.
Therefore, studying the risks of logistics outsourcing is
very important to outsource logistics successfully.
Especially, the processes integration for logistics
outsourcing risk management is different from the general
processes integration. Because the logistics activities are
performed by the third party logistics service providers
(3PLs), but not by firms themselves. Accordingly, the
relations among the outsourcing firm, the third party
logistics service providers and customers are very
complex, which makes it difficult to integrate the
processes for logistics outsourcing risk management.
Fortunately, the advent of electronic business created
YanLi
School of Management,
Huazhong University of
Science ＆Technology, Wuhan,
China
Yanlidesign@126.com
opportunities to do it. In this paper, Firstly, we study the
objective of process integration for logistics outsourcing
risk management and a general process for risk
management. Secondly, a framework on the processes
integration of logistics outsourcing risk management is
addressed. Thirdly, the horizontal integration including
the inter-organization structure, the information flows and
risk management process among firms is highlighted.
Lastly, the paper concludes with a discussion of the
implications for research and practice.
2. The objective of logistics outsourcing risk
management in e-business
The advantages and risks of logistics outsourcing exist
simultaneity. Risk of logistics outsourcing must be
managed effectively in order to get the advantages. The
objective of risk management is to reduce the level of risk
exposure of a given business venture. Given an expected
level of benefits from an outsourcing strategy, a rational,
profit maximizing, and risk-averse decision maker wishes
to minimize the risk exposure of the project or the
strategy. A boundedly rational decision maker may wish,
for the same given level of benefits, to bring the level of
risk exposure below some threshold or acceptable level
[5]. Carnegie Mellon’s Software Engineering Institute
website (www.sei.cmu.edu) explains that without risk
management, companies are continually “fire-fighting”.
With a risk management program in place, companies
shift to proactive decision-making that tries to anticipate
and avoid problems before they occur. It notes: “A
successful risk management practice is one in which risks
are continuously identified and analyzed for relative
importance. Risks are mitigated, tracked and controlled to
effectively use resources.”
3. A framework of logistics outsourcing risk
management
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3.1 Risk and risk management
Risk and risk management have been studied in a
variety of domains, such as Insurance, Economics,
Management, Medicine, Operation Research, and
Engineering. Each field addresses risk in a fashion
relevant to its object of analysis, hence, adopts a particular
perspective [6]. This paper adopts the definition of risk
provided by the Royal Society (1992): “The probability
that a particular adverse event occurs during a stated
period of time, or results from a particular challenge. As a
probability in the sense of statistical theory, risk obeys all
the formal laws of combining probabilities”. The different
dimensions and levels of risk each need to be properly
understood and managed. Risk management is the making
of decisions regarding risks and their subsequent
implementation, and flows from risk estimation and risk
evaluation. Risk management is a forward-looking
activity that makes the potential problems, opportunities,
uncertainties, and threats implicit in an initiative explicit
to management. It is a formal process by which risk can
be brought under control and whereby surprises are
minimized.
3.2 A process integration framework for logistics
outsourcing risk management
Effective management and control of logistics
outsourcing risks is vital to companies’ outsourcing
operations. Many companies are becoming more aware of
the importance of risk management, but do not implement
it. This paper discusses the processes integration of
logistics outsourcing risk management, and a framework
of the processes integration including vertical integration
and horizontal integration is addressed (see figure 1).
(1) Vertical integration. It is the first step of the
processes integration for outsourcing companies and a
pre-requisite for inter-companies integration. Vertical
integration is performed within the firm’s boundaries,
which is also called internal integration. It seeks to
eliminate the traditionally functional “silo approaches”
and emphasize better coordination among functional areas
[7]. The object of vertical integration is to build the risk
management awareness in every department of the
company and let everyone is a risk manager. In this paper,
vertical integration is classified into three levels, which
are the strategic, tactical and operational level. The
strategic goal is identified as the need to improve
company competitiveness and reduce the risk. This fits in
with the company’s version in the future. The second
level, the tactical level, addressed the issue of what must
be done in order to achieve to the strategic goal. This
involves the design of the interface with 3PLs and
customers, the design of various processes and the new
risk management policy. The third level, the operational
level, proposed solutions for how to achieve this,
including the integration of organizational structure, intracompany information system and internal processes.
(2) Horizontal integration. It refers to the integration of
a firm’s activities with those of their customers and
suppliers [8]. Horizontal integration is very important for
the successful logistics outsourcing risk management. It
includes the integration of various functional structures
between companies and the 3PLs. The fourth sector will
focus on the study of the horizontal integration for
logistics outsourcing risk management.
4. Horizontal integration for
outsourcing risk management
logistics
4.1 Risk management organization structure
A formal inter-organizational risk management team is
essential in achieving lateral coordination between the
company and 3PLs. Therefore, it is necessary to set up a
risk management team to manage the logistics outsourcing
risk. The organization structure of the team can take a
matrix-oriented way, whose members come from different
department in the two firms, such as purchasing
department, manufacturing department, transportation
department. The inter-organizational risk management
team should have a clearly expressed common purpose
that satisfies both companies. Those who establish the
teams should emphasize the inter-organizational
viewpoint in the teamwork, and make it clear to the
members how a win-win outcome brings benefits both
organizations. The team is responsible for development
and implementation of logistics outsourcing risk
management. All of members work closely together with
inter-organizational risk management, and analyze, assess
and manage risk in their supply chains. Members from
different departments are responsible for the risk resulting
from their departments, for they are familiar with their
business areas.
4.2 Risk management information platform
The flow of information between the firm and 3PLs in a
supply chain is crucial for logistics outsourcing. It is
essential for carrying out an effective and efficient
movement of consignments. By using more advanced
technology and data sharing, one can increase the resource
utilization and thus reduce costs [9]. In traditional supply
chain, the relation between firms which outsource the
logistics operation and 3PLs is an easy principal-agent
relation. The information on goods is not shared in
maximum. Information asymmetry also exists in
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Vertical integration (Intra-company)
Strategic level
Tactical level
Operational level
Integrate the interface with 3PLs and
customers
Integrate functions and internal process
Integrate internal information system
Co-ordination
Improve company competitiveness
Reduce the risks
Horizontal integration (Inter-companies)
Identification
Monitoring
Risk management
platform
Treatment
Company
3PL provider 1
3PL provider 2
Assessment
Customer 1
Customer 2
Customer n
Information flow
Integration
Fig.1. A framework of processes integration for logistics outsourcing risk management
every supply chain, which is one of the principal reasons
resulting in the logistics outsourcing risk. Therefore, the
4.3 Risk management process
first step of risk management is to set up a risk
management information platform in order to reduce or
Basically, the risk management process for logistics
eliminate the information asymmetry.
outsourcing has the same phases with a general risk
Development in information and communication
management. The difference is that the scope of logistics
technology has made it possible to integrate the supply
outsourcing risk management is broader, which is interchains so that the links between firms, 3PLs and
organizational. The interconnections of the enterprises in
customers have been easier to establish. The firm can set
e-business make them dependent each other and firms can
up a platform of information communication, which is
share the risk management process and develop
seen as figure 2. The platform makes it possible to
collaborative means to manage the risk.
manage information in an efficient manner. The risk
A typical risk management process of an enterprise
management team is responsible for the operation of the
consists of risk identification, risk assessment, risk
information platform. The primary function of
treatment and risk monitoring [11]. The first step is to
information platform is to integrate the information of the
identify the risks involved in a particular initiative to
risk management in the inter-organization and to promote
determine what could go wrong. Often risk management
the communication among companies in the supply chain.
stops at this step, which accounts for the overwhelmingly
On the one hand, firms and customers can query the status
negative impression associated with risks. The second
of goods, such as stocks, transportation time and delivery
step is to assess the company’s exposure to the risks
time through this information platform. On the other hand,
identified. Assessment includes determining both the
3PLs can get more information about the demand of firms
likelihood of the risk occurring and the potential impact if
and customer, which would promote 3PLs to improve
it occurs. Not all risks will occur and not all risks will
their service. According to the vision of e-business,
have a significant effect on an initiative or a strategy.
forecasting and demand information is available to all the
Dealing with risk is the third step. Effectively addressing
partners in real time and without the Forrester or bullwhip
risk involves using a continuum of strategies that depend
effect, i.e. without the enlargement of demand variability
on the nature and amount of risk involved. In some cases,
as orders move up the supply chain [10]. Sharing
simply monitoring the risk is adequate, in others, action
information and re-thinking responsibilities between
should be taken to mitigate or reduce risk. The fourth step
companies are topics receiving a lot of attention in supply
is to risk monitoring. The recognized risk factors can be
chain management at moment. Sharing demand
information electronically more frequently or in real-time
has become possible and, more recently, less costly.
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Company
Purchasing
module
Manufacturing
module
Distribution
module
Risk management information platform
Identification
Order
management
module
Assessment
Stock
management
module
Treatment
Packing
management
module
Monitoring
Transportation
management
module
……..
3PLs
Fig.2. Risk management information platform for logistics outsourcing
monitored to identify the potential increasing trends in
their probability or consequences [11]. Active risk
monitoring ensures that effective counter-measures to
control risks are implemented. Risk monitoring not only
evaluates the performance of risk-reducing measures but
also serves as a continuing audit function.
5. Conclusion
In recent years, logistics outsourcing has become a
choice that lies in the corporate policy, which seems to be
growing interest and importance both from an academic
and a practioner perspective. Logistics outsourcing risks
have been realized by enterprises but few of them
implement the risk management. To manage logistics
outsourcing risk, companies must begin by integrating the
process. For this reason, we have proposed a theoretical
framework for integrating the processes of logistics
outsourcing risk management enabled by electronic
business. We believe that conceptual interdisciplinary
research into logistics challenges merits attention and that
such work could also form the basis for useful empirical
research. Further research should have the following
objectives: to identify the risk factors of logistics
outsourcing; to build up the coordination mechanism for
risk management between firms; to balance between the
benefit and cost for risk management.
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