Research Article, ISSN 2304-2613 (Print); ISSN 2305-8730 (Online)

CC-BY-NC 2014

, Asian Business Consortium |

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Factors Influencing Logistics Outsourcing in Pakistan

Kanwar Uzair

, Danish Ahmed Siddiqui

Research Scholar, Karachi University Business School, University of Karachi, PAKISTAN

Associate Professor, Karachi University Business School, University of Karachi, PAKISTAN

E-mail for correspondence:

kanwar.uzair@gmail.com

https://doi.org/10.18034/abr.v8i1.3

ABSTRACT

The Freight Forwarding and Logistics industry plays a vital role in the overall economy of Pakistan.

The purpose of this study is to determine the factors that influence for outsourcing the logistics and at

the same time performance of outsourcing has been evaluated with respect to Karachi, Pakistan. Three

factors identified as Low Human Assets, Low Physical Assets and Partnership, all have a positive

impact on logistics outsourcing and the firm performance especially in terms of Financial Benefit.

Online survey was conducted and the data was obtained from a sample size of 165 from the seniority

level of the manufacturing industry in Karachi. We measure the inner model by Smart PLS software

to indicate the reliability of all factors that significant impact on logistics outsourcing practices.

Reliability test was also performed which showed that our study is significant.

Key words: Outsourcing, Low Physical Assets, Low Human Assets, Partnership, Logistics Outsourcing Practices and

Financial Benefit

INTRODUCTION

The ability to obtain the goods and distribute it around the

world is the structure of the Supply Chain. Strategically it

competes on the basis of cost, service, time and

transportation that play significant role in supply chain.

Third party logistics providers working as an

independent organization, carry all the responsibilities of

transportation from acquiring of goods to deliver to final

customer that is now. Outsourcing success is the dynamic

factors of the business function since after the revolution

in information technology people are align to each other

through knowledge sharing which significantly integrate

skill workforce with low physical assets and high

transaction uncertainty. It is important in outsourcing that

partners share the abilities on each element to work

effectively. Logistic functions are outsourced to the

external service providers with the aim of acquiring

technological, economic and strategic advantages

(Venkatraman, 1992). Despite of the significance, now it is

considered as the mandatory function of the business.

Problem Statement

In the complex and massively challenging market

environment, organizations now have difficulties of

improving quality, bringing down costs and addressing

individual needs. Hence, now organizations are starting

to focus on logistics as an essential mean to achieve and

sustain competitive advantage. For firms, extending

current or establish new logistics capabilities is an

approach to create value for customers and themselves

(Esper, Fugate &Sramek, 2007; Mentzer, Min & Bobbitt,

2004).

Hsiao et al. (2010), pointed out that companies outsourced

logistics services because they do not own suitable

transport vehicles, which is one of the factors lacking in

the ﬁrm’s physical assets in their case study analysis

Knemeyer and Murphy (2005) states that there has been

very little research concerning the activities that might

inﬂuence the performance of logistics outsourcing

relationships.

Bourlakis and Melewar (2011) examine managing

operations has become very challenging for most

corporations considering the vast range of logistics

functions.

The birth of logistics can be traced back to ancient war

times of Greek and Roman empires where soldiers are

assigned to provide services of supply and distribution of

resources that enable soldiers to move forward from base

position to forward line. After World War II logistics

evolved greatly that consider as an art and science. Now

organization term logistics as providing the right type of

products and or services at the right price, at place, time

in the right condition.

Uzair and Siddiqui: Factors Influencing Logistics Outsourcing in Pakistan (13-20)

Page 14 Asian Business Review ● Volume 8 ●Number 1/2018

The concept of logistics is based on systematic approach

that performs functions in the systematic way starting

from the movement of material from supplier to end user

with the aim of achieving customer satisfaction.

Research Objective

The main purpose of the study is to examine the

influential factors that outsource logistics activities which

impact on firm performance.

Research Questions

Following are the research questions which study to be

done.

What are the factors that influenced to outsource logistics

with extent to logistics outsourcing practices?

What is the effect of logistics outsourcing practices that

impact on logistics outsourcing performance?

Significance of the Study

The findings of this study will provide an insight to the

supply chain manager to outsource the functions of

logistics that significantly impact to operational cost and

time compression of manufacturing firms that like other

firm’s resources whether logistics could be an importance

source to sustainable and improve performance.

Limitation of the Study

The main objective of the research is to explore the areas

with different aspects and to find out new dimension

which provide guidance to the people but to achieve that

there are the constraints that need to be consider. The first

and most precious is the time constraint that limits our self

to work under it, secondly region of the study to work on

it. It is very important to understand the respondent of the

research for generic feedback as well as the sample size

that limit to find out the results which are not efficient to

measure the study.

LITERATURE REVIEW

Theoretical Background

The outsourcing of logistics functions to partners, known

as ``third-party logistics providers'', has increasingly

become a powerful alternative to the traditional,

vertically-integrated firm. To obtain competitive

advantage, Resource based view (RBV) has gain the

dominance in the organization’s strategic management

approaches, which began with Werner felt in the 1980. It

contends that by optimal utilization of resources and

competence, Companies may obtain and sustains

competitive advantage (Day, 1994; Wernerfelt, 1984).

However, Barny 1991 explore that logistics capability is

that part of firm’s resources which allow it to conceive of

and implement strategies that improve efficiency and

effectiveness. According to Dekkers (2011) and Wernefelt

(1984), the RBV defined resources as tangible and

intangible assets that are rooted half-permanent to a firm.

Barney (1991), however, moved the emphasis from the

organizational view to the firm’s goal of reducing the

uncertainty and dependency on other organizations to

reduce the risk for its survival.

Transaction Cost Economics Theory

William 1975 stated that in TCE approach, the properties

of the transaction determine what establish the most

competent governance structure-market, hierarchy or

alliance. The primary factors producing transactional

difficulties include bounded rationality, opportunism,

small numbers bargaining, and information

impactedness. Bounded rationality and opportunism are

behavioral assumptions. Bounded rationality refers to the

rational limitations of the human mind, which increases

the difficulties of understanding fully the difficulties of all

possible decisions. Opportunism refers to decision makers

acting with cunning, as well as out of self-interest. Small

numbers bargaining refers to the degree to which the

buyer has alternative sources of supply to meet its

requirements. Information impactedness refers to the

presence of information asymmetries between the buyer

and supplier, which means that either party may have

more knowledge than the other. These transaction

difficulties and associated costs increase when

transactions are characterized by asset specificity,

uncertainty and infrequency.

Asset specificity refers to the level of customization

supplementary with the transaction. Highly asset-specific

investments represent costs that have little or no value

outside the transaction. The costs can be in the form of

physical asset specificity (level of product or service

customization), human asset specificity (level of

specialized knowledge involved in the transaction) or site

specificity (location). Asset specificity can be non-specific

(highly standardized), idiosyncratic (highly customized to

the organization) or mixed (incorporating standardized

and customized elements in the transaction). According to

Klein et al., 1978 TCE affirms that the potential for

opportunistic behavior is most likely when an exchange

requires one or both parties to make significant

transaction-specific investments, since such investments

create quasi-rents that are subject to the holdup problem.

When asset specificity and uncertainty is low, and

transactions are relatively frequent, transactions will be

ruled by markets. Hierarchical governance occurs when

uncertainty and high asset specificity lead to transactional

difficulties. Medium levels of asset specificity lead to

mutual relations in the form of co-operative alliances

between the organizations or intermediate governance.

Logistics Outsourcing

Companies can either keep logistics functions in house or

contract them out. The decision process is based on an

evaluation of the costs and benefits of outsourcing.

Lankford and Parsa (1999) stated that outsourcing is

Research Article, ISSN 2304-2613 (Print); ISSN 2305-8730 (Online)

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Page 15

usually supported by many factors in all organization

levels. The decision to outsource should take account of

many issues: scale of economy, outsourcer expertise,

strategy, the need for cost savings, and accountability with

greater control of operating costs, moving from fixed into

variable costs, and quality factors

Crum and Allen (1997); Lieb and Miller (2002) suggest that

a user could reduce capital investment in logistics

facilities, focus on core activities, reduce inventory,

improved response rate to marketing and minimize

logistics costs through outsourcing.

Several studies have been completed on various aspects of

outsourcing. Campbell (1995) indicated that a planned

strategy for outsourcing has the potential to deliver a

competitive advantage through allowing the organization

to focus on core activities. This planned strategy involves

measuring the willingness of the organization to

introduce outsourcing, as well as identifying the activities

which offer the best potential to the organization.

Influential Factors of Logistics outsourcing

Power, Sharafali and Bhakoo (2007) examine that majority of

the research in this area has centered on the type of activities

outsourced, the reasons behind these decisions and on

benefits of logistics activities. Gattorna and Hargreaves, 1991

mentioned that the factors that influence to outsource are

categorized into two aspects; control and physical. Control

aspects involves the management activities along with the

performance measurement in contrast to physical aspect it

involves the operation ability which focus on lean

manufacturing to integrate product stabilization.

Khosrowpour, Gunderman, Subramanian (2000) explore the

perception of employee with respect to outsource of

Information system that workforce reduction are an issue for

the client as well as the outsourcing vendor. Once the rumors

have been imposed of outsourcing of Information system,

naturally it started fear and terming of responsibility which

significantly impact to the organization.

Moad (1991) points out, outsourcing vendors reputation

are not the best with the professionals; many employees

see these firms as threat to their security. Frequently,

outsourcing vendors will go over management head

directly to corporate executives. This method often used

by vendors because they realize that management is

generally not receptive to what the vendor has to offer.

Employers who are in the lower ranks of the organization

are also uncomfortable with the idea of being taken over

and becoming a pawn in a business transaction.

Large (1991) states that an organization focusing in

information technology can gain competences in two

different aspects. First, the economies of scale associated

with running large operations cuts down on per unit cost

associated with computing. Second, the knowledge base

of experience and expertise in the company results in a

more efficient and effective organization.

Gupta and Gupta (1992) suggest that the economic losses

tangled to human resources are significant, but are rarely

revealed by companies. However, Buck-Lew 1992

believes that more control is achieved through the use of

an outside party.

Lasher, lves and Jarvenpaa (1991) define partnership as “a

co-operative relationship in which parties are equally

responsible for the business success and failure of the

product or project. It also argue that partnership between

a firms information group and either its supplier (external

partnership) or its internal customers (internal

partnership) can play an important role in the effective

acquisition and management of emerging information

technologies. Furthermore partnership allows both the

parties to work on mutual understanding by setting up

key organizational objectives and competitive advantage

of their respective industries.

Gummesson (1987) narrates the supplier and customer

relationship through the Network/ Interaction

relationship theory that states that “all activities by the

firm to build maintain and develop customer relations”.

The network/interaction theory emphasize on long term

relationship for buyer and seller.

Logistics outsourcing practices

In modern technological world many companies aiming

to achieve the higher market share by taking advantage of

lean manufacturing and sourcing efficiencies. Nowadays

the key element of business performance is the role of

Supply Chain Management. As SCM is becoming the most

complicated and the gap between what companies want

to achieve and what they can do in house continues to

grow, the rationale for outsourcing to Third party logistics

providers (3PLs) is further justified. Therefore, there is

currently a trend among manufacturing firms of

outsourcing those products and activities that are outside

the company’s core business.

Novack, Rinehart and Wells (1992), updated Bowersox’s

logistics framework by suggesting that optimization of the

logistics functions takes precedence over the optimization

of individual logistics activities. According to Novack

framework logistics activities divided into two categories;

the first category involves the “Physical activities that are

required to create form, time and quantity utilities of

customer need. These activities cover inventory,

transportation, and customer service operation. The second

category involves the “Transaction activities that follow or

initiate the physical activities previously presented. The

activities in this category are centered on transaction

negotiation areas (i.e the interaction between firms through

the purchasing of inbound materials, supplies, and

products) and order cycle management areas (i.e. the

management and control of information flows necessary to

create customer service in the logistics system).

Uzair and Siddiqui: Factors Influencing Logistics Outsourcing in Pakistan (13-20)

Page 16 Asian Business Review ● Volume 8 ●Number 1/2018

Conceptual Framework

Hypothesis Development

Razzaque and Sheng (1998) suggested that, firm outsource

logistic activity and depend upon logistic service that does

not possess the required asset to perform the logistic

activity. The low physical asset is a major factor firm

outsources the logistic activity (Vivaldini and Pires 2013).

Hypothesis shows that low physical asset positively affect

outsource logistic activity.

H1 Low physical assets positively affect the extent of

logistics outsourcing practices.

Hsiao et al. (2011) states that the decision outsources the

logistic are influence by investment on employees,

training and development. Kremic et al. (2006) asserted

that firm outsources their function when they do not have

enough expertise to perform. Greaver (1999) states that

lack of specialist staff reason to outsource the logistic

activity. As such, firm have strong human asset, perform

by itself whereas firm have low human asset go for

outsourcing. These argument support positive relation

between low human asset and outsource logistic activity.

H2 Low human assets positively affect the extent of

logistics outsourcing practices.

Lasher, Lves and Jarvenpaa 1991 define partnership as “a

co-operative relationship in which parties are equally

responsible for the business success and failure of the

product or project. It also argue that partnership between

a firms information group and either its supplier (external

partnership) or its internal customers (internal

partnership) can play an important role in the effective

acquisition and management of emerging information

technologies. Furthermore partnership allows both the

parties to work on mutual understanding by setting up

key organizational objectives and competitive advantage

of their respective industries.

H3 Lower Partnership affects the extent of logistics

outsourcing practices.

Warehouse service is one of the part of logistic activity

discuss by Cho et al. (2008). Zhang (2007) asserted firm

outsources warehouse services to improve firm

performance. Hsiao et al. (2011) asserted that packaging

and handling outsource activity are influential factor that

improve the firm performance. Sahay and mohan (2006)

state that 29 % of packaging and handling activity

outsource is a strategy of supply chain to improve firm

performance. Gol and Catay (2007) state that inventory

management is one of the common activity to outsource

to improve the firm efficiency. These argument support

positive relation between logistics outsourcing practices

and outsource logistic performance.

H4 Extent of Logistics outsourcing practices affects the

logistics outsourcing performance.

RESEARCH METHODOLOGY

The aim of the study is to examine the influential factors of

logistics outsourcing which indulge the management for

decision making. Since research is purely based on primary

data. Therefore, with purpose of information collection, a

questionnaire survey was directed to a multi- industry of

manufacturing firms in different region of Pakistan.

Research Design

A survey population was selected from manufacturing

firms in Pakistan belong to multiple industries. In order to

examine the influential factors of logistics outsourcing,

questionnaires were sent to Chief Executive officers,

Managing Directors, departmental heads and

departmental Managers since such people were

considered to have relevant knowledge of firms’ strategies

and were considered appropriate respondents to provide

relevant information. The analysis of the data would be

measured through the qualitative technique.

Face and Content validity

When it comes to questionnaire adaption it is mandatory

to measure the quality and validity of the questionnaires

from the concern professionals. The validity of this

questionnaire has been approved from the supply chain

professional and the relevant teacher of supply chain.

Target Population

The different manufacturing companies who use

outsource logistic and managers from supply chain,

procurement, purchasing, contract manufacturer

management and planning located in Karachi are the

target population of this research.

Sample Size

A model based on the resource based view and

transaction cost theory illustrates the hypothetical

connections among these variables. The data gathered

from the survey were analyzed using Smart PLS software.

A response rate of 41 % out of the 400 ﬁrms selected was

achieved and ﬁxed as the empirical data for this study.

Data Collection

The tool which is designed for the gathering of data is a

questionnaire. In addition, the questionnaire is generated on

the method of Five-Step Likert Scale level which includes

Strong disagree, Disagree, Neutral, Agree and Strongly

Research Article, ISSN 2304-2613 (Print); ISSN 2305-8730 (Online)

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Agree (Likert, R., 1932). Besides, the designed questionnaire

is modified or else adapted from many publications.

Statistical Technique for Data analysis

The software used for the analysis of collected statistics for

this study is SPSS Moreover, the statistical examinations

executed in this study by using Smart PLS software.

Independent Variables (IDV’s)

 Low human assets Specificity

 Low Physical Asset Speciﬁcity

 Partnership

Dependent Variable (DV)

 Financial Beneﬁt

Moderator

 Logistics Outsourcing Practices.

FINDINGS OF THE STUDY

For initial testing we used SPSS for pilot testing and data

screening. Smart PLS 3.2.4 used for testing the content

validity, reliability, convergent validity and discriminant

validity followed by the Heterotrait-Monotrait Ratio

(HTMT) (Hensly, 2015).

Measurement of Outer Model

The validity and reliability of outer model was established

before the examination of proposed hypothesis by using the

Smart PLS 3.2.4 software. Data of analysis were describes in

the following sections. Three criteria were used to validate

and reliability of data of outer model that includes content

validity, convergent validity and discriminate validity.

Composite Reliability: The composite reliability of the

whole measurement model is analyzed by cross loadings

and actual interpretation of confirmatory factor analysis

(CFA). According to Chin (1998) and Heir et al (2013)

strong factors loading within the construct model is must

and if found any construct is weak in construct model it

should have eliminate from the model to improve the

outer model. The threshold of the composite reliability is

greater than 0.7, which consider a strong model and

construct. According to the below Figure 1 mostly loading

are greater than 0.7 so it represents this model is with

strongly loading construct.

Figure 1: Cross Loading

Convergent Validity: The measurement of convergent

validity would be done in three sections. First strongly

construct between the factors loading which threshold is

greater than 0.7Gefen and Straub (2005) , Second calculate

the average variance extracted (AVE) which threshold

accepted is greater than 0.5 (Fornell and Larcker (1981)

and third is composite reliability (CR) should be 0.7 or

greater than. Table 1 shows all the above assumptions

correct.

Table 1: Construct Reliability

Constructs

Cronbach's

Alpha

rho_A

Composite

Reliability

Average

Variance

Extracted

(AVE)

0.728

0.743

0.879

0.785

0.691

0.736

0.824

0.612

LOP

0.823

0.827

0.871

0.531

0.554

0.56

0.817

0.691

0.654

0.853

0.743

Discriminate Validity: There are two different criteria in

which we measure the discriminant validity. First Fornell

and Larcker (1981) which shows the correlation matrix

model basically shows the correlation between the

variables. Tables 2 represent the correlation of discriminate

validity in the form of diagonal line. SecondHeterotrait-

Monotrait Ratio (HTMT), in HTMT the values should be

less than 1 which shows the perfect result of thesis. Table 2

represents the HTMT values of the model.

Table 2: Heterotrait-Monotrait Ratio (HTMT)

LOP

0.675

LOP

0.927

0.92

0.546

0.935

0.942

0.702

0.842

0.977

0.711

As per the above data all the values are less than 1 which

shows that all the variables are accepted and these are

confirmatory discriminate validity of this model Henseler

et al (2015).

Model Evaluation and Hypothesis Testing

The hypothesis testing and model evaluation performed by

PLS structure equation modeling Ringle et al. (2015). The

results are presented in order to investigate the possible

problem, the result shows that the value of low human assets

specificity, low physical asset specificity, and partnership are

significant and positive with logistics outsourcing practices

i.e (0.001), (0.000) and (0.009) respectively. It also states that

the value of logistics outsources practices is (0.000) with effect

to financial benefit that means H1 and H2 are less than

p<0.05 which is significant and positive relationship with

outsourcing performance,

Uzair and Siddiqui: Factors Influencing Logistics Outsourcing in Pakistan (13-20)

Page 18 Asian Business Review ● Volume 8 ●Number 1/2018

Figure 2: SEM output (factors loading and T- Statistics)

According to the above figure of SEM model it represents

the relationship between the independent variables to

dependent variables by the medium of logistics

outsourcing practices. The beta values of all the

independent variables is positive which significantly

impacting on logistics outsourcing practices and it also

states the effect of LOP to financial benefit is positively

that means that organization closely look out the logistics

practices while outsource the logistics department. The

beta value of the low physical asset is on higher side

comparatively to partnership and low human asset so

firms need to consider more consciously on the resources

that organization required because without updated and

technological resources firms could not compete with the

market.

Table 3: Hypothesis Testing and Results

Hypothesis

Estimates

Standard

Deviation

Statistics

Values

Decisions

HA -> LOP

0.355

0.103

3.446

0.001

Accepted

LOP -> FB

0.742

0.054

13.836

0.000

Accepted

P -> LOP

0.252

0.096

2.617

0.009

Accepted

PA -> LOP

0.404

0.067

6.052

0.000

Accepted

As per the above testing of hypothesis the relationship

between the variables have positive relationship and the

p value of all the variables is less than 0.05 which has been

confirmed that the variables that dig out for the study has

significantly impact on the firm performance as we can see

that the value of LOP with the relationship to Financial

Benefit is (0.000) which shows the strong relationship of

logistics outsourcing practices indulge to the financial

benefit to the firms. Therefore we conclude that the

hypothesis of the study has been accepted so it would

recommend the factors of low human asset specificity, low

physical asset specificity and partnership significantly

impact on logistics outsourcing which definitely impact to

the performance of the firm financially.

DISCUSSION

One of the purposes of this research was to examine

factors influencing logistics outsourcing along with their

Performance. Their research found that the three main

factors that push the organization to outsource the logistic

segment that include low human asset specificity, low

physical asset specificity and partnership. These are the

factors that play a vital role in the organization especially

the human resources which is the big asset of the firm that

generate revenue. Nowadays partnership is becoming the

key element of outsourcing because without connecting

business could not run successfully. In this modern world

working independently is not the key to success we need

to co-operate with our strategic partners which help to

achieve the competitive edge.

The findings of our research reveal that the influential

factors investigated in this study have significant effect on

outsourcing success. Findings further reveals that low

human asset specificity, low physical asset specificity and

partnership have significant impact on performance of

outsourcing especially financially perspective. The

possible reason for the acceptance of almost all hypotheses

is that organizations in Pakistan, consider logistics as an

important strategic mean after the such great game

changer of CPEC project that cater almost 80% of the

logistics activities that open the route for exporting the

goods to different region of the world. CPEC project has

now greatly impact to the Pakistan economy, the supply

and demand of the goods now has been increased because

of the building of the hub of transportation that reveal the

supply of the goods through by road conveniently. The

infrastructure of the transportation has been change

especially Gawadar port which has become the central

hub of Asia for transportation of the goods that require

skilled workforce, advanced technological resources with

strong co-ordination with the vendors that build up the

trust to work effectively and all these activities

significantly impact to the economy of the country. The

another reason of the significant of the variable that

Pakistan is becoming the trading country which mainly

depend on logistic service providers firms to get the raw

material around the world, As per the Logistics

Performance Index Pakistan ranked 68

Position out of

160 countries in 2016 which states that Pakistan increasing

the inbound activities on a very large scale.

CONCLUSION

This study has evaluated the key factors that influence the

extent of logistics outsourcing practices and how the

extent of these practices affects logistics outsourcing

performance. LOP has been measured through the four

factors that is transportation, warehouse, packaging and

handling and inventory management. Three factors were

studied to determine whether or not they influence the

extent of logistics outsourcing practices-low of human

assets, low of physical assets and partnership as

elaborated by Xu (2009). The extent of logistics

outsourcing practices is used that provide financial

benefit the organizations that make outsourcing

performance effectively.

Research Article, ISSN 2304-2613 (Print); ISSN 2305-8730 (Online)

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Page 19

POLICY IMPLICATIONS

This study suggest following managerial implication and

policy recommendation for Top Managers, Organizational

owner/decision makers and regulatory bodies.

 Top management should pay more attention on key

human workforce and these should perceive as an

important assets to firm rather than liability.

 Organizations need to more focus on strategic

coordination and must share all information within

the organization for smooth operations, since it is not

only support other logistics operation but it may

improve other department of organization.

 Manager should expend effort to develop and

enhance key logistics capabilities in order to achieve

sustainable performance.

 The development of key strategic physical asset

require people to change by putting aside old ideas

and need to look new ways of doing thing.

 The role of Government and regulatory bodies is also

important since they can implement suitable policies

and can develop such infrastructure that help

manufacturing firm to develop their logistics

capabilities, since these organization are the stake

holder of economy.

 There should be a collaborative committee in the

organization that must ensure to conduct for sharing

different experiences faced which can improve the

performance organization.

Future Research

Although this study has made significant contribution to the

knowledge base on logistics outsourcing by empirically

testing the relationship between influential factors and

performance of logistics outsourcing practices, but like other

studies this research has some limitations. Few influential

factors with the extent of logistics outsourcing practices and

firm’s performance variables have investigated but both of

these have multiple facets and it is beyond the scope of single

research to undertake such task of investigating numerous

facets simultaneously. Other logistics practices element such

as Process capability, Lead time, supply chain network, cost

effective, responsiveness to market, operational capability,

demand oriented and supply oriented capability need to be

examined. Similarly firm performance in this study has focus

on operational level. Other operational performance

variables are further need to investigate.

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