Logistics outsourcing for economies in business networks

Abstract The fundamental choice among governance mechanism is whether to externally organize transactions outside the boundary of the firm in the market, or whether to internally organize transactions within the firm's boundaries. In other words, major decision which is made on the firm's organizational strategy culminates in the make-or-buy decisions. In business and especially in the context of logistics, the worldwide usage and importance of outsourcing has grown dramatically over the last decades and researchers have reported on the outsourcing of logistics functions from several perspectives and a growing interest towards outsourcing is indicated by the volume of writings on the subject in scholarly journals, trade publications and popular magazines. The theoretical framework in outsourcing studies has commonly been the theory of the firm in microeconomics, transaction cost theory, agency theory, marketing or strategic management. However, according to recent studies it seems that several perspectives are needed when studying the development of relationships and the antecedents that underlie outsourcing decisions. Hence, in this study, concepts will be used from several theoretical backgrounds to get an eclectic view of outsourcing. The main research question is to study how the buyers' logistics outsourcing decisions contribute to the accomplishment of goals in business networks. Empirical part of thesis contains two data sets. First data were collected in November 2005 and the target group in this data was northern Finnish companies. Totally 161 acceptable responses were received, corresponding to a 27.4 percent response rate. The second data were collected from industrial companies in Finland during spring 2008. In the second data, 235 acceptable responses were returned, representing a response rate of 22.5 percent. As a result, a two dimensional model was created for describing outsourcing relationships in the logistics service markets. On the one hand, network economies can be gained through horizontal mode of outsourcing, where focus is in unit costs of services and the way to achieve lowest possible unit costs are short-term bidding games among service providers. On the other hand, network economies can be achieved through vertical mode of outsourcing with cooperation and strategic partnership where all participants concentrate on their core competences and thus create network economies through transactional value in long-term. In the middle are hybrid modes of outsourcing where focus is on both unit costs of services and transaction costs. These outsourcing modes are where the outsourcing strategies arise and in this way, the thesis contributes to theoretical development of outsourcing phenomenon and concepts behind logistics outsourcing decision making