Third-party logistics as a strategy for redesigning distribution networks-A case study of a healthcare company Master of Science Thesis in the Master Program of Supply Chain Management

Companies are nowadays exposed to greater risks due to the globalization of the market, shorter product and technology life cycles and the increased use of partners within the manufacturing, distribution and logistics field, which on the whole result in complex international supply network relationships (Christopher et al., 2002). Due to the continuous changes in the market, companies need to constantly review the design of their distribution networks to stay competitive (Chopra & Meindl, 2012). Distribution networks are defined by Chopra & Meindl (2012) as the different solutions a company have access to for moving and storing a product from their own facilities to the customer’s location. As an alternative to redesigning a distribution network inhouse, there is a possibility to outsource all, or a part, of the distribution to a logistics service provider. When outsourcing logistics operations, companies often turn to third-part logistics (3PL) providers. Lieb (1992, p. 29), states that 3PL involves ‘‘the use of external companies to perform logistics functions that have traditionally been performed within an organization” and that ”the functions performed by the third party can encompass the entire logistics process or selected activities within that process’’. Mello et al. (2008), Andersson (1998) and Diabat et al. (2013) argues that the motives to outsource logistics services to 3PL providers are mainly cost reductions, improved service and a reduction of investments. The purpose of this report is to develop decision support for a Swedish healthcare company, which is currently involved in a project that aims at redesigning their distribution network to decrease cost and tied up capital, regarding if their outbound distribution should be outsourced to 3PL providers or performed in-house. Moreover, the report provides knowledge on how to make a 3PL relationship successful. In order to fulfill the purpose of this thesis, two research questions were formulated. The questions are: 1. Which company specific aspects affect the case company’s decision to outsource or perform their outbound distribution in-house, and how are these aspects affecting the decision? 2. If the case company chooses to outsource their distribution, what can they do to make the 3PL arrangement as successful as possible with regard to their specific situation? To be able to reach the purpose of this thesis, data have been collected from articles and books with the aim of obtaining information about logistics outsourcing. Moreover, an empirical study has been made by conducting interviews and sending out questionnaires to selected companies. The data from this study were analyzed to build up arguments in order to discuss the two research questions. The results from the arguments were that the company’s distribution network contains too small warehouses to be able to reach the same economies of scale as a 3PL provider can. Moreover, no major risks with logistics outsourcing were found for the company. Therefore, the case company is recommended to outsource their European distribution since it will reduce distribution costs. The result from the arguments did also indicate that if the company decides to outsource their distribution they are recommended to do it in the form of a partnership with one, or a few, 3PL providers. Further, the company is recommended to put a lot of effort into the supplier selection process, and to use long contract with built-in flexibility for the 3PL relationships.