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Additionally, mediation hypotheses were tested to measure the indirect effect of logistics outsourcing LO on firm performance FP through logistics outsourcing performance LOP and logistics performance LP. Thus, the study tested the following hypotheses:. This section presents first the research design followed in this study.

Thereafter, the qualitative and quantitative approaches are described as used in this study. The uniqueness of the SME context from industry to industry and even country to country calls for combined methods to better address the research questions, as claimed by Saunders, Lewis and Thornhill The quantitative approach helped to test the application of RBV theory to logistics outsourcing. The results from the qualitative approach enriched the quantitative findings and helped advance logistics management literature regarding performance of SMEs.

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The results from the two approaches were interpreted together to provide a comprehensive response to the research questions as opposed to using either of the approaches Saunders et al. The qualitative approach was used to collect data that helped interpret the relationships tested between logistics outsourcing and firm performance.

These two approaches were thus able to complement each other. Specifically, qualitative data helped explain why SMEs outsource logistics services as well as the process they follow to outsource. This provided insights of the kind of statistical relationships that could be expected between logistics outsourcing and performance of the SMEs. The sampling techniques, instrument development and data collection are discussed in the following sections starting with the qualitative approach.

Purposive sampling was used to select five manufacturing SMEs, which participated in the interviews. It was used to select the manufacturing SMEs to provide rich data Creswell regarding logistics outsourcing and firm performance. The enterprises selected represented the five main manufacturing categories in Kenya, as identified by Chege et al. Collecting data from multiple SMEs helped cross-checking to ensure that credible data were obtained.

Conducting the interviews on site helped observe that actual manufacturing was taking place. The interview guide was piloted with two logistics managers. The piloting helped to adjust some questions which were not clear and drop others that were repetitive. In-depth interviews were conducted with directors or owners or managers in charge of logistics in their respective manufacturing SMEs.

One interview was conducted in each of the SMEs. The five interviews were sufficient as there was no additional information obtained after the fifth interview. The five interviews were sufficient, considering the claim by Creswell and Clark and Jogulu and Pansiri that four to five case studies are appropriate to meet the requirements of a mixed methods design.

Three interviews were recorded using an audio recorder, whereas two were captured in interview notes. The qualitative data were analysed through thematic analysis to answer the why and how research questions 1 and 2, respectively. Thematic analysis involved searching for themes across the interview data, as described by Saunders et al. The qualitative data collected through in-depth interviews were transcribed and coded. Themes related to the research questions 1 and 2 were identified. The research process followed in the qualitative approach is outlined in Figure 2.

The units of analysis comprised manufacturing SMEs in Nairobi. SMEs within the manufacturing sector that were engaged in trading or were service orientated were excluded. As such, actual manufacturing was observed during data collection, otherwise the enterprise was excluded. All other manufacturing firms were included in the study, regardless of the use of 3PL services.

This inclusivity allowed for the determination of the extent of logistics outsourcing within the SMEs. Quantitative data were collected using a seven-point Likert-type survey questionnaire with end-points defined to help respondents understand the scale. Although there is no preferred number of points that specific rating scales should have, Krosnick and Presser argue that a lengthy scale e.

In addition to this, the 7-point scale was considered appropriate for this study because of the successful application of the same scale length in past studies Cho et al. The questionnaire collected data on enterprise demographics, logistics outsourcing, logistics outsourcing performance, logistics performance and firm performance. Logistics outsourcing was measured by six items, which were self-developed in line with Langley and Capgemini and Solakivi et al. Logistics outsourcing performance was measured by 15 items comprising communication, trust, cooperation and innovation indicators Deepen et al.

Logistics performance was measured using five items adapted from Green et al. Similarly, firm performance was also measured by five items Solakivi et al. The questionnaire was piloted among ten manufacturing SME managers involved in the day-to-day management of logistics in their enterprises. The piloting exercise led to rewording of some items to make them clear before the data collection.

The drop and pick later method was used to collect quantitative data from SME managers in charge of logistics operations. In some cases, the questionnaires were filled on the spot. In instances of collect later, three attempts spaced one week apart were made to collect the filled questionnaire. Any questionnaires that were not collected within the three attempts were counted as not returned.

Although some respondents promised to email or send the filled questionnaires through postal services, none of these were received through post or email. The quantitative data were analysed using partial least squares structural equation modelling PLS-SEM to investigate the relationship between logistics outsourcing and performance of manufacturing SMEs. EFA was performed, and it identified the latent constructs scales. Ethical clearance was obtained from the relevant authorities within the university as an assurance that carrying out the study did not endanger any person or community. Acceptable research ethics were observed during planning, fieldwork, data analysis and reporting.

For instance, participation in the study was voluntary and respondents could withdraw at any stage. Respondents were assured of anonymity of their responses. Participants were also informed that the study was only for academic purposes.

Managing supplier relations with balanced scorecard | Outsourcing | Strategic Management

This means that the participants did not suffer any loss during or after the study. Those who wanted to have access to the final report were given contacts through which they could make their requests. The enterprises that participated in the qualitative approach included the following: 1 a metal fabricator that manufactures meter boxes and cable trucking accessories, with 25 employees; 2 an industrial chemical manufacturer with 93 employees; 3 a paper products manufacturer, employing 15 people; 4 a food spices and snacks manufacturer with 90 employees and 5 a clothes manufacturer with 17 full-time employees.

The enterprises outsourced logistics services to reduce costs associated with investing in logistics fixed assets, inventory and operations. The industrial chemical manufacturer highlighted that in addition to cost reduction, the enterprise wanted to minimise the risks associated with managing logistics in-house. The respondent from the enterprise observed that:. For instance, we could load a full truck and it is hijacked on the way. We lose the truck and all the goods. With outsourcing security of our goods in transit is not our concern as our LSPs take care of that … we outsource to reduce transport risk.

Logistics outsourcing helped the enterprises to focus on manufacturing. Running logistics in-house means more employees and management time. The respondent from the metal fabricator noted:. The stress we will undergo is a lot. Our transport service providers are helping us a lot. Some of the enterprises, for example, the clothes manufacturer, highlighted that they lacked resources to invest in in-house logistics, and hence, they relied on outsourcing.

In addition to the reasons offered above, the enterprises also observed that they adopted the use of 3PLs so as to achieve flexibility, timely deliveries, eliminate idle capacity of fixed assets, achieve high customer satisfaction and increased profits. Based on the interview data, the enterprises highlighted that logistics outsourcing process must be managed diligently to accrue the expected benefits especially in the improvement of enterprise performance as also argued in the Waugh and Luke study. Three out of five of the manufacturing SMEs highlighted that they used ad hoc models to outsource logistics, whereas the other two had procurement guidelines that directed the outsourcing process.

The ad hoc logistics outsourcing process was used to select the activities to be outsourced and the LSP. That is, they did not have a clear procedure to identify which logistics activity should be outsourced and to what degree, how to select a 3PL service provider and a contract outlining performance expectations from the prospective LSP. This could imply that price lowest bidder was the key determinant in selecting a 3PL. Although some manufacturing SMEs had clear guidelines of managing the purchase process, they lacked a specific process for logistics outsourcing that will lead to improved firm performance.

For instance, once a decision was made on which logistics activity to outsource, the SMEs selected the 3PL service provider on the basis of price only. However, it may be difficult to achieve timely deliveries and high customer satisfaction through such a process. Analysis of data related to the survey is reported in the following paragraphs.

A total of complete questionnaires were returned resulting in a Non-response bias was ruled out based on the Armstrong and Overton study guidelines, entailing categorising the questionnaires into early responses and late responses. The late responses included questionnaires received after second and third collection attempts.

This resulted in and 21 questionnaires in the early and late responses categories. The enterprises that participated in the survey were grouped into various manufacturing categories with The demographics also revealed that the majority All the manifest indicators were modelled as reflective in this study. The indicators were subjected to a first round of EFA using the principal component analysis method and Varimax rotation, but resulted in a suboptimal solution as some factors had low loadings. The factors with low loading were eliminated, and a second round of EFA was performed, resulting to four components accounting for Each of the components had more than three indicators loading on it, revealing an optimal solution Pallant Confirmatory factor analysis was conducted using Smartpls 3.

The final model indicator loading after confirmatory factor analysis is illustrated in Table 2. According to Hair et al. The outer model reveals how the manifest variables relate to the latent variables Hair et al. The outer model is evaluated by checking internal consistency, convergent and discriminant validity Davcik ; Hair et al. The composite reliability values FP: 0.

Discriminant validity problems were ruled out from the model as per Fornell—Larcker criterion and absence of the cross-loading problem among the manifest variables Hair et al. The variance inflation factor VIF values for the model were between 1. The R 2 values for the study model revealed moderate predictive accuracy for FP 0. Finally, LP had a medium effect on FP 0. Statistical significance of the path coefficients was also examined to identify statistically significant relationships and to test the research hypotheses. The hypothesis testing result is illustrated in Table 4 , revealing that hypotheses H 1 and H 2 were rejected, while H 3 , H 4 , H 5 and H 6 were accepted.

These reasons have been echoed across the globe, as highlighted in the studies by Langley and Capgemin , Solakivi et al. The process followed in logistics outsourcing is critical in selecting the right LSP that can help the SMEs achieve the objectives of outsourcing. As highlighted in the previous section, SMEs could be using ad hoc methods when implementing logistics outsourcing strategy. To achieve improved SME performance through logistics outsourcing, a logistics outsourcing model is proposed at the end of this section.

The direct relationship between logistics outsourcing and firm performance was positive, as predicted, but not statistically significant. This finding provided an empirical validation of the results reported in the studies by Chatzoglou and Sarigiannidis and Hsiao et al. Similarly, it partly supported the Cho et al. This result suggests that logistics outsourcing benefits relating to performance of manufacturing SMEs are not straightforward as earlier expected, but might be dependent on factors other than just outsourcing, as also argued by Solakivi et al.

The finding might also imply that the manufacturing SMEs in Nairobi outsourced their logistics for reasons other than just to improve their performance. Some of the reasons were identified as a lack of in-house capabilities, to reduce logistics costs, an aversion to risk and a desire to free management time to focus on core activities.

Thus, it is likely that this strategy would yield performance-related benefits into the future Zailani et al. As highlighted earlier, communication, trust, cooperation and innovation were identified as measures of logistics outsourcing performance. Thus, manufacturing SMEs practicing logistics outsourcing should focus on the quality of communication, building high trust levels, nurturing close cooperation with 3PLs and aiding 3PLs to enhance their innovative capabilities to improve performance.

The positive indirect effect of logistics outsourcing on firm performance validates the results in the Hsiao et al. Similarly, the result also supported the findings of the Lin, Pekkarinen and Ma study which highlighted close cooperation between manufacturer and 3PL as an important factor through which logistics outsourcing can positively influence enterprise performance. This is because cooperation promotes good communication, the building of trust and innovation, thus making it easier for the enterprise to understand how the services offered by a 3PL can influence its performance and make suggestions on any modifications required to achieve the expected results Lin et al.

This finding could imply further that the maintenance of good communication, high trust levels, close cooperation and 3PL innovation reduce contract management costs and other relationship costs, making it possible for the SMEs to reap the benefits of logistics outsourcing, such as reduced logistics operations and fixed costs. Some of the manufacturing SMEs in this study had a formalised process of logistics outsourcing, although not designed to result in improved performance.

To achieve tangible benefits to SMEs based on these findings, there is need to develop a logistics outsourcing model to guide the LO process among SMEs to achieve improved performance. The selected path has the highest statistically significant path coefficients, depicting a strong relationship see Figure 3. SMEs expecting to apply the proposed logistics outsourcing model are expected to do it through a rigorous process. Steps antecedent to the application of the proposed logistics model include the following: 1 a thorough information search to identify the reasons for outsourcing; 2 select the right activity to outsource to achieve objective in 1 ; 3 the right LSP that will better perform the activity selected in 2.

The contract should promote LOP attributes i. High LOP would ensure that 5 LP goals such as cost reduction, risk reduction, meeting of delivery times, the provision of quality goods and the seamless flow of goods are achieved. The achievement of LP goals could lead to better 6 FP in terms of improved profitability, customer satisfaction, return on capital employed, ROA, and increased sales and market share. This path was selected because it had the highest path coefficients, signifying the strongest significant relationship paths in the model.

It requires that upon logistics outsourcing, SMEs should focus on logistics outsourcing performance to improve logistics performance.

Why Outsourcing is Bad for Business

Improved logistics performance might result in improved firm performance Zailani et al. The deduced process upon applying the logistics outsourcing model is summarised, as illustrated in Table 5. Manufacturing SMEs in Nairobi might be practising logistics outsourcing to achieve benefits beyond firm performance, for instance, to acquire logistics capabilities that they lack in-house, to share logistics-related risk and a desire to free management time to focus on core activities. However, manufacturing SMEs that endeavour to practise logistics outsourcing to improve their performance should promote high logistics outsourcing performance by fostering quality communication with the selected 3PL, build high trust levels, maintain a close cooperative relationship with selected 3PL and enhance the innovative capabilities of the selected 3PL.

Thus, logistics outsourcing has an indirect positive effect on the performance of manufacturing SMEs through logistics outsourcing performance. These findings make important theoretical implications by applying the RBV and TCE theories in studying the relationship between logistics outsourcing and firm performance among SMEs. The study recommends that SME managers follow the one-path model deduced to achieve improved performance.


This can be achieved by conducting a thorough information search to identify the need and then select the right activity and the right 3PL service provider. Once a 3PL is selected, a contract should be entered that promotes logistics outsourcing performance attributes.

High logistics outsourcing performance ensures high logistics performance goals are achieved. The achievement of logistics performance goals will lead to better firm performance. This balance may tempt contract manufacturers to compromise on the quality of ingredients. A good contract manufacturer will not compromise when quality is involved. However, this move may actually spur the advent of more automation. As contract manufacturers are competing with others for a finite labor pool, the more progressive of them are going to invest in automation.

Those that do not will feel pain as the competition overtakes them in quality, speed, and price. Efficiency is highly valued and manufacturers are taking complex processes and automating them to new levels of efficiency. They are also integrating these processes with new technologies beyond automation such as artificial intelligence to achieve outcomes that were simply not possible for previous generations. In addition, as the demand for naturally-derived products continues to increase, contract manufacturers are also facing the growing challenge of having to source a continuous supply of plant-based raw materials.

With some materials only grown and harvested at certain times of the year, it can be particularly difficult to ensure that there is enough supply to cover production requirements year-round. CMOs are faced with the same pressures as any other manufacturer when dealing with price, lead times, on-time delivery, and other key measurable success factors, said Kalafat.

This can come up in two different ways, where the CMO is manufacturing its own products in addition to serving as a CMO, or if a customer is concerned other clients of the CMO gain access to their formulations. Contract manufacturers could also facilitate greater communication between raw material suppliers and companies where necessary, and invite customers for an up-close view of raw material sourcing, manufacturing and the procedures that are in place to ensure the production process meets high quality standards.

Number one is always having your paperwork in place. A brand may not want to see every single document for their product; but when they need it, the CMO should have it, no questions asked.

Waning Interest in Trades Remains a Concern for Industry Manufacturers

In the end, you create more value by staying organized and working on increasing further visibility into your ever-growing supply chain. Consumers are demanding and, frankly, have a right to know what comprises the products ingredients they are ingesting as well as the data that supports the claims the brands are making. Research and testing information that will back up marketing claims is also important to disclose, Bath said. It is critically important to share any and all information that impacts the formulation and manufacturing of the product.

Brands and their contract manufacturer need to exercise the open sharing of documentation. This includes certificates of analysis, certificates of origin, GMO statements, allergen statements, and so on. Knowing that this documentation is there allows both the contract manufacturer and the brand to be open and honest with their communication with regulators and consumers.

This builds trust between manufacturers and brands, and that trust can be naturally transferred to consumers. In addition to open quality inspections, certifications, and other credentials, inviting customers inside manufacturing facilities could send a strong message, said Kalafat. As such, many contract manufacturers are receiving more and more requests from customers seeking smaller production batches that enable them to develop solutions that are tailored to individual consumer requirements. Contract manufacturers can help companies elevate their brand trust and reputation by ensuring that sustainability remains a key driver throughout the manufacturing process.

Perhaps personalization and proper dosing per the individual is here to stay. Wood also noted that consumers want to feel a difference from the products they take. In addition, clean label, organic, vegan, and pesticide-free tested products are all trending. People are not just taking tablets and capsules; in fact, there is a trend of pill fatigue.

Consumers want the benefits of supplements without having to swallow a capsule or pill—and they want an easier, more enjoyable experience.

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As such, brands and contract manufacturers are partnering to develop new delivery methods such as powders, beverages, gummies, and more. Our core area is sustain-release beadlets and fast-absorbing liquid capsules, which are novel delivery systems designed to have complementary release points in the consumption of oils plus other actives, simultaneously. Other activities are attempting to remove any titanium dioxide from formulations and only use non-synthetic dyes and colorants whenever possible.

Delayed release capsules are also becoming more popular to prolong the disintegration of capsule shells until they pass through the stomach. This is a key for probiotic and other gut health products to ensure they reach the desired delivery target in the gastrointestinal tract. Related Searches. Suggested For You. My Head is in The Cloud s. Alector, Lonza Partner for Mfg. The Unfolding Pharma Product Mix. Guidelines in Toxicology: A Blessing and a Curse. Drug Discovery Technology Trends.