The effect of outsourcing and situational characteristics on physical distribution transportation efficiency

This research examined the outsourcing decision for the logistics function of motor carrier transportation. A full factorial design was executed on a simulated transportation network to investigate how the efficiency of motor carrier transportation was affected by how it was structured (private/leased fleet versus contract carrier transportation) and the characteristics of the transportation activities. Transaction Cost Analysis (TCA) offered a useful theoretical framework for consideration of this make or buy decision by suggesting the independent variables of asset specificity, uncertainty, and frequency/volume.

Seven two-part research hypotheses examined the relationships among the independent variables to gain a greater understanding of the factors which drive the make versus buy decision for motor carrier transportation.

The major conclusions of this research are:

1. For the system modelled here, structure (private/leased versus contract carriers) and volume had the largest effects on transportation efficiency (mean shipment cost).

2. The results of this study indicated that there may be important factors within the nature of the “supplying” industry that impact the make or buy decision. This research provided strong support for TCA predictions and clearly demonstrated that TCA is a useful framework for understanding firms’ make or buy decisions. Because of the nature of the transportation industry (the high level of competition and the lack of a small numbers bargaining situation), the hypotheses in this research clearly indicated that a "buy" rather than a "make" decision was the most efficient alternative; this result is exactly consistent with TCA predictions.

3. For the system modelled here, higher fixed and per mile equipment leasing expenses (incurred in the operation of refrigerated trailers) caused refrigerated shipments to be more expensive than standard dry trailer shipments. That is, asset specificity (in this case, requirements for refrigerated trailer equipment) had a significant effect on shipment efficiency.