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Since the 1990s, the rapid development in information technology and the fast pace of globalization have brought a great change to the marketplace and business operations. Under such circumstances, the business operations have become more complicated. The business companies must view their operations from a totally new perspective — to operate from a broader view in terms of time and space. Supply chain management is developed from such a point of view which advocates that companies should act as a network that is based upon the concepts of collaboration and process integration (Sabath, 1998). This is because in today’s global environment it is “supply chains that compete rather than companies” (Christopher, 2011).
Among the various supply chain activities, logistics is a key function since it acts as a physical link that connects the companies in the supply chain, enabling the flow of materials and resource (Coyle et al. 2003, Naim et al. 2006), making it a key integral part of the overall supply chain management (Ellram, 1991). In the execution of supply chain management, managing the logistics effectively is vital to enable the smooth running of a supply chain system because the failures in the logistics service would affect the business performance, either directly or indirectly, through sales,costs and quality of service. Thus, in an era of fast changing marketplaces and fierce competitions, mitigating the inefficiencies and risks in logistics can directly benefit the company’s business operations and contribute to the achievement of a sustainable competitive advantage.
Entering into the 21st century, world economy growth has slowed down sharply and is battling with severe depression following the global financial crisis starting from 2008. In the meantime the pressure of market competition is increasing significantly at a global scale, particularly for commodities and services. In this situation, more companies are now trying to identify new ways and better ways to decrease operating costs in order to sustain their profitability and healthy development. They have increasingly realized the importance of effective supply chain management to their global business, and logistics as a key part of this. This in turn has elevated the need to improve key logistics activities such as warehousing, transportation and distribution.These activities are directly associated with the services needed to deliver products to customers, and the associated costs. It is, therefore, now becoming critical that companies start to re-think and re-build their logistics processes for the purpose of cost saving and better delivery performance for customers.
Unfortunately, nowadays a great many companies are being troubled by the logistics inefficiencies, reflected by issues such as an underutilized transportation capacity, a long shipping lead time, a high cost and a lack of sufficient scale (Cruijssen et al. 2010, Palmer et al. 2012). In today’s marketplace, companies often consider two logistics strategies for operating their supply chains (Abdur Razzaque and Chen Sheng, 1998).
(1) Outsourcing logistics — the dominant approach adopted by many industries and firms who want to concentrate on their core competency (Africk and Markeset,1996, Foster, 1994) .
(2) Self-building (in-house) logistics — adopted by traditional vertical integration companies, or companies that increasingly believe they can build the logistics as a core competency (e.g. Amazon, JD.com)
There are intrinsic disadvantages in following either of these models, however.The first model (outsourcing) often results in a high cost with poor stability,predictability and flexibility in logistics service operations due to the shipper’s lack of direct control over logistics. The shipper’s logistics performance is greatly affected by,and subject to, the capability of the outsourced logistics service providers (LSPs), and this represents a significant risk to the shipper’s ability to fulfil customer demand. The second model (self-building) requires a huge initial investment and entails significant challenges regarding how to plan a better demand supply matching between the logistics capacity being first positioned in the market and the actual demand volume that can be attracted to fill this capacity. If large, sufficient, stable and structural freight flow cannot be maintained, significant operating costs must be borne without creating any value which negatively affects the overall business performance. In addition, most companies sell a great variety of products with countless configurations, the demand for which is extremely difficult, or impossible, to anticipate reliably, thereby creating a great risk that the pre-positioned capacity will be either under-utilized or over-stretched.
Operational inefficiencies seem to be a common problem in either the outsourcing or self-building logistics. One of the biggest root causes can be attributed to the fragmentation in both the demand and supply resources (Cruijssen et al. 2010). Most companies nowadays (shippers or logistics service providers) are highly dependent upon their own logistics networks and capacity if they are to fulfil the demand from their customers (Palmer et al. 2012). Due to the reactive and asset heavy nature of logistics and transport businesses, operations efficiency is vulnerable to the fast changing demand if the capacity utilization is completely planned for and subject to the company’s own demand sources. Frequent capacity underutilization, on the one hand, or shortages, on the other, can become a critical issue when the demand is not stable, structural and predictable (Zhu et al. 2014). The unpredictability and structural inefficiencies have been a long-standing problem in the logistics marketplace, since it generally lacks an effective approach to connecting the existing available, but fragmented, logistics resources and networks for more productive use. Consequently,the logistics industry is undergoing a fundamental change in its operations style to counterattack the logistics inefficiencies as well as the deficiencies found in the current ways of managing logistics. One innovative logistics concept that has recently emerged is Logistics Horizontal Collaboration (LHC), which aims to bring together the compatible companies and parallel supply chains to share logistics capacity and capabilities in order to significantly improve the efficiency, flexibility and stability for running logistics.