Research paper

Risk perception on logistics outsourcing of retail chains: model development and empirical verication in Taiwan
Ming-Chih Tsai, Chun-Hua Liao and Chia-shing Han
Department of Marketing, National ChungHsing University, Taichung City, Taiwan
Abstract Purpose This paper aims to develop a qualitative risk model to empirically identify the important outsourcing risks of logistical functions using the data of Taiwanese retail chains. Design/methodology/approach Transaction cost theory (TCT) and resourced based view (RBV) were combined to develop risk events. Analytical hierarchy process was used for risk calibration. Valid data from 75 outsourcer chains and 41 in-house chains were collected through a three-stage survey. Outsourcers were further clustered by risk perception using Wards and K-mean clustering and examined by an ANOVA. Results of outsourcers and in-house chains were compared using nonparametric Spearman rank correlation test. Findings The risk perception increases as the number of functions outsourced increases. Risks related to transaction costs and strategic resources were both signicant. Of the three main risks identied, asset risk and competence risk are more serious concerns than relationship risk. The values of information risk and loss of control account for the bulk of asset risk, while those of poor competence leverage and poor competence in supporting customer service comprise competence risk. Finally, in terms of risk priority, in-house chains showed no signicant difference from outsourcers. Research limitation/implication Interrelationships between risk events were limited to avoid complication. Also, due to the sample limit, the risks calibrated may be more associated with outsourcing execution than outsourcing building/abandoning. Practical implication The risk structure developed herein can be used as a systematic checklist for outsourcing decision-making. The qualitative results may provide specic indications for further risk analysis and future risk control. Originality/value The study lls a gap in the literature, where prior work has seldom used empirical research to compare how well TCT and the RBV predict logistics outsourcing risk, in particular for the distribution side of the supply chain. Keywords Distribution management, Risk management, Analytical hierarchy process Paper type Research paper

Introduction
Logistical activities are among the most commonly outsourced business processes that provide support requirements (LaLonde and Maltz, 1992). However, researchers have pointed out that there is an initial tendency to overstate benets from outsourcing (Schwyn, 1999; Kremic et al., 2006). Business outsourcing does not always achieve the expected benets (Lonsdale, 1999; Harland et al., 2005). Unsuccessful experiences that accrue undesirable consequences for client rms have been often reported (Bahli and Rivard, 2003; Harland et al., 2005). Evaluation of logistics outsourcing risk has been emphasized by decision makers from organizations (Kersten et al., 2005). However, it has received little attention in the academic literature, and
The current issue and full text archive of this journal is available at www.emeraldinsight.com/1359-8546.htm

Supply Chain Management: An International Journal 13/6 (2008) 415 424 q Emerald Group Publishing Limited [ISSN 1359-8546] [DOI 10.1108/13598540810905679]

empirical evidences on it is scant, particularly from the customers perspectives (e.g. Lambert et al., 1999; Murphy and Poist, 2000; Wilding and Juriado, 2004). Previous literature has often described the logistics outsourcing risk in a linguistic manner, based on a very limited sample size. The risk calibration was somewhat subjective and operational models were called for (Lambert et al., 1999; Bahli and Rivard, 2003, 2005). Further, logistics covers a broad range of functions, such as transportation, warehousing, inventory management, and value-adding activity. The range of functions outsourced signies different degrees of commitment and integration between two parties, and may range from a single transaction-based deal to an agreement-based relationship (Bowersox, 1990; SkjoettLarsen, 2000). As the degree of involvement in outsourcing differs among rms, the complexity of the interfaces between rms may differ, leading to different risk concerns (Ellram and Billington, 2001). In addressing these issues, the purpose of this study is to develop a qualitative risk model to empirically identify the important outsourcing risks of different logistical functions using the data of Taiwanese retail chains. We argue that the risk practices are better represented by identifying their priorities, because risk events whose effects are difcult to 415

Risk perception on logistics outsourcing of retail chains Ming-Chih Tsai, Chun-Hua Liao and Chia-shing Han

Supply Chain Management: An International Journal Volume 13 Number 6 2008 415 424

model in probabilistic ways are nevertheless describable in terms of qualitative scales (Satty and Luis, 1991; Tsai and Su, 2002). Expressing risks in order of priority may help managers more effectively conceptualize outsourcing risk management. To develop a framework for risk events, we combined transaction cost theory (TCT) and the resourced based view (RBV). TCT emphasizes the impact of governance costs, whereas RBV focuses on the value effects of outsourcing activities. Based on a broad range of outsourcing literature on TCT and RBV and on a Delphi practice, we established a hierarchical risk event structure. Analytical hierarchy process (AHP) was used to calibrate the relative importance of the risk events. Retail chains were chosen for study in this research. They have become inuential in the retailing industry through their collective power over procurement, distribution and marketing practices. Study of their logistics practices has been limited, however, since much of it remains an internal matter inaccessible to outsiders. We conducted a three-stage survey in a systematic manner to investigate the outsourcing risk perceptions of Taiwanese retail chains: in the rst stage, we collected survey data on the demographics and logistics practices of retail chains. Data from 146 chains was obtained and classied into two groups, those who outsourced their logistics services (hereafter outsourcer) and those who retained them within the home rm (hereafter in-house). In the second stage, the outsourcer chains were targeted for a risk survey. Risk perceptions of outsourcer chains were collected. In the nal stage, the in-house chains were given the outsourcing scenarios associated with the clustered outsourcers, in order to assess their risk perceptions. Results were compared to those of outsourcers. The study lls a gap in the literature, where prior work has seldom used empirical research to compare how well TCT and the RBV predict logistics outsourcing risk, in particular for the distribution side of the supply chain. Further, the risk structure outlined herein can be used as a systematic checklist for outsourcing analysis. The qualitative results may provide specic indications for further risk analysis and future risk control to both academics and practitioners. It may also provide the insights into the reasons why in-house chains may retain their logistics capabilities rather than outsourcing them.

Outsourcing theory
There is an abundance of literature on outsourcing (Kremic et al., 2006). From the economics perspective, past research has been largely been guided by the transaction cost theory (TCT) (Watjatrakul, 2005; Gottschalk and Solli-Sther, 2006). TCT provides a set of principles to analyze outsourcer-vendor transactions and determine the cost structure. Under TCT, governance modes are built upon three principle attributes of transactions: including asset specicity, transaction frequency, and uncertainty (e.g. Aubert et al., 1996a; Ellram and Billington, 2001). Among these, transaction frequency has failed to nd empirical conrmation, in particular when operations are performed on a continuous basis (Aubert et al., 1996b). TCT has recently been extended to analyze outsourcing risk problems, based on the cost of establishing relationships and governance structures associated with outsourcing decisions (Ngwenyama and Bryson, 1999; Trent and Monczka, 2003). A specic asset is an asset whose value 416

is tied to a specic transaction and suffers a signicant decline in value if redeployed to another transaction. Such an asset might be vulnerable to transaction risks from lock-in effects that lead to asset damages and hold-up problems (Williamson, 1975; Barney, 1999). On the other hand, uncertainty has two forms: behavioral uncertainty and environmental uncertainty (Slater and Spencer, 2000). Behavioral uncertainty creates problems for performance evaluation. Exchange partners can use their own guile to create hidden costs by performing inefciently and ineffectively (Rindeisch and Heide, 1997; Williamson, 1985). Environmental uncertainty undermines an organizations ability to predict future outcomes (Leblebici and Gerald, 1981; Klein et al., 1990). Partners may act opportunistically when circumstances change, which may cause organizations to incur costs of monitoring and enforcing the relationship, and costs arising from the failures of the relationship. However, using TCT alone may limit the scope of risk factors taken into consideration (Bahli and Rivard, 2005). It may overemphasize the cost impact but neglect the value effect of interorganizational collaboration (Zajac and Olsen, 1993). That is, organizations outsourcing their services might not be solely concerned with cost (Ngwenyama and Bryson, 1999). Competence as a source of competitive advantage is another important goal to be achieved in outsourcing. In view of the fact that outsourcing can be a strategic choice, the resource based view (RBV) has often been suggested (Quinn and Hilmer, 1994; Arnold, 2000). Strategic resources enable organizations to sustain competitive advantage, if the resources are valuable, rare, imperfectly imitable, and nonsubstitutable. RBV argues that resources are heterogeneously distributed across rms and are imperfectly transferred between rms (Lai, 2004). Failure to retrieve the competence (including resource and capability) may lead to deterioration of services and operations, resulting in capabilities that can be imitated, are inexible, and of no help in enhancing organizational competitiveness. Consequently, the strategic potential of outsourcing activities must be assessed (Lai, 2004; Shang and Marlow, 2005). When markets are viewed as dynamic, the use of TPL not only enables exploitation of competences, but also encourages their development. The theoretical basis provided by the ideas of dynamic competence may be used to assess the service performance throughout the outsourcing activity (Halldorsson and Skjtt-Larsen, 2004). This mainly includes competence leverage (the use of existing competencies) and competence development (the generation of qualitative changes in competencies).

Risk event
Recently, TCT and RBV have been assessed to be complementary (Arnold, 2000; Mahoney, 2001; Watjatrakul, 2005). Both theories have been incorporated into the framework used in this paper to give a broader view for decision-making. In combining these two theories, we divided the risk events into three aspects: asset, relationship, and competence. Among these, asset risk and relationship risk were based on TCT, indicating a hidden cost resulting from asset and relationship failures that may occur during outsourcing. Competence risk indicates a business/market loss relating to poor competence, based on RBV.

Risk perception on logistics outsourcing of retail chains Ming-Chih Tsai, Chun-Hua Liao and Chia-shing Han

Supply Chain Management: An International Journal Volume 13 Number 6 2008 415 424

Following the three main risks, we investigated the sub-risks to construct a two-level hierarchical structure. However, we were unable to identify an appropriate checklist on logistics outsourcing risk that we could use for our assessment. In order to establish our specic checklist, we therefore referred to the literature on general logistics practices. Based on the developed checklist, a Delphi meeting was held to conrm and nalize the signicant risk factors. Thus, the factor structure can be seen to reect both the commonality of a logistics outsourcing practice and the uniqueness of this specic retail chain case. Based on the outsourcing literature, we rst identied 14 sub-events associated with these three main risks. Asset risk consists of ve possible forms of asset damage, including information risk (from information asset), employee resistance (employee asset), loss of control (management asset), brand damage (business asset) and inactive logistics facility (physical asset). The relationship risk indicates the cost incurred from the potential relationship failures stemming from a variety of social, legal, cultural, political and technical causes. Relationship risks included vendors opportunism, contractual violation, poor communication, lack of shared goal and, lack of top management support. As for the competence risk, we identied four events based on dynamic competence. They included poor competence leverage, poor competence of supporting business exibility, poor competence of supporting business innovation, and poor competence protection. The Delphi technique was used to review these 14 subevents for the specic retail chain case. A group of ten highranking managers (including six from retail chains and four from TPLs) was formed. This combination enabled access to a range of knowledge from both sides of the outsourcing relationship. The participants were carefully selected and were all well established in their professional elds (with more than 10 years of experience in logistics outsourcing of retail chains). The Delphi technique is designed with the features of anonymity, iteration, controlled feedback, and statistical group response (Zolingen and Klaassen, 2003). The interviews were done individually to minimize personal interference. Respondents were asked to add any possible risks missing from the list, and to examine the importance of the risks identied. After several iterations and feedback, a consensus was reached. The 14 risk events were largely approved with amendments suggested by the respondents. For example, participants suggested that the risks of brand damage and lack of top management support be removed due to their insignicant effects (top management support was always obtained, considering the strategic role of logistics in the chain business). Further, the two risk events of poor competence in supporting business exibility and poor competence in supporting business innovation were combined because they were considered to be inseparable and were renamed poor competence in supporting strategic development. Finally, an additional item termed poor competence in supporting customer service was suggested (under the competence risk), to illuminate the importance of customer service in the chain business. After the Delphi procedure, 12 sub-events were retained. Brief descriptions are given in Table I. 417

Risk indicator and hypotheses

Scientically, risk is dened as a measure of the probability of occurrence and the severity of adverse effect (e.g. Harland et al., 2003; Zsidisin, 2003). Adverse effect indicates an outcome that does not meet the desirable expectations from a failure or risk event. Accordingly, given a sub-risk event (Eij) the risk (rEij) is measured as the product of the probability of occurrence of the risk event (PEij) and its severity (wEij) as indicated in Equation (1): r E ij pE ij wE ij 1

The designated risk indictor has been used in previous studies (e.g. Tsai and Su, 2005). Clearly, the qualitative risk is calculated without using absolute values. These two risk elements are delineated using qualitative scales, notably a risk matrix or probability-impact grid (e.g. Ward, 1999). Between these two risk elements, the probability of PEij is independent of the risk events and is measured by using qualitative scales that describe the probability of occurrence of a risk event ranging from 0 to 1. Conversely, the severity, wEij, is measured as a weight by comparing the qualitative impact scale (IEij) between the risk events. The analytical hierarchy process (AHP) can be used to calibrate the relativity. Hence, the sum of the weights of the risk events in the same hierarchy would be equal to 1, as indicated in Equation (2):
3 4 XX t1 j1

wEij 1

For a given main event (Ei), its risk value (rEi) is the sum of the risks of their four sub-events, as indicated in Equation (3): r Ei
4 X j1

r E ij

The outsourcing risk (r) is measured as the sum of the risks of three main events, as indicated in Equation (4): r Ei
3 X j1

r E ij

The risk value ranges from 0 to 1, meaning the greater the risk value, the higher the risk. This qualitative risk indicator can be used to rank the outsourcing risk events and make the risk classication less subjective for a given outsourcing activity. It can also be used to compare the risk levels associated with different outsourcing activities. In using this risk indicator, we established two hypotheses for examination. First, we hypothesized that outsourcers risk perceptions are different by retail chain demographics and logistical functions outsourced. To test this hypothesis, we cluster the outsourcers by risk perceptions using a two-stage statistical cluster technique. An ANOVA test is carried out to identify effective clustering variables. Risks associated with the clustered outsourcers were measured and compared. Second, we hypothesized that the risk perception of in-house groups is not associated with that of outsourcers. To test this hypothesis, in-house chains were given assumed outsourcing conditions identical to those of outsourcers to assess their risk perception. The nonparametric Spearman rank correlation test is used to test the difference between these two groups.

Risk perception on logistics outsourcing of retail chains Ming-Chih Tsai, Chun-Hua Liao and Chia-shing Han

Supply Chain Management: An International Journal Volume 13 Number 6 2008 415 424

Table I Structure of risk events

Main events Asset risk (E1) Sub-events E11 Information risk Brief descriptions Loss resulting from unavailable, incomplete, inaccurate, inconsistent, and unsecured business information through outsourcing Loss of skilled personnel, or reduction of workforce, or even sabotage of the process due to employee insecurity Loss of management control over logistics activities, or lack of orderly process for their separation. Low or no utilization of existing logistics facility/technology throughout outsourcing Vendors withhold or distort information to technically misinterpret contract, or to use dependence of outsourcers for price increase. Vendor legally breaks (terminates or amends) the contract, leading to dispute and litigation expenses Vendors over-promising and under-delivery leads to an increase of monitoring cost Different business vision, style, and bureaucracy degree between the two parties leads to cost increase in integration Failure in maintaining existing logistics performance due to deciency in resources or capabilities Failure in developing strategic resource to support outsourcers business exibility and innovation in response to the changing market Failure in developing resource and capabilities to support outsourcers customer service and marketing practices Failure in safeguarding resources and capabilities from being imitated, or vendors replace outsourcer into its business domain References [8] [13]

E12 Employee resistance E13 Loss of control E14 Inactive logistics facility Relationship risk (E2) E21 Vendor opportunism

[2] [5] [9] [13] [2] [3] [5] [6] [7] [8] [9] [1] [11] [4] [11] [14] [15]

E22 Contractual violation E23 Poor communication E24 Lack of shared goals Competence risk (E3) E31 Poor competence leverage E32 Poor competence in supporting strategic development E33 Poor competence in supporting customer services E34 Poor competence protection

[5] [7] [10] [11] [16] [10] [11] [13] [5] [6] [7] [11] [13] [2] [7] [9] [10] [13]

Developed from Delphi practice [3] [7] [9] [12]

Notes: Main references: [1] Arnold, 2000; [2] Bailey et al., 2002; [3] Bolumole, 2001; [4] Bourlakis and Bourlakis, 2005; [5] Boyson et al., 1999; [6] Fernie, 1999; [7] Harland et al., 2005; [8] Hong et al., 2004; [9] Kremic et al., 2006; [10] Lambert et al., 1999; [11] Logan, 2000; [12] Quelin and Duhamel, 2003; [13] Razzaque and Sheng, 1998; [14] Skjoett-Larsen, 2000; [15] Stank and Daugherty, 1997; [16] Wilding and Juriado, 2004

Survey and sample test

In Taiwan, there were 322 merchandise retail chains, excluding those requiring refrigerated logistics service (a sector dominated by a handful of service providers with associated sector-specic risks), in 2006 (Taiwan Chain Store and Franchise Association, 2006). These were divided into two groups, general stores and speciality stores, based on the type of merchandise sold. General store refers to the shops selling general merchandise, such as supermarkets/ hypermarkets and convenience store chains. However, such stores offer a great range of merchandise. Their logistics practices are complicated and diverse, since they must offer food, which requires different temperature conditions in the ow and storage process. Speciality stores, by contrast, include shops selling specic types of merchandise. Their logistics practices are more likely to remain stable and are thus less complicated to study. Further, the number of speciality store chains was far greater than that of general store chains (roughly 80 percent v. 20 percent). Therefore, we targeted speciality stores for data collection by using a systematic sampling method. Based on the structure of the Taiwanese retail chain market, the main data sources are from the sectors of boutique grocers, apparel, pharmacy, bookstores, furniture, and 3C products (consumer electronics, computers and 418

communication). The annual turnover of these chains largely (64 percent) lies between $101-1,000 million. Eighty percent of them have fewer than 20 stores, or between 21 and 100. Franchise stores are far less common than chain-owned stores (23 percent v. 77 percent). Hence, business decisions were made by the chain headquarters, with little negotiation with the individual stores. We designed a three-stage survey plan to collect the data required. It was conducted over a period of 11 months between September 2006 and August 2007. For each survey, the respondents were carefully selected for credibility of results. Face-to-face interviews or telephone interviews were used to ensure understanding of the questions asked. In the rst stage, we surveyed the participants for their demographic data (including number of stores, annual turnover, and store ownership) and logistics practices (including outsourcing/inhouse decision, logistical functions outsourced, length of contract, change of practices over time). The questionnaire was designed in a semi-structured format. Out of the 322 chains in the population, 146 chains with a total annual turnover of $14.2 billion accepted our invitation for interviews, a response rate of 45.3 percent. The respondents were all executives in charge of logistics decisions. Their business titles ranged from specialist, division managers (from the divisions of distribution or

Risk perception on logistics outsourcing of retail chains Ming-Chih Tsai, Chun-Hua Liao and Chia-shing Han

Supply Chain Management: An International Journal Volume 13 Number 6 2008 415 424

logistics) to deputy managers. Their average working experience with retail chains was 8.1 years. Among these 146 chains, 97 chains (66 percent) have outsourced their logistics, whereas the remaining 49 chains kept their logistics in-house. Their logistics practices were broadly stable, because 94 percent of the samples have not changed their practices over the past ve years (despite an average contract length of 1.8 years). The result of the rst stage survey was used to identify the respondents of outsourcers and in-house chains for the following two risk surveys. In accordance with the qualitative risk indicators developed, the risk survey consisted of two sessions: starting with: 1 an impact scale survey (IEij); followed by 2 a probability of occurrence (PEij). In the rst impact scale session, we explained all of the risk events identied as well as the qualitative evaluation scales designed. The 10 qualitative impact scales were linguistically categorized into ve groups as: insignicant, minor, moderate, major and catastrophic impacts (Stewart and Melchers, 1997) to help interviewees express their opinions. After the rst session, the interviewees were asked to give the probabilities of the occurrence of risk events. As with the impact scales, we provided 5 scenario groups describing the probabilities: as rare, unlikely, moderate, likely and almost certain. These ve linguistic groups evenly divide the probability of the occurrence into 10 intervals from 0 to 1. Each group consists of two intervals with steps of 0.1 between the two intervals. Although the respondents from the rst survey expressed their willingness to participate in the following risk survey, some respondents later withdrew, mainly due to business condentiality concerns. Thus 79 outsourcers and 44 inhouse chains were collected for the second and the third stage surveys. The risk data were individually computed, based on the Equations from (1) to (4), during which AHP was applied to calibrate the weights, using the following three steps (Mustafa and Al-Bahar, 1991): 1 First, we established one and three impact comparison matrix for the main and three sub-event risks. The matrices signify the degree to which the impact scale of one risk event dominates that of the others using pairwise comparisons. 2 Next, we derived relative weights for the various failures in each matrix. The relative weights were computed as the components of the normalized eigenvector associated with the largest eigenvalue of their comparison matrix. For the sub-risk events, the composite weights were calculated by aggregating the relative weights through two hierarchies, i.e. by multiplying the relative weight derived in the second level by those derived in their preceding rst level. 3 Finally, we computed the ratio of hierarchies to examine the consistency between two hierarchies to achieve a satisfactory degree of comparison consistency. The inconsistency index of a sample should be lower than 0.1 for validity. The Super Decision software program (version 1.6.0) was used for calculation. Some samples failed the consistency test and were excluded from our sample base. The nal valid data totals were 75 outsourcers and 41 in-house chains. 419

Risk clustering of outsourcers

The risk perceived by the outsourcers may vary with their logistical functions outsourced and chain demographics. To testify this hypothesis and identify the outsourcers with similar risk perceptions, we applied a two-stage statistical cluster technique: a hierarchical Wards clustering to determine the number of clusters, followed by the non-hierarchical K-means technique to separate the outsourcer chains. In Wards cluster, the decision on the number of clusters was guided by an agglomeration schedule, which displays the squared Euclidean distances between each group. To help identify large relative increases in the cluster homogeneity, we calculated the percentage change in the clustering coefcient in a stepwise manner. The result indicates that two to three clusters presented the largest percentage change in coefcient (25 percent). Hence, the appropriate number of clusters was determined to be two. Based on that number, we applied the K-means technique to divide the 79 outsourcer chains into two clusters. The totals for the two outsourcer clusters were 41 and 38, respectively. Thereby, we applied ANOVA to examine the potential differences in demographics and logistics practices between these two clusters. The results are given in Table II. Among the six variables examined, logistical functions outsourced was the sole variable that effectively explains the difference between the two clusters (F 64:418, p 2 value 0:002). It appears that the risk perceived by the outsourcer chains was solely associated with the logistical functions outsourced, irrespective of chain demographics. The functions outsourced by these two risk clusters were further investigated. The outsourcing percentages by logistical functions were described as indicated in Figure 1. Between these two clusters, one cluster outsourced a limited range of logistical functions, mainly transportation (plus a few packaging service), to service providers. We thus termed these transportation outsourcers. The other cluster, by contrast, outsourced a broader range of logistical functions. On average, for a retail chain in this cluster, the probability that transportation, warehousing, or inventory management was outsourced was 96 percent, 74 percent, and 68 percent, respectively. We thus termed the cluster multi-function outsourcers.

Risk perceptions of outsourcers

For the outsourcer chains within a cluster, the risks perceived were statistically indifferent. We measured the geometrical average to better represent the collective opinion, according to group decision theory (Satty, 1991). The results are displayed Table II Signicant test between two risk clusters
Variables Measurement scale Ratio Nominal Nominal Ratio Ratio Nominal

F
5.825 64.418 2.102 4.399 0.014 0.781

P value
0.019 0.002 * * * 0.152 0.040 0.906 0.381

Outsourcing practices Contract length Functions outsourced Demographics Store type Annual turnover No. of stores Channel relations

Risk perception on logistics outsourcing of retail chains Ming-Chih Tsai, Chun-Hua Liao and Chia-shing Han

Supply Chain Management: An International Journal Volume 13 Number 6 2008 415 424

Figure 1 Outsourcing percentages by two risk clusters

in Table III. The outsourcers risk perception increases along with an increase in the number of functions outsourced. The risk for multi-function outsourcers (0.34) was measured as more than twice that of transportation outsourcers (as 0.16) on the designated 0-to-1 scale. For a transaction-based outsourcing, the transportation outsourcers were more concerned with cost increases than non-strategic resources. In cost increases, asset risk was far more effective than relationship risk (0.08 v. 0.03). Notably, loss of control, information risk, and inactive physical assets were rated the 1st, 3rd, and 4th most important risks, respectively, among the 12 sub-risks. Transportation performance plays a tremendous role in a chains distribution efciency. Hence, competence risk is signicant in transportation outsourcing (risk value of 0.05). Poor competence leverage and poor competence in customer service were rated the 2nd and the 5th most important subrisks, respectively. Together, these ve risks accounted for almost 70 percent of the total risk perceived for a given act of transportation outsourcing. Table III Risk perceptions between two risk clusters
Risk clusters Risk events E11 E12 E13 E14 E21 E22 E23 E24 E31 E32 E33 E34 Asset risk (E1) Information risk Employee resistance Loss of control Inactive logistics facility Relationship risk (E2) Vendor opportunism Contractual violation Poor communication Lack of shared goals Competence risk (E3) Poor competence leverage Poor competence in strategic development Poor competence in customer services Poor competence protection Overall risks

By contrast, multiple-function outsourcers perceived competence risk to be more serious than asset risk (0.14 v. 0.12). Deeper outsourcing integration may aim to ensure and improve logistics competence, and failure to do so may have a greater business impact. Thus, risk concerns over poor competence leverage (E31), poor competence in strategic development (E32) and poor competence for customer service (E33) were most commonly mentioned, and were rated the 1st, 3rd, and 5th most important risks. Among the asset risks, information risk (E11) and inactive logistics facility (E14) were rated the 2nd and 4th most important risks. In the multiplefunction outsourcing, information assets are the strategic resource with the greatest cost if misused, while physical assets present the strong possibility of lock-in.

Risk perceptions of in-house chains

At the nal survey stage, in-house chains were given the two outsourcing conditions, transportation outsourcing, and multiple-function outsourcing, to assess their risk

Transportation outsourcers Rank 0.08 0.026 0.008 0.030 0.015 0.013 0.007 0.006 0.005 0.05 0.027 0.010 0.014 0.003 3 8 1 4 0.030 6 9 10 11 2 7 5 12 0.16

Multiple-functions outsourcers Rank 0.12 0.055 0.006 0.026 0.029 0.027 0.018 0.019 0.017 0.057 0.042 0.028 0.010 2 12 7 4 0.08 6 10 9 8 0.14 1 3 5 11 0.34

420

Risk perception on logistics outsourcing of retail chains Ming-Chih Tsai, Chun-Hua Liao and Chia-shing Han

Supply Chain Management: An International Journal Volume 13 Number 6 2008 415 424

perception. The geometrical averages of 40 valid samples were measured and compared with those of the outsourcer chains, as indicated in Figure 2. The in-house chains presented a higher outsourcing risk than their outsourcer counterparts. They increased their total risk levels by approximately 12 percent to reach 0.30 and 0.44 for the two outsourced function ranges, respectively. Concerns over employee risk (E12), relationship risks (E21 to E24) and certain competence risks (e.g. E32, E33) were prominent in the interviews. Thus, the difference between the outsourcers and in-house chains is signicant. The high risk levels perceived may account in part for why they prefer to keep their logistics functions in-house. However, in terms of risk priority, the results of the inhouse chains were rather similar to those of outsourcers. We conducted a consistency test of the null hypothesis (H0) that there is no association between the risk perceptions of outsourcer and in-house. Given the sample of 12 risk events (n 12), the correlation coefcients for the two consistency tests were 0.72 and 0.9. With the p values shown (0.008 and 0.000), we rejected the null hypothesis (H0) at a conservative signicance level of 0.01, and accepted the alternative statement: there is a positive association between outsourcers and in-house rms and their risk perceptions. As with the outsourcers, in-house chains perceived asset risk to be slightly higher than competence risk for transportation outsourcing (as the risk values of 0.13 to 0.11). But when there is multiple-function outsourcing, these two risks appeared to be equal (as 0.16). Relationship risk presented a lower effect than asset and competence risks in logistics outsourcing, with the risk values of 0.07 and 0.14 for the two outsourced function ranges. Asset risk was dominated by information risk (E11), which was assessed to be the most important risk in the list for both outsourced function ranges. Next, loss of control (E13) was crucial in transportation outsourcing and inactive logistics asset (E14) was notable for multiple-function outsourcing. In the dimension of competence risks, in-house chains presented Figure 2 Risk perceptions of outsourcer and in-housed chains

the same results as the outsourcers. That is, poor competence leverage (E31) and customer services (E33) were more signicant than competence development (E32 ) in transportation outsourcing. When there was multi-function outsourcing, the risk priority became competence leverage (E31), followed in sequence by competence development (E32) and customer services (E33). Finally, in relationship risk, behavior failures, such as vendor opportunism (E21) and contractual violation (E22) were more serious concerns than the remaining two sub-events.

Findings and discussion

Based on the valid data of 116 Taiwanese retail chains, we found the outsourcing risk perceptions statistically varied with the range of logistical functions outsourced. The empirical results conrmed the previous hypothesis that the degree of involvement in outsourcing differs among rms, which may result in differing complexity in the interfaces between rms, leading in turn to different risk concerns (Ellram and Billington, 2001). The more logistical functions outsourced, the higher the outsourcing risk the retail chains will perceive. The risk levels were acceptable because the outsourcing was performed on a continuing basis. More than 94 percent of the chains have not changed their outsourcing practices over the past ve years, despite an average contract length of 1.8 years. This implies that the benets derived from logistics outsourcing might have outweighed the risks incurred. But, the risks were not negligible because the outsourcer chains were prone to risk-aversion when in long-term partnerships. Risks related to transaction costs and strategic resources were both signicant for logistics outsourcing. When engaging in a single transportation outsourcing, which was conventionally regarded as non-core, routine-based or assetbased, the outsourcers perceived asset risk to be more important than competence risk. However, when engaging in a multiple-function outsourcing, the outsourcers raised these two risks to a very similar level (competence risk took a big

421

Risk perception on logistics outsourcing of retail chains Ming-Chih Tsai, Chun-Hua Liao and Chia-shing Han

Supply Chain Management: An International Journal Volume 13 Number 6 2008 415 424

leap, because strategic resources were generally the main concern in a deeper integration). These results support previous studies that recommended the combination of both TCT and RBV for outsourcing analysis (Arnold, 2000; Mahoney, 2001; Watjartrakul, 2005). Absence of either theory may lead to a risk underestimate. Asset risk Our results highlight the value of information assets and management assets. Information assets are considered vital business resources that increase resource utilization, reduce cost and create advantages for competitiveness. Chain systems generally invest heavily in information systems to integrate a number of working stores. Information risk is thus an urgent concern of retailers logistics outsourcing. Information risk may result from inaccessible information sharing (as when the TPL is relatively poor in delivering and integrating a high quality information system), or poor information quality (such as incomplete, inaccurate and inconsistent information), and information being illegally possessed or used by vested interests and biases. At present, a growing number of outsourcing contracts contain articles specically aimed at information risk prevention. Further, information risk management was established as the rst step towards outsourcing risk management (Xu et al., 2006). Loss of control over logistics activity was crucial in a transportation outsourcing, as found in previous studies (Boyson et al., 1999; Razzaque and Sheng, 1998). Vendors may be reluctant to provide complete service in a contract with a single function outsourced. Desirable distribution practices of a retail chain may thus be impaired. Typically, controversial issues between two parties include site selection of the distribution centre, delivery schedule, delivery quantity and quality required for exceptional demands. To mitigate the risk, some chains have conducted a relationship transformation, e.g. from a transaction-based relationship to a partner agreement. Others have provided a supply contract with risk (cost) sharing, as is the practice in other industries (Aktas and Ulengin, 2005). Conversely, the multiple-function outsourcing carries less risk of a loss of control. Given higher revenue opportunities, service vendors were more willing to restructure themselves to support their customers needs. Competence risk Logistics have received recognition as a competitive parameter for distribution businesses. Its strategic development has been largely a decision of the chain operator, to gain maximum distribution interest and reduce the risks of dependency. Recently, an increasing number of Taiwanese retail chains have sought and introduced Japanese distribution/logistics know-how through international joint-ventures for rapid market success. Further, retail chains have linked a number of stores by a strong nancial or legal tie to form scale economies in purchasing, distribution, and marketing practices. They are economically and culturally unwilling to share their strategic know-how with outside organizations. As a result, outsourcing commissions were more tactical or operational than strategic. A vendors chance of developing strategic competence as the joint solution partner was low. Operational performance became of more immediate concern than the complementary competency acquired and developed through outsourcing. Further, competence failures were less likely to occur due to capability deciency (such as lack of 422

operational know-how or performance evaluation mechanisms). Rather, they were due to resource deciencies, such as vendors experiencing nancial instability or lack of prot. In addition, it is worth noting that the retail chains were concerned with poor competence in customer service. Logistics/transportation processes form an immediate chance of meeting customers in delivery. At present, a growing number of chain systems are using logistics as a channel to improve the customer services of chain stores (to provide customized products and engage in customer communication/consultation). However, chain outsourcers are suspicious of the competence of logistics vendors to perform such tasks, and their service motives in treating the chain stores as their joint customers. Relationship risk Relationship risk presented a lower effect than asset risks and competence risks. As stated earlier, the outsourcing commission was prone to be operational. Logistical operations were relatively standardized with a long history of service. The lower technological barrier plus Taiwans recent opening policy to foreign players has attracted many service providers to enter the eld. In a small island where service vendors are great in number and service quality was easily justied, environmental and behavioral uncertainties stated in TCT theory may have been largely reduced. Relationship risks were less likely to occur. Further, chain systems possessed an asymmetric power over their service vendors, and technically they were good at managing relationships. Therefore, dispute and litigation issues have been few, according to the outsourcers surveyed. In-house chains risk perception In-house chains were more conservative about outsourcing risk than outsourcers. They increased the risk values by 12 percent and rated the risk items with a smaller variation. Comparing with outsourcers, they were sensitive to behavioral uncertainties, including organizational behaviors (such as vendor opportunism and contractual violation) and individual behaviors (employee resistance). However, in terms of the important risks, their assessment result was rather similar to that of the outsourcers.

Study limitations and further research

According to TCT and RBV, interrelationships between the three main risks identied may exist. But we excluded these from our analysis to avoid complication. For example, the relationship risk may affect asset risk and competence risks (Power et al., 2007), and asset risk may affect competence risk (Loh and Venkatraman, 1991). Analytical network process (ANP) can be used for the dependence analysis (Satty, 1996). In addition, the qualitative risk was designed to express risk in a deterministic manner. However, vagueness may exist in responses in some risk measurements. The risk value may be expressed as a possibility and Fuzzy AHP can be used for calibration. Further, samples of the chains varying their logistics practices were few in our study area. That fact has largely restrained us from investigating the risk perceptions of the retail chains experiencing changes in logistics practices, or entering into or returning from a logistics outsourcing agreement. The

Risk perception on logistics outsourcing of retail chains Ming-Chih Tsai, Chun-Hua Liao and Chia-shing Han

Supply Chain Management: An International Journal Volume 13 Number 6 2008 415 424

risks calibrated from the long-term outsourcers/in-house may be more associated with outsourcing execution than outsourcing building/abandoning. Another limitation is that the study results merely reect Taiwanese perspectives. Different contexts with different environmental settings may have generated different results. The qualitative risk assessment may serve as a screening that gives a more specic indication on where to focus the actions, as the risk perceived by outsourcers was broadly acceptable. Issues of outsourcing risk control that are multidimensional, involving risk taking, reduction, transferring, and sharing (Hallikas et al., 2004), may be initiated. Further, in the study venue where logistics data is available, asset, nancial and performance indictors should be sought and located in the third level of the risk events. The use of both objective data and subjective perceptions may result in a more robust construction of the outsourcing risk which in turn will increase the effectiveness of the risk prediction.

References
Aktas, E. and Ulengin, F. (2005), Outsourcing logistics activities in Turkey, Journal of Enterprise Information Management, Vol. 18 No. 3, pp. 316-29. Arnold, U. (2000), New dimensions of outsourcing: a combination of transaction cost economics and the core competencies concept, European Journal of Purchasing & Supply Management, Vol. 6 No. 1, pp. 23-9. Aubert, B.A., Rivard, S. and Patry, M. (1996a), Development of measures to assess dimensions of IS operation transactions, International Journal of Police Science & Management, Vol. 24 No. 6, pp. 661-80. Aubert, B.A., Rivard, S. and Patry, M. (1996b), A transaction cost approach to outsourcing behavior: some empirical evidence, Information & Management, Vol. 30 No. 2, pp. 51-64. Bahli, B. and Rivard, S. (2003), The information technology outsourcing risk: a transaction cost and agency-based perspective, Journal of Information Technology, Vol. 18 No. 3, pp. 211-21. Bahli, B. and Rivard, S. (2005), Validating measures of information technology outsourcing risk factors, The International Journal of Management Science, Vol. 33 No. 2, pp. 175-87. Bailey, W., Masson, R. and Raeside, R. (2002), Outsourcing in Edinburgh and the Lothians, European Journal of Purchasing & Supply Management, Vol. 8 No. 2, pp. 83-95. Barney, J.B. (1999), How a rms capabilities affect boundary decisions, Sloan Management Review, Vol. 40 No. 3, pp. 137-45. Bolumole, Y.A. (2001), The supply chain role of third-party logistics providers, International Journal of Logistics Management, Vol. 12 No. 2, pp. 87-102. Bourlakis, C. and Bourlakis, M. (2005), Information technology safeguards, logistics asset specicity and fourth-party logistics network creation in the food retail chain, Journal of Business & Industrial Marketing, Vol. 20 No. 2, pp. 88-98. Bowersox, D.J. (1990), Strategic benets of logistics alliances, Harvard Business Review, Vol. 68, pp. 36-45. Boyson, S., Corsi, T., Dresner, M. and Rabinovich, E. (1999), Managing effective third party logistics 423

relationships: what does it take?, Journal of Business Logistics, Vol. 20 No. 1, pp. 73-100. Ellram, L. and Billington, C. (2001), Purchasing leverage considerations in the outsourcing decision, European Journal of Purchasing & Supply Management, Vol. 7 No. 1, pp. 15-27. Fernie, J. (1999), Outsourcing distribution UK retailing, Journal of Business Logistics, Vol. 20 No. 2, pp. 83-95. Gottschalk, P. and Solli-Sther, H. (2006), Maturity model for IT outsourcing relationships, Industrial Management & Data Systems, Vol. 106 No. 2, pp. 200-12. Halldorsson, A. and Skjtt-Larsen, T. (2004), Developing logistics competencies through third party logistics relationships, International Journal of Operations & Production Management, Vol. 24 No. 2, pp. pp192-pp206. Hallikas, J., Karvonen, I., Pulkkinen, U., Virolainen, V.M. and Tuominen, M. (2004), Risk management processes in supplier networks, International Journal of Production Economics, Vol. 90 No. 8, pp. 47-58. Harland, C., Brenchley, R. and Walker, H. (2003), Risk in supply networks, Journal of Purchasing and Supply Management, Vol. 9 No. 2, pp. 51-62. Harland, C., Knight, L., Lamming, R. and Walker, H. (2005), Outsourcing: assessing the risks and benets for organizations, sectors and nations, International Journal of Operations & Production Management, Vol. 25 No. 9, pp. 831-50. Hong, J., Chin, A.T.H. and Liu, B. (2004), Logistics outsourcing by manufacturers in China: a survey of the industry, Transportation Journal, Vol. 43 No. 1, pp. 17-25. Kersten, W., Boger, M., Hohrath, P. and Spath, H. (2005), Supply chain risk management: development of a theoretical and empirical framework, Operations and Technology Management, Vol. 1, pp. 3-17. Klein, S., Frazier, G.L. and Roth, V.J. (1990), A transaction cost analysis model of channel integration in international markets, Journal of Marketing Research, Vol. 27 No. 2, pp. 196-209. Kremic, T., Tukel, O.I. and Rom, W.O. (2006), Outsourcing decision support: a survey of benets, risks, and decision factors, Supply Chain Management: An International Journal, Vol. 11 No. 6, pp. 467-82. Lai, K.H. (2004), Service capability and performance of logistics service providers, Transportation Research Part E: Logistics and Transportation Review, Vol. 40 No. 5, pp. 385-99. LaLonde, B.J. and Maltz, A.B. (1992), Some propositions about outsourcing the logistics function, International Journal of Logistics Management, Vol. 3 No. 1, pp. 1-11. Lambert, D.M., Emmelhainz, M.A. and Gardner, J.T. (1999), Building successful logistics partnerships, Journal of Business Logistics, Vol. 20 No. 1, pp. 165-81. Leblebici, H. and Gerald, S. (1981), Effects of environmental uncertainty on information and decision process in bank, Administrative Science Quarterly, Vol. 26 No. 4, pp. 578-96. Logan, M.S. (2000), Using agency theory to design successful outsourcing relationships, International Journal of Logistics Management, Vol. 11 No. 2, pp. 21-32. Loh, L. and Venkatraman, N. (1991), An empirical study of information technology outsourcing: benets, risks, and performance implications, Computerworld.

Risk perception on logistics outsourcing of retail chains Ming-Chih Tsai, Chun-Hua Liao and Chia-shing Han

Supply Chain Management: An International Journal Volume 13 Number 6 2008 415 424

Lonsdale, C. (1999), Effectively managing vertical supply relationships: a risk management model for outsourcing, Supply Chain Management: An International Journal, Vol. 4 No. 4, pp. 176-83. Mahoney, J.T. (2001), A resource-based theory of sustainable rents, Journal of Management, Vol. 27 No. 6, pp. 651-60. Murphy, P.R. and Poist, R.F. (2000), Third-party logistics: some user versus provide perspectives, Journal of Business Logistics, Vol. 2 No. 1, pp. 121-33. Mustafa, M.A. and Al-Bahar, J.F. (1991), Project risk assessment using the analytic hierarchy process, IEEE Transaction on Engineering Management, Vol. 38 No. 1, pp. 46-52. Ngwenyama, O.K. and Bryson, N. (1999), Making the information systems outsourcing decision: a transaction cost approach to analyzing outsourcing decision problems, European Journal of Operational Research, Vol. 115 No. 2, pp. 351-67. Power, D., Sharafali, M. and Bhakoo, V. (2007), Adding value through outsourcing Contribution of 3PL services to customer performance, Management Research News, Vol. 30 No. 3, pp. 228-35. Quelin, B. and Duhamel, F. (2003), Bring together strategic outsourcing and coporate strategy: outsourcing motives and risks, European Management Journal, Vol. 21 No. 5, pp. 647-61. Quinn, J.B. and Hilmer, F.G. (1994), Strategic outsourcing, Sloan Management Review, Vol. 35, pp. P43-P55. Razzaque, M.A. and Sheng, C.C. (1998), Outsourcing of logistics functions: a literature survey, International Journal of Physical Distribution & Logistics Management, Vol. 28 No. 2, pp. 89-107. Rindeisch, A. and Heide, J.B. (1997), Transaction cost analysis: past, present, and future applications, Journal of Marketing, Vol. 61 No. 4, pp. 30-54. Satty, T.L. (1991), The Analytic Hierarchy Process, McGrawHill, New York, NY. Satty, T.L. (1996), Decision Making with Dependence and Feedback: The Analytic Network Process, RWS Publications, Pittsburgh, PA. Satty, T.L. and Vargas, L.G. (1991), Prediction, Projection and Forecasting, Kluwer Academic Publishers, Boston, MA. Schwyn, R. (1999), How to approach IT outsourcing, Health Management Technology, Vol. 2 No. 6, pp. 28-31. Shang, K.U. and Marlow, P.B. (2005), Logistics capability and performance in Taiwans major manufacturing rms, Transportation Research Part E, Vol. 41 No. 3, pp. 217-34. Skjoett-Larsen, T. (2000), Third party logistics - from an interorganizational point of view, International Journal of Physical Distribution & Logistics Management, Vol. 30 No. 2, pp. 112-27. Slater, G. and Spencer, A.D. (2000), The uncertainty foundation of transaction cots economics, Journal of Economic Issue, Vol. 34 No. 1, pp. 61-87. Stank, T.P. and Daugherty, P.J. (1997), The impact of operation environment on the formation of cooperation

logistics relationships, Logistics and Transportation Review, Vol. 33 No. 1, pp. 53-65. Stewart, M.G. and Melchers, R.E. (1997), Probabilistic Risk of Assessment of Engineering Systems, Chapman & Hall, London. Taiwan Chain Store and Franchise Association (2006), Taiwanese Chain Store Almanac, Annual report, 2006 (Chinese edition). Trent, R.J. and Monczka, R.M. (2003), Understanding integrated global sourcing, International Journal of Physical Distribution & Logistics Management, Vol. 33 No. 7, pp. 607-29. Tsai, M.C. and Su, Y.S. (2002), Political risk assessment on air logistics hub developments in Taiwan, Journal of Air Transport Management, Vol. 8 No. 6, pp. 373-80. Tsai, M.C. and Su, C.H. (2005), Political risk assessment of ve East Asian ports the viewpoints of global carriers, Marine Policy, Vol. 29 No. 4, pp. 291-8. Ward, S.C. (1999), Assessing and managing important risks, International Journal of Project Management, Vol. 17 No. 6, pp. 331-6. Watjatrakul, B. (2005), Determinants of IS sourcing decisions: a comparative study of transaction cost theory versus the resource-based view, Journal of Strategic Information Systems, Vol. 14 No. 4, pp. 289-415. Wilding, R. and Juriado, R. (2004), Customer perceptions on logistics outsourcing in the European consumer goods industry, International Journal of Physical Distribution & Logistics Management, Vol. 34 No. 8, pp. 628-44. Williamson, O.E. (1975), Markets and Hierarchies, Analysis and Antitrust Implication: A Study in the Economics of Internal Organization, Free Press, New York, NY. Williamson, O.E. (1985), The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting, Free Press, New York, NY. Xu, J., Liu, Z. and Li, Y. (2006), Integrating processes of logistics outsourcing risk management in e-business, Proceedings of the 2006 IEEE/WIC/ACM International Conference on Web Intelligence and Intelligent Agent Technology, Hong Kong, 18-22 December. Zajac, E.J. and Olsen, C.P. (1993), From transaction cost to transactional value analysis: implications for the study on interorganizational strategies, Journal of Management Studies, Vol. 30 No. 1, pp. 131-45. Zolingen, S.J.V. and Klaassen, C.A. (2003), Selection processes in a Delphi study about key qualications in senior secondary vocational education, Technological Forecasting & Social Change, Vol. 70 No. 4, pp. 317-40. Zsidisin, G.A. (2003), Managerial perceptions of supply risk, Journal of Supply Chain Management, Vol. 39 No. 1, pp. 14-25.

Corresponding author
Ming-Chih Tsai can dragon.nchu.edu.tw be contacted at: mctsai@

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints

424