Logistics service providers add value to Internet retailers, study shows

A survey of 200 internet sellers found there is still a lack of understanding of the value of logistics service providers (LSPs) in lowering costs and improving revenue, according to an article that appeared in the summer 2006 issue of California Management Review.

A. Michael Knemeyer, an assistant professor of logistics at Fisher and co-author of the article, indicated that most e-commerce firms view the outsourcing of logistics services only from a cost perspective. Many fail to realize that a positive relationship with LSPs can not only help streamline operations and lower costs in shipping process, but they can also improve customer loyalty and help a company expand into new markets.

For example, online retailers can utilize a provider’s existing relationships with local delivery carriers to gain access for their products into new markets, said Knemeyer, who co-authored the study with Elliot Rabinovich, assistant professor of supply chain management at Arizona State’s W.P. Carey School of Business.

“There’s an opportunity to find logistics providers that will open up new business and new consumer markets, open up supply relationships that you wouldn’t get access to with your own system or with that of another provider.”

A. Michael Knemeyer

“There’s an opportunity to find logistics providers that will open up new business, new consumer markets and new supply relationships that you wouldn’t get access to with your own system or with that of another provider,” Knemeyer said. “Retailers need to examine a potential providers’ relationship network and how they can leverage these networks to cut costs and open up new revenue streams.”

Reliable delivery by an e-seller could also secure a customer’s loyalty. A customer might be willing to pay more for an item supported by superior logistics execution rather than deal with the unreliable logistics system of an Internet seller with a lower price. Being able to charge more and tap into complementary services provided by a logistics provider can help a seller’s bottom line in many ways, Knemeyer said.

When the Internet age ushered in e-commerce as a new way of conducting business, many proponents of this “New Economy” thought it would eliminate the need for middlemen.

“That just never really happened because companies quickly realized you still need to get the product to the consumer, you still need to manage the activities associated with product fulfillment and you still need logistics service expertise to do that,” Knemeyer said. One way of gaining this expertise is through relationships with LSPs.

The authors' survey of Internet retailers of various sizes found that 10 to 20 percent of the cost of the items purchased online goes to pay for delivery.

Forming a relationship with a logistics service provider is not a quick fix that is guaranteed to turn a profit for the Internet sellers, Knemeyer said. When selecting a logistics provider, a retailer should first spend time looking at their needs and then find providers with specific capabilities that can fill those gaps.

The survey also indicated that 30 percent of sellers that engaged the services of a LSP didn’t establish formal evaluation procedures for selecting their partner. In some cases, the seller experienced the “winner’s curse” by selecting the lowest bid and then almost immediately were hit with extra fees or had the provider cut corners in its service.

Knemeyer suggests that retailers should always be concerned about the consumer when it comes to using a third-party to deliver products.

“Retailers need to constantly monitor their logistics execution to ensure the customer is happy with the service,” he said. “Ineffective product delivery through bad logistics outsourcing relationships can keep companies from building a loyal consumer base.”