What Makes Logistics Integration More Effective? Governance from Contractual and Relational Perspectives

• Author: Qianwen Wang,Xiande Zhao,Baofeng Huo
• DOI: http://doi.org/10.1111/jbl.12236
• Published date: 01 September 2020
• Date: 01 September 2020

What Makes Logistics Integration More Effective? Governance

from Contractual and Relational Perspectives

Qianwen Wang

1

, Baofeng Huo

2

, and Xiande Zhao

3

1

Zhejiang University

2

Tianjin University

3

China Europe International Business School (CEIBS)

Third-party logistics (3PL) user–provider integration is attracting increasing attention from both academics and practitioners. However, it

remains unclear how best to adopt governance mechanisms to safeguard 3PL user–provider integration (e.g., information sharing and pro-

cess coordination). Based on transaction cost economics and social exchange theory, this study examined the individual and joint effects of con-

tractual (e.g., detailed contracts and contract application) and relational governance (e.g., trust and relational norms) on 3PL user–provider

integration for operational performance. We conducted a survey involving 247 3PL service users and analyzed the conceptual model using the

method of structural equation modeling. The results showed that process coordination improved operational performance, while information

sharing alone did not significantly improve operational performance but complemented the role of process coordination in improving operational

performance. In addition, having detailed contracts was positively related to process coordination, while contract application was positively

related to information sharing. Trust was not significantly related to information sharing or process coordination, while relational norms were

positively related to both. Finally, three joint effects on 3PL user–provider integration were found. Two of them were substitutional (detailed

contracts and relational norms; contract application and trust), and one was complementary (detailed contracts and trust). This study makes sev-

eral theoretical contributions and provides novel guidelines for 3PL relationship development.

Keywords: contractual governance; relational governance; complementary/substitutional relationship; 3PL user–provider integration; China

INTRODUCTION

The real-time global economy and technological innovation have

fostered a market transformation from traditional logistics to digi-

tal logistics that is characterized by integration, cooperation, con-

nectivity, adaptiveness, autonomous control, and cognitive

improvement (Kayikci, 2018). This transformation has led to a

boom in third-party logistics (3PL) services and reshaped how

logistics users interact with their providers and emphasized inte-

gration across the logistics value chain. The focus on 3PL relation-

ships has evolved over time from relationships to mutually

beneficial and continuous partnerships with a strategic value-added

orientation. 3PL service users outsource a broad array of inven-

tory, transportation, warehousing, and customer service functions

to service providers that are equipped with advanced technologies

and global coverage. In this context, services span boundaries and

allow users to concentrate on core businesses and acquire opera-

tional advantages (Mortensen and Lemoine, 2008; Jayaram and

Tan, 2010; Sheikh and Rana, 2012). Despite these benefits, total

logistics costs remain extremely high due to the constraint of poor

user–provider integration in communication and coordination, hin-

dering efforts to establish a seamless logistics chain.

China is playing a critical role in developing the global logistics

industry with an annual growth rate of 20% in recent years. How-

ever, according to the China Federation of Logistics and Purchas-

ing, total logistics costs in China exceeded 1.21 trillion yuan and

accounted for 14.6% of the country’s gross domestic product in

2017—almost double the equivalent figure in the United States.

Accordingly, China’s State Council issued the Mid- to Long-term

Plan for Logistics Development, seeking to standardize, formalize,

develop, and refine the logistics industry by 2020. The emphasis

on solving logistics problems and establishing long-term logistics

goals has drawn attention to ways of enhancing 3PL relationships.

The significance of 3PL user-provider integration has been

demonstrated in Western countries. Previous studies highlighted

the importance of integration with 3PL service users from various

perspectives (Hertz and Alfredsson, 2003; Mortensen and

Lemoine, 2008). Jayaram and Tan (2010) empirically confirmed

that users who integrate with 3PL providers have different firm

performance. Such a practice allows users to establish seamless

logistics chains connecting information and material flows (Hand-

field and Bechtel, 2002; Lambert et al., 2004; Rabinovich et al.,

1999; Vaidyanathan, 2005). However, as a tailoring process, inte-

gration is often exposed to destabilizing forces, such as unclear

responsibilities, imperfect contracts, and outsourcing failures and

should therefore be safeguarded by governance (Cavusgil et al.,

2004; Jap, 2001; Liu et al., 2009; Yang et al., 2011). Moreover,

governance issues in emerging markets often generate different

outcomes, compared to those in Western countries. Thus, it is cru-

cial to further explore 3PL user-provider integration from a gover-

nance perspective in emerging markets, in order to help managers

to direct their efforts. [Correction made on August 13, 2020 after

first online publication: Some sentences in this paragraph were

rewritten to highlight why the authors explored 3PL user-provided

integration from a governance perspective.]

For governance, as two dominant theoretical foundations, trans-

action cost economics (TCE) and social exchange theory (SET)

postulate different paths and outcomes. TCE contends that firms

are exposed to opportunistic and self-interested behaviors that

lead to high transaction costs, and thus firms adopt contractual

governance (e.g., detailed contracts and contract application) to

Corresponding author: Baofeng Huo, College of Management and

Economics, Tianjin University, Tianjin 300072, China; E-mail: bao-

feng@tju.edu.cn

Journal of Business Logistics, 2020, 41(3): 259–281 doi: 10.1111/jbl.12236

©2020 Council of Supply Chain Management Professionals

curb those behaviors via economic incentives (Williamson, 1985;

Lai et al., 2012; Huo et al., 2015). SET emphasizes reciprocity

and posits that bilateral relationships arise from social interactions

and embeddedness, which involve trust and relational norms

(Granovetter, 1985). Contractual and relational governance mech-

anisms are effective in safeguarding relationships, but given the

elusive and multifaceted nature of governance, it remains unclear

whether one should combine economic and social standpoints to

safeguard 3PL user–provider integration. Previous studies have

depicted these perspectives as substitutional (e.g., Dyer and

Singh, 1998; Dyer, 2002), complementary (e.g., Luo, 2002;

Poppo and Zenger, 2002), both substitutional and complementary

(e.g., Woolthuis et al., 2005; Zhou and Xu, 2012), and having no

interaction (e.g., Cavusgil et al., 2004). These disparate or even

contradictory findings may be attributed to different selections of

contractual/relational governance, such as detailed contracts and

trust (e.g., Cavusgil et al., 2004; Wang et al., 2011) or detailed

contracts and relational norms (e.g., Cannon et al., 2000), leav-

ing several issues unexplored. To fill these research gaps, this

study draws on TCE and SET to explore a conceptual framework

that incorporates contractual and relational governance, 3PL user–

provider integration, and operational performance, with the speci-

fic aim of resolving three research questions:

1 What is 3PL user–provider integration and how does it

improve operational performance?

2 As 3PL businesses become increasingly complex, are firms

more likely to conduct contractual or relational governance to

safeguard 3PL user–provider integration?

3 Does the joint use of contractual and relational governance

have a synergistic effect on 3PL user–provider integration?

This paper proceeds as following sections. Section Literature

Review and Research Hypotheses presents the literature review

and develops research hypotheses. Section Research Methodol-

ogy presents the methodology, including the sampling and data

collection, questionnaire design and measurements, and reliability

and validity tests. Section Analyses and Results analyzes the

results of the model tests, which are discussed further in Sec-

tion Discussion. Section Conclusions, Limitations, and Future

Directions outlines contributions and limitations of the study and

offers potential directions for future research.

LITERATURE REVIEW AND RESEARCH HYPOTHESES

Contractual and relational governance: TCE and SET

The governance of user–provider relationships is receiving

increasing attention from scholars (Heide and John, 1992; Heide,

1994; Nickerson et al., 2001; Griffith and Myers, 2005; Zhao

et al., 2006a; Wang and Wei, 2007; Liu et al., 2009). Gover-

nance theory concentrates on horizontal collaboration rather than

the market, assuming three characteristics of governance: (1)

independence between firms, (2) continuous interactions arising

from the need to exchange resources and negotiate mutual goals,

and (3) game-like interactions rooted in trust and regulated by

rules (Rhodes, 1997). Firms adopt contractual or relational gover-

nance to control and coordinate individual firms’behaviors. TCE

postulates that firms should adopt contractual governance to

coordinate transactions and control opportunism to achieve

mutual goals (Dwyer et al., 1987; Poppo and Zenger, 2002; Wu

et al., 2007). Such contractual governance can be specified as the

design and application elements of contracts (Woolthuis et al.,

2005; Wuyts and Geyskens, 2005; Faems et al., 2008; Zhou and

Xu, 2012). As the dominant governance mechanism, a detailed

contract refers to the extent to which each party’s roles, responsi-

bilities, and obligations are specified in clauses before actual

transactions are conducted (Williamson, 1985; Dyer, 2002; Luo,

2002; Wuyts and Geyskens, 2005). It helps to coordinate mutual

goals (e.g., relating to price, inventory, transportation, and deliv-

ery) and constrains potential opportunism between users and pro-

viders (Wu et al., 2007; Huo et al., 2015). Most previous studies

focused on the proactive design of transactions in contracts, but

the application process embedded in contractual governance has

often been ignored (Bell et al., 2006; Faems et al., 2008). Con-

tract application refers to the severity of the disciplinary action

taken by a principal to prevent violations of contractual obliga-

tions. It serves as a control mechanism by obliging partners to

follow agreed provisions (Antia and Frazier, 2001; Woolthuis

et al., 2005). The two mechanisms of contractual governance

monitor and reduce undesirable behaviors using specified regula-

tions and legal authorities.

However, TCE has been criticized for overstating the desir-

ability of contracts because it emphasizes the rational and calcu-

lative nature of governance for future expectations rather than

the social nature arising from prior exchanges (Macneil, 1978;

Macneil, 1980; Uzzi, 1997; Poppo and Zenger, 2002). Ghoshal

and Moran (1996) argued that TCE scholars exaggerate the sus-

picion between contract partners. Logistics relationships are diffi-

cult to safeguard through formal contracts (Klein et al., 2007). In

this sense, we also draw on SET as a complementary theory for

analyzing the role of relational governance in 3PL relationships.

SET assumes that self-enforcing governance, involving trust and

relational norms, can not only mitigate opportunism (the focus of

contractual governance) but also foster the enforcement of obli-

gations and expectations (Anderson and Narus, 1990; Heide and

John, 1992; Liu et al., 2009; Arranz and Arroyabe, 2012). The

social processes and incentives at work generate standards and

expectations for establishing partnerships. As Arrow (1973) sta-

ted, “there is an element of trust in every transaction”(p. 24).

Trust refers to a firm’s confidence in the integrity, benevolence,

and credibility of its partners (Barney and Hansen, 1994; Zaheer

et al., 1998). This definition encompasses three beliefs: (1) integ-

rity, whereby trading partners will operate in the pursuit of

mutual benefits, (2) benevolence, whereby no partner will exploit

another’s vulnerabilities, and (3) credibility, whereby partners

have the expertise to perform effectively and reliably (Anderson

and Narus, 1990; Wu et al., 2007). As a bonding force or moral

contract, trust fosters a collaborative atmosphere and interdepen-

dence between trading partners (Liu et al., 2009). With these

beliefs and mutual concerns, both 3PL service users and provi-

ders are willing to make idiosyncratic efforts to resolve short-

term conflicts in favor of forging long-term relationships. Rela-

tional norms are shared behavioral expectations that trading part-

ners will fulfill for mutual well-being, which are a

multidimensional concept involving flexibility, information

exchange, and solidarity (Gibbs, 1981; Heide and John, 1992;

260 Q. Wang et al.