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Third party logistics: a literature review and research agenda
Third party logistics
Konstantinos Selviaridis and Martin Spring Department of Management Science, Lancaster University Management School, Lancaster, UK
Abstract Purpose – To provide a taxonomy of third party logistics (3PL) research and, based on that, to develop a research agenda for this field of study. Design/methodology/approach – The proposed 3PL research classification framework is based on a comprehensive literature review, which concentrates on peer-reviewed journal papers published within the period 1990-2005. A total of 114 academic sources have been retrieved and analysed in terms of research purpose and nature, method employed, theoretical approach and level of analysis. Findings – The review reveals that 3PL research is empirical-descriptive in nature and that it generally lacks a theoretical foundation. Survey research is the dominant method employed, reflecting the positivist research tradition within logistics. It identifies certain knowledge gaps and develops five propositions for future research. It suggests that focus should be directed towards more normative, theory-driven and qualitative method-based studies. It also argues that further empirical research in relation to 3PL design/implementation and fourth party logistics services is needed. Originality/value – This paper fulfils an identified need for a comprehensive classification framework of 3PL studies. It essentially provides both academics and practitioners with a conceptual map of existing 3PL research and also points out opportunities for future research. Keywords Third party vendors, Distribution management Paper type Literature review
1. Introduction In recent years there has been a surge of academic interest and publications in the area of third party logistics (3PL). This can be partly explained by the growing trend of outsourcing logistics activities in a wide variety of industrial sectors (Transport Intelligence, 2004). The continuing wave of consolidation within the 3PL industry has also resulted in the emergence of large companies that have the capabilities to offer sophisticated logistics solutions on a continental or even global scale. Such logistics service providers (LSPs) strive to assume a more strategic role within the supply chain of clients, expanding their scale and scope of operations. Despite the growing interest in 3PL, the literature on this area appears to be disjointed. Based on an extensive literature review (114 references), this paper aims to offer a taxonomy of 3PL studies and point out opportunities for further research. In a previous attempt, Razzaque and Sheng (1998) summarised the results of their literature survey which also included articles from practitioner journals and the trade press. For the sake of rigour, the present study concentrates only on refereed journal papers published during 1990-2005. 1.1 A note on definitions Terms such as “logistics outsourcing” “logistics alliances” “third party logistics” “contract logistics” and “contract distribution” have been used interchangeably to
The International Journal of Logistics Management Vol. 18 No. 1, 2007 pp. 125-150 q Emerald Group Publishing Limited 0957-4093 DOI 10.1108/09574090710748207
describe the organisational practice of contracting-out part of or all logistics activities that were previously performed in-house (Aertsen, 1993; Bowersox, 1990; Lieb, 1992; Sink et al., 1996). Different definitions tend to emphasize different aspects of outsourcing arrangements such as the service offering, nature and duration of relationships, performance outcomes, extent of third party responsibility over the logistics process and position/role in the supply chain. 3PL is usually associated with the offering of multiple, bundled services, rather than just isolated transport or warehousing functions (Leahy et al., 1995). Contemporary 3PL arrangements are based on formal (both short- and long-term) contractual relations as opposed to spot purchases of logistics services (Murphy and Poist, 1998). In recent years, the term fourth party logistics (4PL) has also emerged to describe more advanced contracting arrangements. Van Hoek and Chong (2001, p. 463) define 4PL as: . . . a supply chain service provider that participates rather in supply chain co-ordination than operational services. It is highly information based and co-ordinates multiple asset-based players on behalf of its clients.
It is also noteworthy that some authors provide broad definitions of the 3PL industry, including freight forwarders and shipping lines (Rao and Young, 1994). Overall, it appears that 3PL terminology is overlapping and fails to take into account the shippers’ industry-specific characteristics. 2. Method A comprehensive literature review was conducted with the aim of constructing a classification framework for 3PL studies and developing a research agenda for the future. The review focused on refereed journal papers published within the period 1990-2005. The papers were primarily retrieved from logistics journals, although publications were also found (through database searches) in supply chain management, operations management and marketing journals. 2.1 Analysis of findings The analysis of literature is based on multiple dimensions. Following Croom et al. (2000), both content- and method-oriented criteria are used. The papers were firstly classified according to their research purpose (descriptive vs normative) and nature (empirical vs conceptual). The results indicate that most 3PL studies (60 per cent) are empirical-descriptive in nature (Figure 1).
Figure 1. Classification of 3PL literature in terms of research purpose and nature
In terms of the methods employed, although case-based research is also conducted, the majority (50 per cent – see Table I) are based on surveys, apparently reflecting the positivistic research tradition within logistics (Ellram, 1996; Gammelgaard, 2004; Mentzer and Kahn, 1995). 3PL studies are weakly theorised, with 69 per cent of the papers having no theoretical foundation and simply describing trends in the industry. This confirms others’ views that logistics research lacks a theoretical basis (Kent and Flint, 1997; Mentzer et al., 2004). Nonetheless, some work uses theories such as transaction cost economics (TCE) and the resource-based view (RBV) of the firm to explain logistics outsourcing. Relationship marketing approaches, network theory, agency theory, competence theory, channel theory, political economy theory and social exchange theory have also been applied to explain aspects of 3PL relations. However, their use seems to be the exception rather than the rule and most of them are applied on a piecemeal basis, without serving any broader research objective. The level of analysis of 3PL research is also examined (Table II). In line with Harland (1996) and Hakansson and Snehota (1995), studies are classified in terms of three levels: (1) the firm; (2) the dyad; and (3) the network.
Third party logistics
The majority of studies (67 per cent) focus on the firm level, examining issues from either the shipper’s or the LSP’s viewpoint (e.g. outsourcing decision). Regarding the dyadic level, the literature concentrates on different aspects of the LSP-client relationship (e.g. contracting). Very few studies (6 per cent) exist at the network level (e.g. logistics triads). 3. An integrative framework for 3PL research An integrative framework for 3PL research is proposed (Table III), based on the identification of main themes within this area of study. Existing studies are classified Methodology
Surveys (58) Case studies (17) Other secondary data (e.g. internet research) (13) Literature review (10) Multi-method research (9) Other (7)
51 15 11.5 9 8 5.5
Table I. 3PL research methods – frequency and percentages
Level of analysis Percentage of studies Indicative topics Firm Dyad Network
67 27 6
Outsourcing decision; selection criteria; 3PL growth 3PL success factors; contracting; performance measurement Logistics triads; horizontal networks
Table II. Analytical level of 3PL research
according to their research purpose and level of analysis. The framework offers a taxonomy of past and current 3PL research and also helps in identifying gaps that need to be addressed in the future. A detailed discussion of the relevant literature is presented in the following. 4. The firm level A wide range of issues are examined either from the client’s or the service provider’s viewpoint. 4.1 Outsourcing decision The decision to outsource (or not) logistics activities depends on a multitude of variables, which refer to both internal and external considerations. Rao and Young (1994) have identified factors such as centrality of the logistics function, risk and control, cost/service trade-offs, information technologies and relationships with LSPs. The concept of logistics complexity is also introduced to incorporate a number of critical drivers that impact on the above identified factors. Product-related (e.g. special handling needs), process-related (e.g. cycle times) and network-related (e.g. countries served) drivers are believed to have an indirect influence in the outsourcing decision (Rao and Young, 1994). van Damme and Ploos van Amstel (1996) discuss four categories of considerations related to economic viability, market issues (demand variability and customer service), personnel/equipment availability and extent of supplier dependence. They also identify several favourable conditions for outsourcing such as expanded assortment and demand seasonality (van Damme and Ploos van Amstel, 1996). Hong et al. (2004b) discuss determinants of outsourcing in terms of the shipper firm’s characteristics (e.g. firm size). In the same vein, Daugherty and Droge (1997) link the logistics outsourcing decision with the shipper’s organisational structure; organisations that have decentralised “line activities” at the business unit level are expected to outsource more in comparison to shippers that organise theirs centrally. The “do or buy” decision is also affected by evaluation of cost/service trade-offs. One important determinant of the decision is cost comparison between alternative options. Costs associated with performing logistics activities in-house and investment in capital assets is traded-off against service provider fees. The lowest cost solution should then be selected (van Damme and Ploos van Amstel, 1996). However, cost is not the single most important decision variable and logistics service issues are also
Table III. An integrative framework for 3PL research
Benefits/risks of outsourcing Service offerings and usage 3PL selection criteria Growth strategies
Logistics triads 4PL/LLP
Outsourcing decision Purchasing 3PL services 3PL services marketing
Formation and evolution of 3PL relations Managing 3PL relations Contracts Information exchange Performance measurement 3PL success factors Partnership models
considered (La Londe and Maltz, 1992; McGinnis et al., 1995; Sarel and Zinn, 1992). For instance, Maltz (1994b) examined the relative impact of cost and service on the decision to outsource warehousing and found that organisations were reluctant to use third-party warehousing due to customer service considerations. Several authors have applied TCE theory to the logistics outsourcing decision. For example, Aertsen (1993) argued that high asset specificity coupled with difficulties in performance measurement should lead to in-house distribution. Maltz (1994a) found that high asset specificity is associated with in-house warehousing, whereas high transaction frequency leads to outsourcing. Skjoett-Larsen (2000) combined asset specificity and uncertainty to create a framework for the outsourcing decision: 3PL providers must be used in the case of medium-specific assets or in cases of high asset specificity, but low uncertainty. The decision to contract-out logistics can also be driven by resource and capability considerations (Bolumole, 2001). Forming relationships with 3PL providers is an efficient and effective means of achieving the required service without investing heavily in assets and new capabilities (Persson and Virum, 2001; Stank and Maltz, 1996). In this way, shippers can focus on their core business. Furthermore, changes in the business environment, increased competition, pressure for cost reduction and the resulting need to restructure supply chains are often quoted as motives for the formation of alliances with LSPs (Bagchi and Virum, 1996; van Laarhoven and Sharman, 1994). Whatever the rationale for contract logistics, it is noted that the outsourcing decision should be examined in the context of corporate and logistics strategy at specific time periods (Fernie, 1999). 4.2 Benefits and risks of outsourcing A variety of benefits and risks in relation to 3PL have been reported in the literature. These can be classified as strategy-, finance- and operations-related. Outsourcing non-strategic activities enables organisations to focus on core competence and exploit external logistical expertise (Sink and Langley, 1997). 3PL providers can also contribute to improved customer satisfaction and provide access to international distribution networks (Bask, 2001). The most often-cited risks are associated with loss of control over the logistics function and loss of in-house capability and customer contact (Ellram and Cooper, 1990). However, it is usually the case that shippers employ a mixed strategy regarding logistics and retain important logistics activities (e.g. order management) in-house (Wilding and Juriado, 2004). While it is reported that users of 3PL enhance their flexibility with regard to market (investments) and demand (volume flexibility) changes, lack of responsiveness to customer needs is also cited as a problem of outsourcing (van Damme and Ploos van Amstel, 1996). Logistics outsourcing offers many cost-related advantages such as reduction in asset investment (turning fixed cost into variable), labour and equipment maintenance costs (Bardi and Tracey, 1991). LSPs serve multiple customers and are able to utilize capacity better and spread logistics costs, thus achieving economies of scale (van Damme and Ploos van Amstel, 1996). However, cost reduction is not always realised due to unrealistic fee structures proposed by service providers (Ackerman, 1996); and even if realised, it can be offset by the provider’s margin (Wilding and Juriado, 2004). Cost savings evaluation can be difficult due to the shipper’s lack of awareness of internal logistics costs. Indeed, the outsourcing option may be chosen in order to give
Third party logistics
an indication of in-house costs and serve as an external benchmark for logistics efficiency (van Laarhoven et al., 2000). Regarding operational advantages and problems of 3PL, evidence is contrasting. Reported benefits include reduction in inventory levels, order cycle times, lead times and improvement in customer service (Bhatnagar and Viswanathan, 2000; Daugherty et al., 1996; Wong et al., 2000). However, other authors cite problems with respect to service performance, disruption to inbound flows, inadequate provider expertise, inadequate employee quality, sustained time and effort spent on logistics, loss of customer feedback and inability of 3PL providers to deal with special product needs and emergency circumstances (Ellram and Cooper, 1990; Gibson and Cook, 2001; Sink and Langley, 1997; Svensson, 2001; van Laarhoven et al., 2000). Despite gaining access to logistics information systems (Rao et al., 1993), shippers appear to be dissatisfied with service provider’s IT capabilities and prefer to rely on in-house systems instead (van Laarhoven et al., 2000). 4.3 Service offerings and usage The review reveals a mismatch between supply and demand for logistics services (Murphy and Poist, 2000). Evidence from recent industry surveys indicates that while LSPs expand their offerings to include information systems, consulting, contract manufacturing and even purchasing and financial services, there is a low uptake of such services and buyers in general prefer to outsource transport- and warehouse-related functions (Lieb and Bentz, 2005a; Lieb and Kendrick, 2003; Lieb and Randall, 1999). The literature appears to focus on the demand-side of 3PL; a large number of studies focus on the extent of 3PL usage across specific countries/regions and industries. A series of annual surveys conducted in the USA by Lieb and colleagues (Lieb, 1992; Lieb and Bentz, 2004, 2005b; Lieb et al., 1993; Lieb and Miller, 2002; Lieb and Randall, 1996) is a well-known example. Main issues examined by such studies include services used, usage rate, contract renewal rates, outsourcing costs and geographical spread of services. Generally speaking, findings indicate the prominence of transport, warehouse and administration-related (e.g. freight payment) services and confirm the continuing growth of logistics outsourcing (Ashenbaum et al., 2005; Lieb and Bentz, 2005b; Murphy and Poist, 1998). Research regarding 3PL usage also includes experience from specific countries or industries. Country-specific studies appear to stress the prominence of transport and warehousing services and also identify other activities with growth potential (e.g. freight bill auditing/payment, see Min, 2002). Examples include: . Australia (Dapiran et al., 1996; Sohal et al., 2002); . China (Hong et al., 2004a); . Malaysia (Sohail and Sohal, 2003); . Mexico – US border (Maltz et al., 1993); . New Zealand (Sankaran et al., 2002); and . Singapore (Bhatnagar et al., 1999). Fernie (1999) reports a low uptake of 3PL service in the UK retail sector, whereas Wilding and Juriado (2004) submit that firms within the European consumer goods
industry use both in-house and contract logistics, with transportation and overflow storage to be the most-often outsourced services. Evidence also suggests that shippers outsource services in bundles (e.g. warehousing and inventory control) by combining activities that share common transactional elements and information flows (Maltz and Ellram, 2000; Maltz et al., 1993; Rabinovich et al., 1999). Overall, there appears to be weak demand for value-added solutions such as information systems, 4PL and manufacturing-related services (van Hoek, 2000b, c; van Hoek and Dierdonck, 2000). Most client organisations perceive such activities as too important to outsource and express their reservations about LSP capabilities in those areas. It is even suggested that such services are supply-driven and do not reflect the shippers’ needs (Wilding and Juriado, 2004). The bulk of logistics services bought still remains in the areas of transportation and warehousing. 4.4 Purchasing 3PL services Two main issues are identified regarding procurement of 3PL services: (1) normative purchasing frameworks; and (2) 3PL selection criteria. 4.4.1 Purchasing frameworks. Three main frameworks for procurement of logistics services have been identified. Andersson and Norman (2002) compare the purchasing process between commoditised (e-freight exchanges) and advanced logistics services. They find that definition of service requirements appear to be more difficult, criteria for 3PL selection extend far beyond price considerations and contracts are much more detailed when buying advanced logistics solutions (Andersson and Norman, 2002). In contrast, Sink and Langley (1997) emphasize process issues such as need identification, top management commitment, formation of cross-functional buying team, development of selection criteria and service implementation. Bagchi and Virum (1998) also emphasize process, but their framework is wider in scope than the previous two, dealing with post-contracting issues such as performance measurement and goal redefinition (Bagchi and Virum, 1998). All these models emphasize need awareness as the starting point of the process. However, Sink and Langley’s (1997) and Bagchi and Virum’s (1998) models assume that the buyer is responsible for service definition and also extend to post-contracting issues such as service implementation and performance measurement. On the other hand, Andersson and Norman (2002) draw a distinction between purchasing of commodity and advanced logistics services, arguing that a different approach (in terms of time and effort requirements) is appropriate in each case. Generally speaking, all three models appear to present many similarities to generic purchasing frameworks (Baily et al., 1998). 4.4.2 Selection criteria for 3PL providers. Several criteria for LSP choice have been discussed in the literature; typically, these include cost, service quality and reliability, flexibility, responsiveness to requests and financial stability. Some criteria are developed with specific client needs in mind, while others are common for all circumstances (Bagchi and Virum, 1996). There is contrasting evidence on the relative importance of price; some authors (van Laarhoven and Sharman, 1994) rank it as top criterion, while others argue that service performance and quality requirements
Third party logistics
precede discussions about rates (Crum and Allen, 1997; La Londe and Maltz, 1992; Menon et al., 1998). Qualitative factors such as supplier reputation, references from clients and response to information requests are used for the initial screening of candidate service providers (Sink and Langley, 1997). Moreover, prior experience of the client’s industry, its regulations and products types are perceived as important selection factors by buyers (Aghazadeh, 2003; Sink et al., 1996; van Damme and Ploos van Amstel, 1996). Overall, the criteria cited seem to apply to all 3PL purchasing circumstances, irrespective of buyer characteristics and special requirements. A rare exception is Meade and Sarkis (2002), who present special factors pertaining to third party reverse logistics services (e.g. reverse logistics functions and process). 4.5 Marketing of 3PL services Berglund et al. (1999) have identified several factors facilitating the rise of the 3PL market. On the demand side, key drivers include reduction in asset intensity, reduction of labor costs and restructuring of distribution; on the supply side, industry deregulation and declining profit margins in basic services are among the reasons for growth. Some authors have explained how transportation firms developed into 3PL providers by expanding their service offerings to differentiate themselves from competition (Sheffi, 1990; Virum, 1993). Overall, the evolution of the 3PL market is explained with reference to three distinct phases (Berglund et al., 1999; Hertz and Alfredsson, 2003): (1) In the 1980s, many transportation and warehousing firms have developed into 3PL providers (e.g. Exel Logistics and Frans Maas). (2) In the early 1990s, firms that specialise in express parcel deliveries entered the market (e.g. DHL, TNT, UPS and FedEx). (3) In the late 1990s, companies originally specializing in financial services, IT services and management consulting entered the market by developing competences in information systems and supply chain planning (e.g. Andersen Consulting). IT systems are increasingly being used to offer real-time information to clients and enhance visibility for supply network members (Lewis and Talalayersky, 2000; Piplani et al., 2004; Sauvage, 2003). Concepts such as 4PL and lead logistics provider (LLP) have also been introduced with the aim of covering reported demands for trans-national logistics solutions and integrated management of supply chains (Skjoett-Larsen, 2000; van Hoek and Chong, 2001). Nevertheless, much confusion remains regarding the marketing of logistics services. Logistics operators often claim that they can do everything, without in fact possessing the capabilities to match their value propositions (Bask, 2001; Sink et al., 1996). Consequently, various classifications of LSPs have been proposed, distinguishing principally between asset-based and non-asset based LSPs (Razzaque and Sheng, 1998; Sheffi, 1990). Asset-based providers own physical assets such as truck fleets and warehouses and focus on the management and execution of transport and warehouse-related activities. Non-asset based firms rely on human expertise and information systems and offer management-oriented services, sub-contracting physical distribution activities to asset-based companies.
Berglund et al. (1999) have noted the gradual shift from asset-based to system (non-asset) based providers and distinguished between “service” (offering low cost, specific competitive services to many clients) and “solution” (customized and complex services to a few key customers) providers. Hertz and Alfredsson (2003) classify LSPs in terms of their abilities for general problem solving (co-ordination) and the extent of adaptation to client needs. Persson and Virum (2001) present a typology of 3PL vendors in terms of service complexity and degree of asset specificity. Based on RBV theory, Lai (2004) has proposed a typology of LSPs in terms of their service capabilities and performance results. Bolumole (2003) presents a framework for evaluating the supply chain roles of LSPs, arguing that certain elements of the client’s strategy shape the outsourcing decision and requirements, which in turn influence the role of 3PL providers within the supply chain (Bolumole, 2003). However, it seems to be static in nature (e.g. shippers with external supply chain orientation may also outsource due to cost efficiency advantages). 4.6 Growth strategies In a highly competitive sector cost reduction, market segmentation and service differentiation are the main ways of improving 3PL performance and profits (Panayides, 2004; Sum and Teo, 1999). In addition, environmental changes and the introduction of new technologies have an impact on LSP strategic planning (Hum, 2000). For example, e-commerce and its implications for logistics operations should be fully understood by 3PL firms (Delfmann et al., 2002; Gudmudsson and Walczuck, 1999). LSPs employ a variety of growth strategies. Important means of expansion include mergers and acquisitions (M&As), joint ventures, strategic alliances, piggybacking (i.e. following the client’s expansion and establishing new operations in foreign markets) and organic growth (Stone, 2001, 2002). Consolidation is the main feature of the industry and large, multi-national firms start to emerge. Main reasons for M&As include economies of scope, expanded geographical coverage, acquisition of specialized capabilities and requirements for investment in IT and equipment (Carbone and Stone, 2005). Both vertical (shipper-LSP) and horizontal (among LSPs) alliances are set up mainly with the aim of getting access to complementary resources and capabilities. In particular, horizontal alliances among LSPs are deemed necessary for the development of cross-border logistics solutions (Carbone and Stone, 2005; van Hoek, 2000a). Some authors though question the effectiveness of Pan-European and global logistics operators and they argue for the existence of local, medium-sized 3PLs that better serve customer needs in foreign markets (Evans, 2000). 5. The dyad level: inter-organisational relationships in 3PL Existing literature suggests that the nature of 3PL relationships (i.e. transactional or collaborative) is a function of service offering composition, contract duration and the client’s motivation for outsourcing. 5.1 Formation and evolution of 3PL relations There are many examples of partnerships between LSPs and manufacturers/retailers in the logistics literature (Bhatnagar and Viswanathan, 2000; Bowersox, 1990; House and Stank, 2001). It is suggested that such partnerships develop gradually,
Third party logistics
as the number of outsourced activities increases over time. Shippers often adopt an “increasing scope” strategy (van Laarhoven et al., 2000) in respect of their relationships with LSPs. According to this practice, buyers are looking for specific solutions at the initial stages of the relationship in order to test the provider’s capabilities (van Damme and Ploos van Amstel, 1996). However, over time, the scope of the relationship increases and the offering expands to include more value-added and customised solutions (Sink et al., 1996). The nature of the relationship also depends on the client’s rationale for outsourcing (Bolumole, 2001). The role of LSPs is limited to operational issues when the shipper sees the outsourcing option as the means to achieve cost savings. But when the outsourcing decision is made due to resource considerations, the 3PL provider is seen as a strategic partner who has a critical role in the customer’s supply chain strategy (Bolumole, 2001). 5.2 Management of 3PL relationships The design and implementation of 3PL relations appears to be problematic. Often-cited difficulties include lack of understanding of client’s supply chain needs, lack of adequate expertise in specific products and markets, unrealistic customer expectations, inadequate description of services and service levels, lack of logistics cost awareness by the client and lack of 3PL innovation (Ackerman, 1996; Ellram and Cooper, 1990; Wilding and Juriado, 2004). In response to such problems the literature focuses on issues such as 3PL selection, contracting, information sharing between client-LSP and performance measurement systems. In relation to service provider choice, the buyer organization should create a comprehensive list of selection criteria that extend beyond price considerations (Section 5.4.2). These issues are now considered in turn. 5.2.1 Contracts. The preparation of contracts is important to the success of 3PL relationships (Boyson et al., 1999). In the literature, there are two opposing views about the role of formal contractual agreements. While the majority of authors seem to agree that the existence of formal contracts is necessary for the management and control of 3PL relations, it is also argued that detailed contracts can also be perceived as an indication of lack of trust (Lambert et al., 1999). According to the literature (Andersson and Norman, 2002; Boyson et al., 1999; Logan, 2000) a typical 3PL contract includes: . contract term (i.e. number of years); . costs per activity; . service and activities description; . service levels; . bonus payment for excellent performance; . penalty clauses for service failures; . allocation of roles and responsibilities, risks and insurance costs; and . contract termination clause. 5.2.2 Information exchange. Frequent communications and information sharing between the contracting parties are crucial for effective management of 3PL relations (Stank et al., 1996). Information exchange is important even in the pre-contracting
period, when the buyer attempts to assess the capabilities of the potential supplier (Bienstock, 2002). Communication channels in multiple organizational levels are established in order to cover the strategic as well as operational information needs. In many instances, joint meetings are also established to review the provider’s performance and solve any arising problems (Boyson et al., 1999). More seldom, inter-organisational teams and committees are formed with the aim of facilitating information exchange between contracting parties and/or improving business processes (Huiskonnen and Pirttila, 2002). 5.2.3 Performance measurement. Performance measurement systems appear to be instrumental for assessing the extent of 3PL success and identifying corrective action in case of service failures (van Hoek, 2001; Wilding and Juriado, 2004). The establishment and continuous monitoring of key performance indicators (KPIs) related to logistics services allows users to compare achieved with expected service levels. Examples of such measures include delivery timeliness and accuracy, order fill rates and inventory turns (Wilding and Juriado, 2004). Performance metrics can also be used by LSPs for benchmarking purposes (Stank et al., 1994; Sum and Teo, 1999). Additional practices for management and control of 3PL relations include carrying out customer satisfaction surveys, gaining access to LSP information systems, jointly planning and implementing performance improvement projects and organising 3PL forums where the client organisation shares information with regard to logistics strategy objectives (Boyson et al., 1999; Wilding and Juriado, 2004). The role of IT systems as safeguarding mechanisms in the shipper-3PL provider relationship has been stressed by Bourlakis and Bourlakis (2005). 5.3 Success factors There have been many studies so far investigating success factors for 3PL partnerships (Lambert et al., 1999; Leahy et al., 1995; Murphy and Poist, 2000; Tate, 1996; van Laarhoven et al., 2000). The list below summarises these factors, which appear to be common to those presented in the wider inter-firm partnership and strategic alliances literature: . common goals and compatible interests; . compatibility of information systems; . compatibility of organisational culture and routines; . customer orientation; . expert knowledge in specific markets/products/processes; . financial stability of service provider; . frequent communications and information exchange; . joint investment for achieving relationship objectives; . joint planning, management and control of 3PL relationship; . mechanisms for dispute resolution; . power balance between contracting parties; . provider ability to stay updated with respect to new technologies; . risk and reward sharing;
Third party logistics
. . . .
service level improvement/reduction of distribution costs; service provider flexibility and responsiveness; top management support; and understanding client’s supply chain needs.
5.4 Logistics partnership models Various prescriptive partnership models have been proposed in the literature. Bagchi and Virum (1998) identify three distinct phases: (1) need awareness phase; (2) planning phase; and (3) evaluation phase. The starting point is the identification of the need for outsourcing. This is an important stage and shippers must make sure that potential suppliers are well-informed about their needs because research has revealed a difference in perceived alliance formation motives between LSPs and their customers (Whipple et al., 1996). Gardner et al. (1994) identify key stages in the 3PL partnership building process, including partner selection and relationship design and evaluation. Lambert et al. (1999) emphasize main drivers for relationship formation (e.g. asset/cost efficiencies), facilitating factors (e.g. compatibility of culture), main partnership components (e.g. joint planning and control) as well as outcomes (e.g. improved customer service and competitive advantage) of 3PL collaboration. Factors such as asset specificity and environmental capacity (i.e. demand/supply ratio for 3PL services) have a positive effect on the formation of collaborative relations, whereas high transaction volume and high industry concentration are negatively related to 3PL partnerships (Stank and Daugherty, 1997). Certain relationship characteristics (e.g. asset specificity and communication) and customer attributes (e.g. size of firm) are positively associated with relationship outcomes such as customer retention and performance improvement (Knemeyer and Murphy, 2005). In the same vein, Knemeyer et al. (2003) have empirically investigated the level of partnership development in the context of 3PL. Moore and Cunningham (1999) apply a social exchange perspective, linking the effectiveness of 3PL relations with high levels of equity, commitment and trust among shippers and LSPs. Whatever their starting point of analysis or theoretical perspective, all frameworks include a relationship evaluation stage. A feedback mechanism is also incorporated in order to adjust the relationship objectives and adapt processes. Some of them do not consider specific 3PL characteristics. Even worse, researchers who apply such frameworks to 3PL relationships do no appear to provide any justification for doing so. These frameworks also suggest, either implicitly or explicitly, that 3PL alliances are a means to achieve competitive advantage, by gaining access to external resources and capabilities (Gentry and Vellenga, 1996; Sinkovics and Roath, 2004). Collaborative 3PL relations can lead to new competence development and innovation, provided that partners openly exchange information and share their knowledge and skills (Halldorsson and Skjoett-Larsen, 2004). Organisational learning is thought to be an important quality which facilitates innovation and 3PL service improvement (Chapman et al., 2003; Panayides, 2007; Panayides and So, 2005).
6. The network level: logistics triads and networks Current research focuses on dyadic LSP-client interactions. However, the boundary-spanning role of logistics (Mentzer et al., 2004) and the importance of customer service for 3PL arrangements are reflected in many studies, which either implicitly or explicitly discuss the client’s customer interface, i.e. the treatment extends beyond the dyad to consider larger networks.
Third party logistics
137 6.1 Logistics triads Maltz and Ellram (1997) argue that there are two important interfaces that need to be assessed before outsourcing the logistics function: the LSP-client and the LSP-final customer interface. The LSP is positioned between the client and its customers, potentially having a crucial role in handling end-customer information and feedback. In this sense, the relevant unit of analysis becomes the inter-firm triad, rather than the dyad. In line with McGinnis et al. (1995), the 3PL provider represents the third party to a transaction (the first and second being the buyer and the seller) and fulfils part or all of the logistical needs related to that transaction in a way that a triad of exchange relations is formed (Figure 2). There are a few studies that explicitly discuss the formation of logistics outsourcing triads. Bask (2001) argues that the term 3PL implies a triadic link among suppliers, their customers and LSPs. Larson and Gammelgaard (2001) investigate the preconditions, benefits and barriers to the formation of collaborative relations among buyers, sellers and 3PL providers. Carter and Ferrin (1995) have illustrated the impact of trilateral collaboration on the reduction of transport costs. Moreover, Gentry (1996a, b) has studied the role of carriers in strategic buyer-supplier alliances and concluded that LSPs mainly have operational responsibilities and are not involved in strategic planning of the supplier-customer alliance. 6.2 Logistics networks (4PL/LLP) Various forms of sub-contracting are also considered in the literature. In particular, the design of 4PL/LLP solutions entails that the LSP acts as a single point of contact within the client’s supply chain (van Hoek and Chong, 2001). The 4PL provider is often regarded as a non asset-based company which makes use of its supply chain design/planning capabilities and IT solutions and acts as a single interface between the client and multiple (asset-based) LSPs (Skjoett-Larsen, 2000). Logistics providers also develop horizontal networks in order to gain access to complementary resources and capabilities (Carbone and Stone, 2005; Lemoine and Dagnaes, 2003).
Figure 2. A logistics triad
7. Directions for future research The proposed framework not only provides a conceptual map of 3PL studies, but also helps in identifying further research opportunities. Five generic propositions regarding future 3PL research are formulated and elaborated upon in the following. 7.1 Focus on network research The review has revealed a knowledge gap in relation to the design and implementation of 4PL/LLP contracting arrangements. Existing studies focus on conceptualising 4PL and pointing out its difference from 3PL, without reaching a common definition. Further, empirical research should be directed towards these phenomena, in particular: . rationale and main drivers for 4PL solution development; . enablers and inhibitors regarding the design and implementation of 4PL; . scope of service offering; . structure and management of 4PL networks; . management of intra- and inter-organisational (supply chain) change; . extent of solution standardisation and transferability (to other clients); . profit and risk-sharing in 4PL; and . empirical examination of the role of 4PL providers as supply chain integrators. By definition, 3PL create linkages and interdependencies in the supply chain (McGinnis et al., 1995). Logistics services are regarded as “component” services (Axelsson and Wynstra, 2002) and thus interdependencies and interfaces among supply chain processes and relationships should be taken into account when designing and implementing 3PL offerings. It is proposed that network theory (Hakansson and Snehota, 1995) provides a framework for mapping activity and resource/capability dependencies and tracking their evolution over time. Such an approach would potentially offer insights about the dynamics of outsourcing and service design decisions (e.g. customer base change and impact on logistics service design). Existing studies of logistics triads and networks do not seem to add any insights that are intrinsically supra-dyadic, i.e. emergent properties that cannot exist at the dyad level. For example, they focus on supply chain collaboration issues but do not examine the implications of indirect relationships and mediating roles that are necessarily part of 3PL and 4PL. It is suggested here that 3PL/4PL phenomena could offer considerable insights to existing network research. For instance, empirical research in 4PL contracting would potentially contribute to a better understanding of the formation of inter-firm networks, including the motives, contingencies and processes of network development (Ebers, 1997). 7.2 Focus on normative research Further normative research is needed to provide practitioners with tools and frameworks for decision-making. On this front, two suggestions are offered: (1) Outsourcing decision framework. Existing research simply lists factors and drivers that impact on the outsourcing decision. A normative framework is needed that will address the impact of buyer operational characteristics (product, process and supply chain-related) on the scale and scope of
outsourcing and the type of 3PL relationship required. For example, special product handling requirements might drive investments in dedicated facilities/equipment/staff and development of long-term contractual relations as a result. (2) Selection criteria framework. Selection criteria in the literature do not take into account organisational and operational contingencies and special buyer requirements. It is proposed that a framework is developed to examine the impact of buyer’s internal (centralised vs local decision-making; composition of the buying team) and external (position in the supply chain; supply chain scope of outsourcing, i.e. inbound/outbound/after-market; geographical scope) characteristics on the development and subsequent use of 3PL selection criteria. In addition to decision-making frameworks, the advancement of normative research should be linked to a stronger theoretical foundation for 3PL. This is addressed in detail below. 7.3 Focus on theory-based research Existing studies that adopt a TCE approach to explain the outsourcing decision focus on asset specificity as their main construct and pay little attention to (or at best take for granted) the actual costs of defining what is to be exchanged, writing contracts and measuring performance. They also fail to include production costs in their analysis. It is suggested that such “mundane” transaction costs (Baldwin and Clark, 2003) can be important in determining the boundaries of the firm, given the prominence of cost-efficiency criteria for logistics outsourcing. Asset specificity only partly explains the “do or buy” decision and future research should explicitly consider those costs, incorporate service production costs in the analysis and also examine the relationship between them, bearing in mind that the decision should be made based on the minimization of the sum of production and transaction costs. For instance, high transaction costs ex-ante (e.g. detailed specification and standardisation of processes/interfaces) can be offset by a proportionally higher reduction in service production costs and ex-post co-ordination and frictional costs (e.g. contract re-negotiation) in a way that makes outsourcing economical (Langlois, 2005). The acquisition of external resources/capabilities and logistics expertise is often cited as a driver for outsourcing, but there has been little theoretical explanation so far. Existing studies, adopting a RBV approach, are static in nature and focus on the buyer side suggesting that firms can acquire the necessary resources, develop unique assets and achieve superior logistics performance through 3PL relations (Sinkovics and Roath, 2004). An exception is Halldorsson and Skjoett-Larsen (2004) who stress the development of inter-firm processes and capabilities through 3PL partnerships. Two directions for research are suggested: (1) Broader application of the dynamic capabilities perspective (Dosi et al., 2000) focusing on how (and to what extent) 3PLs learn from existing client relationships, adapt, reconfigure and transfer capabilities in an industry which service innovation and customisation is seen as a means of achieving competitive advantage.
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(2) In connection with the above, the relevance of the path dependency concept (Teece et al., 2000) should be examined. Future research should consider how past choices of 3PLs regarding their processes, capabilities and positions influence current and future development of competences and associated service offerings. Moreover, the impact of past and current investment/divestment choices of the buyer on the scale and scope of outsourcing could be investigated. Two overarching conclusions are offered in connection with the proposition for more theory-based research: (1) The relationship between 3PL and theory should be a bi-directional one; not only systematic application of theoretical perspectives can help build sounder explanations about 3PL phenomena, but also empirical research into 3PL offers opportunities for extension and refinement of existing theory of a more generic nature. (2) Integration and cross-fertilisation of theoretical perspectives can help provide a more robust explanation of 3PL covering the outsourcing process in its entirety, from outsourcing decision to design, implementation and evolution of such relationships (Halldorsson et al., 2003). 7.4 Focus on empirical research in 3PL design/implementation More specifically, two suggestions for future research are made: (1) Empirical research should be directed towards contractual practices and the development of performance measurement systems in 3PL. Existing literature regarding 3PL contractual design is mainly conceptual in nature and further empirical evidence is needed about the type of contracts, charging mechanisms and fee structures applied, the level of detail in respect of service specification and the extent of inclusion of penalty/incentive clauses. Such data would potentially reveal whether and how contractual design matches the characteristics of the deal and the broader relationship (Collins, 1999). In other words, there is a need to examine (empirically) whether contracts are important in terms of relationship management or represent only part of the business deal and the client-3PL provider relationship. Empirical research should also focus on performance measurement in 3PL relationships, looking at issues such as the impact of the contract/charging mechanism on what is being measured (e.g. open-book contracts often require detailed measurement systems) and potential distinctions between contractual and operational KPIs. Also, despite the fact that service offerings grow in complexity and value added services are introduced (e.g. product installation), there is little evidence in the literature regarding the development of KPIs for such advanced services (van Hoek, 2001). Future studies should examine the extent to which metrics are developed for valued added services and develop classification frameworks of KPIs accordingly. (2) Given the increasing complexity and uncertainty in the 3PL market (i.e. development of complex offerings, confusing service marketing and buyer uncertainty; e.g. Bask, 2001), there is a need to re-visit how logistics capabilities and services are defined and designed in specific client-service provider relationships as well as how they are re-packaged and evolve over time.
Existing literature rather generally assumes that the buyer is responsible for specifying services and also ignores the dynamics of service offering definition. Based on the above, it is proposed that empirical research should focus on the process (how) of service definition in 3PL relationships. 7.5 Focus on qualitative methods and triangulation The review has revealed a dominance of survey research in 3PL. Surveys have been particularly useful for identifying trends and practices in the 3PL market (e.g. Lieb series). However, they appear to be less effective when studying inter-firm relationships; they present construct validity problems as they often focus on one-sided data and perceptions of the phenomena under study or are based on mismatched service provider-user pairs (Murphy and Poist, 2000). Hence, case studies and qualitative methods should be used to gain a deeper understanding of the formation and evolution of 3PL relationships (Frankel et al., 2005). A qualitative research design facilitates data collection from several parties and enables the capture of potentially crucial contextual information about the outsourcing process (e.g. impact of broader supply chain strategy). Existing studies appear to be cross-sectional in nature and tend to focus on specific stages of the outsourcing process (e.g. outsourcing decision). It is suggested that longitudinal research is needed to address the process in its entirety. For instance, a single multi-year case study (Leonard-Barton, 1990) examining the various stages of the process, from decision-making through to design, implementation and post-contracting evaluation would offer rich data about dependencies among stages and help integrate various issues that are often addressed in isolation in the literature. In connection with the above, it is suggested that a triangulation research strategy (Jick, 1979), combining quantitative and qualitative methods, would integrate findings and enhance their validity. A proposed research design regarding the development of 4PL solutions, based on triangulation, is shown in Figure 3. At the first stage focus group interviews with senior management of buyers and LSPs would investigate the drivers and decision-making factors regarding 4PL adoption. Participants should represent different industries in order to identify specific market characteristics and contingencies that could potentially affect the decision to adopt (or not) 4PL. As a second step, in-depth case studies of 4PL design and implementation would offer insights about the scope of service offering, contractual design, structure and management of inter-firm relationships and the enablers and inhibitors of change. As a final stage, a post-implementation survey would focus on the performance benefits and problem areas of 4PL adoption across different sectors.
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Focus group sessions
4PL drivers and decision-making factors
In-depth case studies
4PL performance benefits and problem areas
4PL design and implementation
Figure 3. A 4PL research proposal based on triangulation
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Martin Spring is Senior Lecturer in Operations Management in the Department of Management Science, LUMS, and convener of the Supply Chain Management and Modelling Research Group. Previously he was a Senior Lecturer in Supply Chain Management at
Third party logistics
Manchester School of Management (MSM), UMIST. He spent about ten years working in manufacturing industry, mostly in production engineering and production management roles. Following his PhD in operations strategy, supply chain management has been the focus of most of his research and teaching. Taking a rather broad view of what constitutes supply chain management, recent research interests have included risk in supply networks, power relations in supply chains, and the procurement of complex inter-organisational services like third-party logistics, management consultancy and complex IT-based systems such as SAP. His current research centres on more general questions of how services are traded in supply networks. His work has been funded by the EPSRC and the Teaching Company Directorate, and has been published in a range of international operations management, design and supply chain management journals. Martin sits on the national ESRC CASE Studentship awards panel and was co-editor of the International Journal of Operations and Production Management from 1999-2004. He was a Programme Director of the MSc in Operations Management, then Director of Postgraduate Programmes at MSM, UMIST.
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