Chapter 2 Literature Review
2.1 Papers Related to Factors for the Selection of 3PL Providers
To select the suitable provider, a set of factors (criteria) must be defined. By establishing a set of selection criteria, a company will be better able to select a 3PL provider that will best fit its needs and existing operations (Bhatnagar et al., 1999). Sink and Langley (1997) presented a conceptual model of the 3PL buying process, which is composed of five distinct steps: (1) identify the need to outsource logistics, (2) develop feasible alternatives, (3) evaluate and select a supplier, (4) implement service, and (5) assess ongoing service performance. They characterized the selection phase as an essential task in the logistics outsourcing management.
Indeed, studies have started to provide empirical evidence that supplier selection criteria have impact on the operational performance and the overall business performance of both the outsourcing company and the outsourcing service provider. Kannan and Tan (2002) mentioned that evaluation criteria for selecting a provider have been widely discussed in prior literature. The two most frequently cited criteria for outsourcing logistics activities are cost savings and service improvement expectations through outsourcing.
Due to a survey of 154 firms offering warehousing services in the United States by Spencer et al. (1994), the most important evaluative criteria for selecting external or third-party service providers are, in descending order of importance, the following: on-time performance, service quality, communication, reliability, service speed, and flexibility.
According to Petroni and Braglia (2000), criteria such as management capability, production capacity and flexibility, design and technological capability, financial stability, experience, reputation and geographical location demonstrate the capabilities of feasible suppliers.
Criteria such as finances (including willingness to share financial records), consistency, relationship (comprising communication openness and long-term relationships), flexibility, design and technical capabilities, reliability (encompassing incremental improvement capability), customer service, price etc., may be taken into consideration. Aghazadeh (2003) provided five steps to select an effective 3PL provider and presented four relevant criteria:
similar value/objectives, up-to-date information technology systems, trustworthy key management, and a relationship of mutual respect and shared willingness.
Many studies have emphasized financial as an essential requisite for logistics partners (Bottani and Rizzi, 2006). Efendigil et al. (2008), suggested to select the third party of reverse logistics providers by using performance indicators like: on time delivery ratio, confirmed fill rate, service quality level, unit operation cost, capacity usage ratio, total order cycle time, system flexibility index, integration level index, increment in market share, research and development ratio, environmental expenditures, and customer satisfaction index. According to Chen and Wu (2011), some frequently used criteria from literature are price, delivery performance, range of services provided, the ability of response, human resources, IT capability, speed and punctuality, finance status, past experiences, expertise technology, product reliability, reputation, the quality of service, market share, geographical location, and surge capacity. However, cost is not the single most important decision variable; logistics service issues are also considered (Selviaridis and Spring, 2007). Thus, 3PL users need to balance cost with service (Setthakaset and Basnet, 2005). The empirical study conducted by McGinnis et al. (1995) in the US, depicted that both the firm’s competitive responsiveness strategy and the level of environmental hostility affect the selection criteria. They also showed that there are eight important criteria: on time shipment and deliveries, superior error rates, financial stability, creative management, ability to deliver as promised, availability of top management, responsiveness to unforeseen occurrences and importance of meeting performance requirements before price discussions occur.
In 2003, the International Warehouse Logistics Association (IWLA), which comprises more than 550 logistics companies of North America, identified the following ranking of 3PL selection criteria (in a descending order): price, reliability, service quality, on-time performance, cost reduction, flexibility and innovation, good communication, management quality, location, customize service, speed of service, order cycle time, easy to work with,
customer support, vendor reputation, technical competence, special expertise, systems capabilities, variety of available services, decreased labor problems, personal relationships, decreased asset commitment, and early notification of disruptions. Huang and Kadar (2002) based on their survey of the 3PL market in China, ranked the following criteria for the selection of 3PL providers (from the most to least important in a descending order):
industry/operation experience, reputation, lower price, network coverage, own strategic asset, integrated logistics pro-viding capability, and good IT system.
Moberg and Speh (2004) investigated the criteria that are considered most important to U.S. warehousing customers when selecting third party providers. According to their empirical survey, the top four selection criteria are responsiveness to service requirements, quality of management, track record of ethical importance, and ability to provide value-added services. The less important selection criteria are (in a descending order): low cost, specific channel expertise, knowledge of market, personal relationship with key contacts, willingness to assume risk, investment in state of art technologies, size of firm, and national market coverage. Qureshi et al. (2007) selected 10 logistics companies of West Indies, using TOPSIS (Technique for Order Preference by Similarity to Ideal Solution) and AHP. The first step is to use AHP to determine priority weight of criteria. The criteria in descending order of importance are as follows; long-term relationship, size and quality of the company's reputation, financial stability, ability to solve the problem, quality of manager, the consistent performance of technology, flexibility and geographical scope and range of services provided.
Finally, they used the TOPSIS to rank the importance of 3PL.
The abovementioned studies show that the 3PL selection is an MCDM problem, including both quantitative and qualitative factors that are often in conflict. The reviewed literature addressed criteria for choosing third party logistics service, or factors for selection of third party logistics service. We summarized the factors considered in the above papers into Table 1.
Table 1 Factors for the selection of 3PL in various papers
Factor Paper
Price
Chen and Wu (2011), Setthakaset and Basnet (2005), Huang and Kadar (2002), Selviaridis and Spring (2007), IWLA (2003), Efendigil et al. (2008)
On-time Performance
Spencer et al. (1994), Efendigil et al. (2008), Chen and Wu (2011), McGinnis et al. (1995), IWLA (2003)
Service Quality
Efendigil et al. (2008), Chen and Wu (2011), Setthakaset and Basnet (2005), IWLA (2003), Selviaridis and Spring (2007), Spencer et al.
(1994), Kannan and Tan (2002) Communication Spencer et al. (1994), IWLA (2003)
Reliability Spencer et al. (1994), IWLA (2003), Petroni and Bralia (2000)
Flexibility
Spencer et al. (1994), Petroni and Bralia (2000), Efendigil et al. (2008), Chen and Wu (2011), IWLA (2003), Qureshi et al. (2007)
Management Quality
Petroni and Bralia (2000), Aghazadeh (2003), M cG innis et al. (1995), IW LA (2003), M oberg and Speh (2004), Q ureshi et al.
(2007), Petroni and Bralia (2000)
Financial Stability
Petroni and Bralia (2000), Bottani and Rizzi (2006), Chen and Wu (2011), McGinnis et al.
(1995), Qureshi et al. (2007)
Special Experience
Petroni and Bralia (2000), Chen and Wu (2011), IW LA (2003), Huang and Kadar (2002)
Reputation Petroni and Bralia (2000), Chen and Wu
(2011), IW LA (2003), Huang and Kadar
(2002), Qureshi et al. (2007)
Location Petroni and Bralia (2000), Chen and Wu
(2011), IWLA (2003), Qureshi et al. (2007) Relationship Petroni and Bralia (2000), Aghazadeh (2003) Customer Service Petroni and Bralia (2000), Efendigil et al.
(2008), IWLA (2003)
Information Technology Systems (IT system)
Aghazadeh (2003), Chen and Wu (2011), Huang and Kadar (2002), Petroni and Bralia (2000), Qureshi et al. (2007), IWLA (2003), Moberg and Speh (2004)
Cost Reduction Kannan and Tan (2002), IWLA (2003)
Easy to Work with IWLA (2003)
Decreased Labor Problem IWLA (2003)
Personal Relationship IWLA (2003), Moberg and Speh (2004) Own Strategic Asset Huang and Kadar (2002), Moberg and Speh
(2004)
Speed Spencer et al. (1994), Chen and Wu (2011), Kannan and Tan (2002), IWLA (2003)
Globalization M oberg and Speh (2004), Q ureshi et al.
(2007)
Network Coverage Huang and Kadar (2002)
Variety of Service
M oberg and Speh (2004), Efendigil et al.
(2008), Petroni and Bralia (2000), IW LA (2003)
Customer Support IWLA (2003),Moberg and Speh (2004)