A brief literature review on decision methods analysis for 3PL selection

Fabio FavarettoGuilherme Ernani Vieira

Luis Eugenio Carretero-Dias

Abstract - There has been an increasing interest inthird-party logistic (3PL) evaluation and selectionmethods lately. Proposed methods in academicliterature have significant differences, approachesand conditions to be used, yet comprehensivereference of such methods was not found. Thisproblem is considered in this article, which maingoal is to make a descriptive analysis of existingmethods for evaluation and selection of 3PLproviders. A classification of methods is madeusing characteristics commonly highlighted inacademic literature. This paper is an exploratorystudy and main expected result is a reference ofcurrent 3PL selection and evaluation researches.Most of the analyzed methods for 3PL selectionand evaluation considered a mixed betweenqualitative and quantitative approaches and arenot based in real cases. Descriptions of whichmethod to use in each particular situation was notfound.Keywords: Third-party logistics; evaluation andselection methods; logistic outsourcing; decisionmethods.

I. INTRODUCTIONCOMPETITIVE markets make enterprises more

concerned in getting good results. One way to hitthis goal is to focus on core competences orprocesses. Activities that can be performed bypartners are outsourced in different ways, varyingfrom a simple and volatile commercial supply to along term partnership. Logistic is a process that has astrong role in manufacturing enterprises and mainly tothose in dynamic competitive environments. Thegrowth of logistics process outsourcing has ledbusiness to a new class of logistic service providerscalled third-party logistics (3PL). To Qureshi et ale(2007), the outsourcing of logistical functions tothird-party service providers has become anincreasingly powerful trend in modem multinationalcompanies. Bounfour (1999) proposes that the mainreasons of an enterprise to outsource some of itsfunctions are:

1. Concern in the core business or process;2. Reduce technological complexity;3. Reduce costs and

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4. Develop new competitive approaches,through innovation.

The 3PLStudy (2007) presents a research withmore than 1,500 logistic and supply chain executivesand approximately 82% of their enterprises are 3PLservices user.

According to Gunasekaran and Ngai (2008),nowadays 3PL has become very popular for disposingproducts to market as soon as possible and also forthe timely delivery of products to the customers.Due to the importance of logistic services, enterprisesneed to carefully evaluate and select their serviceproviders. Selection is a process where manycandidates are analyzed to choose the best providerfor a situation. To contract one or more 3PL provideris also necessary to carefully evaluate candidates.There is a great amount of academic work that dealswith this 3PL related issue. Selection methods havedifferent classifications, purposes and applicationconditions. In addition there is a vast range ofrequired information in order to properly use thesemethods. To enterprises and academics it is difficultto know exactly what kind of methods are availableand what their main features are. This paper will workwith this problem and its main goal is to show a briefanalysis of existing methods for selection of 3PLservice provider.

II. LITERATURE REVIEW AND ANALYSISThis review was based on some of the most

renewed international journals about operationsmanagement, supply chain management and logistics,such as: Production and Inventory ManagementJournal, International Journal of ProductionEconomics and Journal of Business Logistics.Preferred articles were the ones that brought largeliterature reviews.

The initial review concentrated in operationsmanagement, logistics and supply chain managementjournals and annals. Other researched areas were:service management, quantitative and qualitativedecision methods and strategy. Search engines ofacademic bases were used. First selection was donebased on titles and keywords, followed by abstract.Around 50 articles were then selected to be used.The following articles analyses are chronologicallydivided for easier comprehension.

Articles ranging from 1997 to 2000:• Sink and Langley Jr. (1997) justify

logistic outsourcing by core competencefocusing. A third-party case studiesliterature review is presented and mainobjective is to provide a managerialframework for the selection of 3PL basedon these cases. Authors present a fivesteps sequence to be performed by ateam. Third step is to perform anevaluation of likely suppliers, obtainrequired data, qualitative evaluatecandidates and then choose supplier.Initial selection is based on traditionalcriteria like: quality, cost, capacity anddelivery capability. More rigorous criteriacan be added as: references, depth ofmanagement expertise, financial strengthand others. Proposals for a specificscenario can be required and visits can bedone to analyze potential candidates.Evaluation is used to select 3PL provider.

• In Menon et al. (1998) the main goal is tomake an exploratory study to examine thecriteria for selecting 3PL provider and toknow how the firm's competitiveness andexternal environment affects thesecriteria. In this research it is highlightedthat supplier perceived performance andsupplier perceived capability are moreimportant selection criteria than price.Criteria items are defined based on aliterature review and on a survey withlogistic managers. Proposed selectiondecision method is that a team evaluatesand ranks providers candidates. Logisticmanagers analyze this rank and select aprovider according to defined criteriacomposed by strategic and operationalitems.

Articles ranging from 2001 to 2005:• Van et al. (2003) consider the 3PL as a

supply chain special member hardlyaffected by demand variations. Theydevelop a new decision method to moreeffectively support the evaluation andselection of 3PL in the supply chainnetwork environment. Authors use anexpert system based on a humanevaluation of some features of pastlogistic cases. Systems utilization is oneprocess activity of knowledge gathering.Classes of items for evaluation are

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defined but specific items should be set ineach case according to the expertise. Itcomposes a dynamic environment wherechanges are incorporated and used in newcases.

• Zhang et al. (2004) stated that theevolution of supply chains leads to thecreation of a new integrator elementcalled fourth-party logistic (4PL) who isresponsible for managing a group of 3PL.Managing activities includes selecting3PL providers. The authors proposed aprocess where a group of experts valuecandidates using some defined itemscriteria. These items are then used in anAnalytic Hierarchy Process (AHP) multi­criteria decision method. Items rangefrom operational, strategic and external.Proposed process is based on literaturereview and previous academic findings.

• A framework for evaluating 3PL is alsopresented by Vaidyanathan (2005). In thiscase evaluation is a way of selection. Thisframework explains functions thatproviders must have to enhanceinformation and material flows. Theproposed method follows a process. Inthe first activity, the necessary functionsare compared and some candidates arediscarded. After some other steps, anevaluation is done using a provided list ofcriteria divided in six factors: IT(information technology), quality, cost,services, performance metrics andintangibles. Evaluation (and selection) isconducted by a team that rankscandidates.

Articles ofyear 2006:• To Aguezzoul et al. (2006), additional

requirements are being placed on manyindustries and chains and previousselection decision methods do not supportsome needed factors, such as: price,services offered location, technology andquality between others. Authors addressthis problem in two steps. First they usemain and secondary criteria chosenaccording to the situation in a flexibleselection method where user canintroduce desirable criteria and weights.Second, they use an ELECTRE multicriteria method. Authors present anumerical example where criteria

definition is based on a literature review.Specialists provide values for eachcriterion of each candidate and theproposed method is used to index them.The first candidate in the final rank isselected.

• Zhang et al. (2006) propose the use of aquantitative multi criteria decisionmethod as a way to allow decisionmakers specify their preference using asingle scale. The method is based onprevious works and literature reviews.Method uses a DEA (Data EnvelopmentAnalysis) combined with AHPtechniques. Criteria are based on previousresearch and use operational and strategicmatters. Method utilization is a singleactivity that makes an evaluation ofcandidates. Zhang et al. (2004) andZhang et al. (2006) have the same basisfor their proposals, but use differentmethods, criteria and sub-criteria.

Articles ofyear 2007:• Alard et al. (2007) proposed a reference

process for global sourcing based on anaction research with enterprises. Thisprocess should be used in an interactiveway. Supplier selection is an activityperformed after deciding 'make-or-buy'.Proposed supplier evaluation andselection are performed bottom-up in astrategic process of procurement and usea qualitative method. Possible suppliersare pre-selected and evaluated in detail.Criteria are not defined and can be addedaccording to situation.

• To Cao et al. (2007), outsourcinglogistics activities is a way for anenterprise to attempt maximizing supplychain profit. Considering the limitationsof simple previous methods, authorsproposed an integrated method usingmulti-criteria (Borda Function) and GrayRational Analysis to select a 3PLprovider based on a literature review.Selection is part of a process that beginswith an objective definition and thenmakes a candidates filtering, establishesweights for defined criteria and ranksproviders. This process is conducted by agroup of specialists and used criteria arecomposed from operational, strategic and

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external items. Items values are definedby specialists.

• Isiklar et al. (2007) consider logisticsoutsourcing a strategy that can leadenterprises to greater competitiveness.Their claims to enhance searching speedand accuracy of 3PL selection method byusing a combinatory approach of aparticular multi- criteria technique withlearning methodologies. The proposal isbased in a literature review and is appliedin a case where best solution is chosen fora specific situation. Choice is made by anintelligent system that uses a case base. Ateam analyzes previous cases using givencriteria to enrich this base. Criteriaconsider operational and strategic issues.

• To Jharkharia and Shankar (2007), 3PLproviders are offering a great range ofservices in face of an ascending need tooutsource. In this scenario, thecomplexity of selection activity increasesdue to the growth of needed selectioncriteria. To deal with this complexity, theauthors suggest a selection method basedin an ANP (Analytic Network Process)multi criteria decision method. Thisproposal is based on literature review andis applied in a case. This article mainobjective is to provide a reference formanagers or decision makers that need toselect a 3PL for their organizations. Theproposed method is a process with twosteps: initial screening of providers andfinal selection. Criteria items are definedand cover operational and strategicmeasures. A team performs an initialqualitative evaluation and use ANP forfinal selection.

• Qureshi et al. (2007) point that toearmark the potential 3PL provider it isnecessary to make a systematicevaluation in face of a changing demand.Authors propose to use a framework withthe Technique for Order Preference bySimilarity to Ideal Solution (TOPSIS).Their methodology deals with qualitativeand quantitative criteria and uses AHP toweigh criteria. Evaluation andsubsequently selection is performed as asingle activity. The proposal is based onliterature review and is intended to beused for an experienced decision maker's

team. Used criteria have both operationaland strategic items.

• Zhang et al. (2007) point that 3PL hasbecome a potentially valuable way ofsecuring competitive advantage (insupply chains) and improvingorganization performance. They proposeda system to evaluate and select 3PLproviders based on criteria found inliterature. The method uses a techniquefor pattern identification called PrincipalComponent Analysis. Item criteria areboth operational and strategic and have adetailed description. A case is presentedto illustrate the method. Value for eachcriterion is measured using givendefinitions.

• Facing the rapid increasing number of3PL providers, Xu and Wang (2007)proposed a method based on fuzzyconsiderations to help enterprises tochoose supplier reasonably. Definedcriteria are based on previous works andcover operational and strategic items. Ateam specifies values and weights forthese items and results are indexed usinga proposed quantitative method. Selectionis performed as an activity. Methodapplication evaluates and ranks 3PLcandidates.

Articles ofyear 2008:• Efendigil et al. (2008) proposed a holistic

approach to select 3PL for reverselogistic that can be used for more generallogistic regarding some specificity.Authors proposed an integratedconceptual framework combiningartificial intelligence and fuzzy logic toassist managers in determining the mostappropriate 3PL. Method application isdivided in process phases and isperformed by a team from the contractingenterprise. The AHP method is usedinitially for weighing defined itemscriteria that use operational, strategic andexternal measures. Proposed toolevaluates and selects 3PL providers.Contract duration is not specified.

• Liu and Wang (2008) affirm that 3PLutilization is derived from a globalmarkets trend. Authors proposed anintegrated fuzzy decision method for 3PLselection based on the contracting

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company different logistic needs. It isproposed to deal with imprecise anduncertain situations. Application is aprocess that consists in evaluating somedefined criteria and applies the proposedmethod. The proposed method is basedon literature review and a real case ispresented to illustrate it. Criteria itemsare both strategic and operational.

III. SELECTION METHOD ANALYSISMost articles use mixed method type for

evaluating and selecting 3PL provider. This class wasattributed to methods that use some kind ofquantitative analysis mixed with qualitativeinferences. Mixed methods can benefit from bothqualitative and quantitative methods in a broadcriteria range. Mixed methods utilization usuallybegins with variables measurement or scale that areused as criteria. Value attribution can be based in wellestablished basis or can be subjective. Differences ininitial value attribution can lead to distinct evaluationor selection and some methods consider analyzingthis phenomenon using fuzzy tools. Other articlesconsider a quantitative approach as an initial selectionfor a candidate set creation. This set is then analyzedin a qualitative way for experts and managers team.Quantitative methods (as a part of a mixed model) aremainly of two types: multi criteria decision methods(AHP, ANP and ELECTRE) and artificialintelligence. Some articles also included fuzzy logicto avoid biased evaluations.

Four articles considered strictly qualitativemethods: Menon et al. (1998), Sink and Langley Jr.(1997), Vaidyanathan (2005) and Alard et al. (2007).In these works there are a set of subjective orobjective criteria used to rank 3PL providers. Thistype of method is more flexible and susceptible toopinions and preferences and is usually conducted bya team.

Two articles considered strictly quantitativemethods: Zhang et al. (2007) and Efendigil et al.(2008). In this type of method just objective criteria(those that can be measured) are used in quantitativemethods with no subjective interpretation. There is noexperts need and calculation can be automated. Table1 sums up the analyzed articles classified according tothe selection method.

REFERENCES3PLStudy, 2007. The logistics outsourcing: resultsand findings of 12th annual study [online] . Availablefrom: www.3PLStudy.com [Acessed 13 November2008].Aguezzoul, A., Rabenasolo, B. and Jolly-Desodt, A.,2006. Multicriteria decision aid tool for third partylogistics provider's selection. In: Annals of 2006International Conference on Service Systems andService Management, 25-27 October 2006, Troyes.912-916.Alard, R., Oehmen, J. and Bremen, P., 2007.Reference process for global sourcing. In: Annals ofthe 200 7 IEEE International Conference on IndustrialEngineering and Engineering Management, 30 May­02 June 2007, Singapore. 367-371.Bounfour, A., 1999. Is outsourcing of intangibles areal source of competitive advantage? InternationalJournal ofApplied Quality Management, 2 (2), 127­151.Cao, J., Cao, G. and Wang, W., 2007. A hybridMCMD integrated borda function and gray rationalanalysis for 3PL selection. In: Proceedings of 2007IEEE International Conference on Grey Systems andIntelligent Services, 18-20 November 2007 Nanjing.IEEE,215-220.Efendigil, T., Onut, S. and Kongar, E., 2008. Aholistic approach for selecting a third-party reverselogistics provider in the presence of vagueness.Computers & Industrial Engineering, 54, 269-287.Gunasekaran, A. and Ngai, E. W. T., 2008. Modelingand analysis of build-to-order supply chains.European Journal of Operational Resource, 195,319-334.Isiklar, G., Alptekin, E. and Biiyiik6zkan, G., 2007.Application of a hybrid intelligent decision supportmodel in logistics outsourcing. Computers &Operations Research, 34, 3701-3714.Jharkharia, S. and Shankar, R., 2007. Selection oflogistics service provider: an analytic network process(ANP) approach. Omega, 35, 274-289.Kumar, M., Vrat, P. and Shankar, R., 2006. A multi­objective 3PL allocation problem for fish distribution.International Journal of Physical Distribution &Logistics Management, 36 (9), 702-715 .

still there is no consensus in 3PL selection andevaluation decision method definition andapplication.

ACKNOWLEDGEMENTSThe authors would like to thank the Brazilian FederalResearch Funding Agency (CAPES - Coordenacaode Aperfeicoamento de Pessoal de Nivel Superior) forthe financial support.

Table I. Articles classification according to the proposed method

IV. CONCLUSIONSFrom the review papers analyzed, only Zhang et

at. (2007) made a detailed definition of used criteriaitems for the evaluation and selection of 3PLproviders. Misunderstanding of proposed items canlead to erroneous method utilization and poor results.More than one item definition could be important tohave a clear way of measuring criteria variables. Thisconsideration is especially important and should bewith subjective criteria items. It can be added that acontracting enterprise may need to invest a greatamount of the time and to gather all necessaryinformation, which is not usually available. In anycase, differences in initial value attribution can lead tovery distinct results.

3PL selection is an important task to enterpriseswilling to be efficient and competitive. It is necessaryto use a decision support method to perform this taskbut research in this field is still in its early stage andtherefore needs to be expanded. There are a greatrange of selection decision methods that can be usedin particular situations but it was not foundcomparisons about in which situation one method isbetter than another. A great range of operational andstrategic criteria items can be used to cover largeoutsourcing and competitive questions but it does notguarantee good results during the 3PL evaluation andselection process.

Analyzed methods have limitations due to a gapof empirical research and a great number ofsu.bje~tive criteria items that must be used. Yet manycriteria are not defined in details and can havedifferent interpretations and evaluations.

Selecting and evaluating are tasks usuallyperformed together and it can be useful in situationswith many initial3PL candidates to realize these tasksin two phases: pre-selection and detail evaluation.There is a need to extend the limits of current worksin more pragmatic and enterprise oriented views. And

type for 3PL evaluation and selection .

Main method

Strictly Strictly qualitative Mixedquantitative

Zhang et al. Sink and Langley Jr. Yan et al, (2003)(2007) (1997) Zhang et al. (2004)Efendigil et al. Menon et al. (1998) Aguezzoul et al. (2006)(2008) Vaidyanathan (2005) Zhang et al. (2006)

Alard et al. (2007) Cao et al. (2007)Isiklar et al. (2007)Jharkharia and Shankar(2007)Qureshi et al. (2007)Xu and Wang (2007)Liu and Wang (2008)

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Li, X., Ying, W., Liu, Wenhuang; Chen, J. andHuang, B., 2003. The decision optimization model of4PL. In: Annals of 2003 IEEE InternationalConference on Systems, Man and Cybernetics, 5 - 8October 2003, Washington D.C., 1241-1245.Liu, H. and Wang, W., 2008. An integrated fuzzyapproach for provider evaluation and selection inthird-party logistics. Expert Systems withApplications, Article in press.Menon, M. K., McGuiniss, M. A. and Ackerman, K.B., 1998. Selection criteria for providers of thirdy­party logistics services: an exploratory study. JournalofBusiness Logistics, 19 (1), 121-137.Qureshi, M. N., Kumar, D. and Kumar, P., 2007.Selection of potencial 3PL service providers usingTOPSIS with interval data. In: Annals of the 2007IEEE International Conference on IndustrialEngineering and Engineering Management, 30 May­02 June, Singapore, 1512-1516.Rafiq, M. and Jaafar, H. S., 2007. Measuringcustomer's perceptions of logistic service quality of3PL service provider. Journal of Business Logistics,28 (2),159-175.Sink, H. L. and Langley JR., C. J., 1997. Amanagerial framework for the acquisition of third­party logistics services. Journal ofBusiness Logistics,18 (2), 163-189.Vaidyanathan, G., 2005. A framework for evaluatingthird-party logistics. Communications ofthe ACM, 48(1), 89-94.Van, X., Wang, K. and Sun, L., 2006. Third partylogistics services usage: a case study of medium andlarge scale Chinese firms. In: Annals of the 2006IEEE International Conference on Service Operationsand Logistics, and Informatics, 21-23 June 2006,Shangai, 442-447.Van, J., Chaudhry, P. E. and Chaudhry, S. S., 2003. Amodel of a decision support system based on case­base reasoning for third-party logistics evaluation.Expert Systems, 20 (4), 195-207.Xu, G. and Wang, X., 2007. How to choose the thesupplier in logistic outsourcing based on membershipdegree. In: Annals of the 14th InternationalConference on Management Science & Engineering,20-22 August 2007, Harbin, 286-292.Zhang, H., Li, X., Liu, W., Li, B. and Zhang, Z.,2004. An application of the AHP in 3PL vendorselection of a 4PL system. In: Annals of the 2004IEEE International Conference on Systems, Man andCybernetics, 10-13 October 2004, The Hague, 1255­1260.Zhang, H., Li, X., Liu, W., Li, B. and Zhang, Z.,2006. An AHPIDEA methodology for 3PL vendorselection in 4PL. Lecture Notes on Computer Science,3865, 646-655.

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