third party logistics: a literature review and research agenda

Third party logistics: a literaturereview and research agenda

Konstantinos Selviaridis and Martin SpringDepartment 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, todevelop a research agenda for this field of study.

Design/methodology/approach – The proposed 3PL research classification framework is basedon a comprehensive literature review, which concentrates on peer-reviewed journal papers publishedwithin the period 1990-2005. A total of 114 academic sources have been retrieved and analysed interms 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 itgenerally lacks a theoretical foundation. Survey research is the dominant method employed, reflectingthe positivist research tradition within logistics. It identifies certain knowledge gaps and develops fivepropositions 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 inrelation to 3PL design/implementation and fourth party logistics services is needed.

Originality/value – This paper fulfils an identified need for a comprehensive classificationframework of 3PL studies. It essentially provides both academics and practitioners with a conceptualmap of existing 3PL research and also points out opportunities for future research.

Keywords Third party vendors, Distribution management

Paper type Literature review

1. IntroductionIn recent years there has been a surge of academic interest and publications in the areaof third party logistics (3PL). This can be partly explained by the growing trend ofoutsourcing logistics activities in a wide variety of industrial sectors (TransportIntelligence, 2004). The continuing wave of consolidation within the 3PL industry hasalso resulted in the emergence of large companies that have the capabilities to offersophisticated logistics solutions on a continental or even global scale. Such logisticsservice providers (LSPs) strive to assume a more strategic role within the supply chainof clients, expanding their scale and scope of operations.

Despite the growing interest in 3PL, the literature on this area appears to bedisjointed. Based on an extensive literature review (114 references), this paper aims tooffer a taxonomy of 3PL studies and point out opportunities for further research. In aprevious attempt, Razzaque and Sheng (1998) summarised the results of their literaturesurvey which also included articles from practitioner journals and the trade press.For the sake of rigour, the present study concentrates only on refereed journal paperspublished during 1990-2005.

1.1 A note on definitionsTerms such as “logistics outsourcing” “logistics alliances” “third party logistics”“contract logistics” and “contract distribution” have been used interchangeably to

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Third partylogistics

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The International Journal of LogisticsManagement

Vol. 18 No. 1, 2007pp. 125-150

q Emerald Group Publishing Limited0957-4093

DOI 10.1108/09574090710748207

describe the organisational practice of contracting-out part of or all logistics activitiesthat were previously performed in-house (Aertsen, 1993; Bowersox, 1990; Lieb, 1992;Sink et al., 1996). Different definitions tend to emphasize different aspects ofoutsourcing arrangements such as the service offering, nature and duration ofrelationships, performance outcomes, extent of third party responsibility over thelogistics process and position/role in the supply chain.

3PL is usually associated with the offering of multiple, bundled services, rather thanjust isolated transport or warehousing functions (Leahy et al., 1995). Contemporary3PL arrangements are based on formal (both short- and long-term) contractualrelations 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 describemore advanced contracting arrangements. Van Hoek and Chong (2001, p. 463) define4PL as:

. . . a supply chain service provider that participates rather in supply chain co-ordination thanoperational services. It is highly information based and co-ordinates multiple asset-basedplayers on behalf of its clients.

It is also noteworthy that some authors provide broad definitions of the 3PLindustry, including freight forwarders and shipping lines (Rao and Young, 1994).Overall, it appears that 3PL terminology is overlapping and fails to take into accountthe shippers’ industry-specific characteristics.

2. MethodA comprehensive literature review was conducted with the aim of constructing aclassification framework for 3PL studies and developing a research agenda for thefuture. The review focused on refereed journal papers published within the period1990-2005. The papers were primarily retrieved from logistics journals, althoughpublications were also found (through database searches) in supply chainmanagement, operations management and marketing journals.

2.1 Analysis of findingsThe analysis of literature is based on multiple dimensions. Following Croom et al.(2000), both content- and method-oriented criteria are used. The papers were firstlyclassified 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 3PLliterature in terms ofresearch purpose andnature

Descriptive

Normative

Empirical Conceptual

60%

24%

9%

7%

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In terms of the methods employed, although case-based research is also conducted, themajority (50 per cent – see Table I) are based on surveys, apparently reflecting thepositivistic 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 notheoretical foundation and simply describing trends in the industry. This confirmsothers’ views that logistics research lacks a theoretical basis (Kent and Flint, 1997;Mentzer et al., 2004). Nonetheless, some work uses theories such as transaction costeconomics (TCE) and the resource-based view (RBV) of the firm to explain logisticsoutsourcing. Relationship marketing approaches, network theory, agency theory,competence theory, channel theory, political economy theory and social exchangetheory have also been applied to explain aspects of 3PL relations. However, their useseems to be the exception rather than the rule and most of them are applied on apiecemeal basis, without serving any broader research objective.

The level of analysis of 3PL research is also examined (Table II). In line withHarland (1996) and Hakansson and Snehota (1995), studies are classified in terms ofthree levels:

(1) the firm;

(2) the dyad; and

(3) the network.

The majority of studies (67 per cent) focus on the firm level, examining issues fromeither the shipper’s or the LSP’s viewpoint (e.g. outsourcing decision). Regarding thedyadic level, the literature concentrates on different aspects of the LSP-clientrelationship (e.g. contracting). Very few studies (6 per cent) exist at the network level(e.g. logistics triads).

3. An integrative framework for 3PL researchAn integrative framework for 3PL research is proposed (Table III), based on theidentification of main themes within this area of study. Existing studies are classified

Methodology Per cent

Surveys (58) 51Case studies (17) 15Other secondary data (e.g. internet research) (13) 11.5Literature review (10) 9Multi-method research (9) 8Other (7) 5.5

Table I.3PL research

methods – frequencyand percentages

Level of analysis Percentage of studies Indicative topics

Firm 67 Outsourcing decision; selection criteria; 3PL growthDyad 27 3PL success factors; contracting; performance measurementNetwork 6 Logistics triads; horizontal networks

Table II.Analytical level of

3PL research


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according to their research purpose and level of analysis. The framework offers ataxonomy of past and current 3PL research and also helps in identifying gaps thatneed to be addressed in the future. A detailed discussion of the relevant literature ispresented in the following.

4. The firm levelA wide range of issues are examined either from the client’s or the service provider’sviewpoint.

4.1 Outsourcing decisionThe decision to outsource (or not) logistics activities depends on a multitude ofvariables, which refer to both internal and external considerations. Rao and Young(1994) have identified factors such as centrality of the logistics function, risk andcontrol, cost/service trade-offs, information technologies and relationships with LSPs.The concept of logistics complexity is also introduced to incorporate a number ofcritical drivers that impact on the above identified factors. Product-related (e.g. specialhandling needs), process-related (e.g. cycle times) and network-related (e.g. countriesserved) 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 considerationsrelated to economic viability, market issues (demand variability and customer service),personnel/equipment availability and extent of supplier dependence. They alsoidentify several favourable conditions for outsourcing such as expanded assortmentand 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 logisticsoutsourcing decision with the shipper’s organisational structure; organisations thathave decentralised “line activities” at the business unit level are expected to outsourcemore 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 alternativeoptions. Costs associated with performing logistics activities in-house and investmentin capital assets is traded-off against service provider fees. The lowest cost solutionshould then be selected (van Damme and Ploos van Amstel, 1996). However, cost is notthe single most important decision variable and logistics service issues are also

Firm Dyad Network

Descriptive Benefits/risks of outsourcingService offerings and usage3PL selection criteriaGrowth strategies

Formation and evolution of 3PL relationsManaging 3PL relations

ContractsInformation exchangePerformance measurement

3PL success factors

Logisticstriads4PL/LLP

Normative Outsourcing decisionPurchasing 3PL services3PL services marketing

Partnership modelsTable III.An integrativeframework for 3PLresearch

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considered (La Londe and Maltz, 1992; McGinnis et al., 1995; Sarel and Zinn, 1992). Forinstance, Maltz (1994b) examined the relative impact of cost and service on the decisionto outsource warehousing and found that organisations were reluctant to usethird-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 difficultiesin performance measurement should lead to in-house distribution. Maltz (1994a) foundthat high asset specificity is associated with in-house warehousing, whereas hightransaction frequency leads to outsourcing. Skjoett-Larsen (2000) combined assetspecificity and uncertainty to create a framework for the outsourcing decision: 3PLproviders must be used in the case of medium-specific assets or in cases of high assetspecificity, but low uncertainty.

The decision to contract-out logistics can also be driven by resource and capabilityconsiderations (Bolumole, 2001). Forming relationships with 3PL providers is anefficient and effective means of achieving the required service without investingheavily in assets and new capabilities (Persson and Virum, 2001; Stank and Maltz,1996). In this way, shippers can focus on their core business. Furthermore, changesin the business environment, increased competition, pressure for cost reduction andthe resulting need to restructure supply chains are often quoted as motives for theformation of alliances with LSPs (Bagchi and Virum, 1996; van Laarhoven andSharman, 1994). Whatever the rationale for contract logistics, it is noted that theoutsourcing decision should be examined in the context of corporate and logisticsstrategy at specific time periods (Fernie, 1999).

4.2 Benefits and risks of outsourcingA 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. Outsourcingnon-strategic activities enables organisations to focus on core competence and exploitexternal logistical expertise (Sink and Langley, 1997). 3PL providers can alsocontribute to improved customer satisfaction and provide access to internationaldistribution networks (Bask, 2001). The most often-cited risks are associated with lossof control over the logistics function and loss of in-house capability and customercontact (Ellram and Cooper, 1990). However, it is usually the case that shippers employa mixed strategy regarding logistics and retain important logistics activities (e.g. ordermanagement) in-house (Wilding and Juriado, 2004). While it is reported that users of3PL enhance their flexibility with regard to market (investments) and demand (volumeflexibility) changes, lack of responsiveness to customer needs is also cited as a problemof outsourcing (van Damme and Ploos van Amstel, 1996).

Logistics outsourcing offers many cost-related advantages such as reduction inasset investment (turning fixed cost into variable), labour and equipment maintenancecosts (Bardi and Tracey, 1991). LSPs serve multiple customers and are able to utilizecapacity better and spread logistics costs, thus achieving economies of scale (vanDamme and Ploos van Amstel, 1996). However, cost reduction is not always realiseddue to unrealistic fee structures proposed by service providers (Ackerman, 1996); andeven 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 ofinternal logistics costs. Indeed, the outsourcing option may be chosen in order to give


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an indication of in-house costs and serve as an external benchmark for logisticsefficiency (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 timesand improvement in customer service (Bhatnagar and Viswanathan, 2000; Daughertyet al., 1996; Wong et al., 2000). However, other authors cite problems with respect toservice performance, disruption to inbound flows, inadequate provider expertise,inadequate employee quality, sustained time and effort spent on logistics, loss ofcustomer feedback and inability of 3PL providers to deal with special product needsand emergency circumstances (Ellram and Cooper, 1990; Gibson and Cook, 2001;Sink and Langley, 1997; Svensson, 2001; van Laarhoven et al., 2000). Despite gainingaccess to logistics information systems (Rao et al., 1993), shippers appear to bedissatisfied with service provider’s IT capabilities and prefer to rely on in-housesystems instead (van Laarhoven et al., 2000).

4.3 Service offerings and usageThe review reveals a mismatch between supply and demand for logistics services(Murphy and Poist, 2000). Evidence from recent industry surveys indicates that whileLSPs expand their offerings to include information systems, consulting, contractmanufacturing and even purchasing and financial services, there is a low uptake ofsuch services and buyers in general prefer to outsource transport- andwarehouse-related functions (Lieb and Bentz, 2005a; Lieb and Kendrick, 2003; Lieband Randall, 1999).

The literature appears to focus on the demand-side of 3PL; a large number of studiesfocus 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 servicesused, usage rate, contract renewal rates, outsourcing costs and geographical spread ofservices. Generally speaking, findings indicate the prominence of transport, warehouseand administration-related (e.g. freight payment) services and confirm the continuinggrowth 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 orindustries. Country-specific studies appear to stress the prominence of transportand 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, whereasWilding and Juriado (2004) submit that firms within the European consumer goods

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industry use both in-house and contract logistics, with transportation and overflowstorage to be the most-often outsourced services. Evidence also suggests that shippersoutsource services in bundles (e.g. warehousing and inventory control) by combiningactivities that share common transactional elements and information flows (Maltz andEllram, 2000; Maltz et al., 1993; Rabinovich et al., 1999).

Overall, there appears to be weak demand for value-added solutions such asinformation systems, 4PL and manufacturing-related services (van Hoek, 2000b, c;van Hoek and Dierdonck, 2000). Most client organisations perceive such activities astoo important to outsource and express their reservations about LSP capabilitiesin those areas. It is even suggested that such services are supply-driven and do notreflect the shippers’ needs (Wilding and Juriado, 2004). The bulk of logistics servicesbought still remains in the areas of transportation and warehousing.

4.4 Purchasing 3PL servicesTwo 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 logisticsservices have been identified. Andersson and Norman (2002) compare the purchasingprocess between commoditised (e-freight exchanges) and advanced logisticsservices. They find that definition of service requirements appear to be moredifficult, criteria for 3PL selection extend far beyond price considerations and contractsare much more detailed when buying advanced logistics solutions (Andersson andNorman, 2002).

In contrast, Sink and Langley (1997) emphasize process issues such as needidentification, top management commitment, formation of cross-functional buyingteam, development of selection criteria and service implementation. Bagchi and Virum(1998) also emphasize process, but their framework is wider in scope than the previoustwo, dealing with post-contracting issues such as performance measurement and goalredefinition (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 assumethat the buyer is responsible for service definition and also extend to post-contractingissues such as service implementation and performance measurement. On the otherhand, Andersson and Norman (2002) draw a distinction between purchasing ofcommodity and advanced logistics services, arguing that a different approach (in termsof time and effort requirements) is appropriate in each case. Generally speaking, allthree 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 beendiscussed in the literature; typically, these include cost, service quality and reliability,flexibility, responsiveness to requests and financial stability. Some criteria aredeveloped with specific client needs in mind, while others are common for allcircumstances (Bagchi and Virum, 1996). There is contrasting evidence on the relativeimportance of price; some authors (van Laarhoven and Sharman, 1994) rank it as topcriterion, while others argue that service performance and quality requirements


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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 responseto information requests are used for the initial screening of candidate serviceproviders (Sink and Langley, 1997). Moreover, prior experience of the client’s industry,its regulations and products types are perceived as important selection factors bybuyers (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 isMeade and Sarkis (2002), who present special factors pertaining to third party reverselogistics services (e.g. reverse logistics functions and process).

4.5 Marketing of 3PL servicesBerglund et al. (1999) have identified several factors facilitating the rise of the 3PLmarket. On the demand side, key drivers include reduction in asset intensity, reductionof labor costs and restructuring of distribution; on the supply side, industryderegulation and declining profit margins in basic services are among the reasons forgrowth. Some authors have explained how transportation firms developed into 3PLproviders by expanding their service offerings to differentiate themselves fromcompetition (Sheffi, 1990; Virum, 1993). Overall, the evolution of the 3PL market isexplained with reference to three distinct phases (Berglund et al., 1999; Hertz andAlfredsson, 2003):

(1) In the 1980s, many transportation and warehousing firms have developed into3PL providers (e.g. Exel Logistics and Frans Maas).

(2) In the early 1990s, firms that specialise in express parcel deliveries entered themarket (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 developingcompetences in information systems and supply chain planning (e.g. AndersenConsulting).

IT systems are increasingly being used to offer real-time information to clients andenhance visibility for supply network members (Lewis and Talalayersky, 2000; Piplaniet al., 2004; Sauvage, 2003). Concepts such as 4PL and lead logistics provider (LLP)have also been introduced with the aim of covering reported demands fortrans-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 logisticsservices. Logistics operators often claim that they can do everything, without in factpossessing 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 (Razzaqueand Sheng, 1998; Sheffi, 1990). Asset-based providers own physical assets such astruck fleets and warehouses and focus on the management and execution of transportand warehouse-related activities. Non-asset based firms rely on human expertise andinformation systems and offer management-oriented services, sub-contractingphysical distribution activities to asset-based companies.

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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 complexservices to a few key customers) providers. Hertz and Alfredsson (2003) classify LSPsin terms of their abilities for general problem solving (co-ordination) and the extent ofadaptation to client needs. Persson and Virum (2001) present a typology of 3PLvendors in terms of service complexity and degree of asset specificity. Based on RBVtheory, Lai (2004) has proposed a typology of LSPs in terms of their service capabilitiesand 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 andrequirements, 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 externalsupply chain orientation may also outsource due to cost efficiency advantages).

4.6 Growth strategiesIn a highly competitive sector cost reduction, market segmentation and servicedifferentiation are the main ways of improving 3PL performance and profits(Panayides, 2004; Sum and Teo, 1999). In addition, environmental changes and theintroduction of new technologies have an impact on LSP strategic planning(Hum, 2000). For example, e-commerce and its implications for logistics operationsshould be fully understood by 3PL firms (Delfmann et al., 2002; Gudmudsson andWalczuck, 1999).

LSPs employ a variety of growth strategies. Important means of expansion includemergers 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 industryand large, multi-national firms start to emerge. Main reasons for M&As include economiesof scope, expanded geographical coverage, acquisition of specialized capabilities andrequirements for investment in IT and equipment (Carbone and Stone, 2005).

Both vertical (shipper-LSP) and horizontal (among LSPs) alliances are set upmainly with the aim of getting access to complementary resources and capabilities.In particular, horizontal alliances among LSPs are deemed necessary for thedevelopment of cross-border logistics solutions (Carbone and Stone, 2005; van Hoek,2000a). Some authors though question the effectiveness of Pan-European and globallogistics operators and they argue for the existence of local, medium-sized 3PLs thatbetter serve customer needs in foreign markets (Evans, 2000).

5. The dyad level: inter-organisational relationships in 3PLExisting literature suggests that the nature of 3PL relationships (i.e. transactional orcollaborative) is a function of service offering composition, contract duration and theclient’s motivation for outsourcing.

5.1 Formation and evolution of 3PL relationsThere are many examples of partnerships between LSPs and manufacturers/retailersin the logistics literature (Bhatnagar and Viswanathan, 2000; Bowersox, 1990;House and Stank, 2001). It is suggested that such partnerships develop gradually,


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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 relationshipswith LSPs. According to this practice, buyers are looking for specific solutions at theinitial stages of the relationship in order to test the provider’s capabilities (van Dammeand Ploos van Amstel, 1996). However, over time, the scope of the relationshipincreases and the offering expands to include more value-added and customisedsolutions (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 shippersees the outsourcing option as the means to achieve cost savings. But when theoutsourcing decision is made due to resource considerations, the 3PL provider is seenas a strategic partner who has a critical role in the customer’s supply chain strategy(Bolumole, 2001).

5.2 Management of 3PL relationshipsThe design and implementation of 3PL relations appears to be problematic. Often-citeddifficulties include lack of understanding of client’s supply chain needs, lack ofadequate expertise in specific products and markets, unrealistic customer expectations,inadequate description of services and service levels, lack of logistics cost awarenessby 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 onissues such as 3PL selection, contracting, information sharing between client-LSP andperformance measurement systems. In relation to service provider choice, the buyerorganization should create a comprehensive list of selection criteria that extend beyondprice 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 3PLrelationships (Boyson et al., 1999). In the literature, there are two opposing views aboutthe role of formal contractual agreements. While the majority of authors seem to agreethat the existence of formal contracts is necessary for the management and control of3PL relations, it is also argued that detailed contracts can also be perceived asan 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 contractincludes:

. 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 sharingbetween the contracting parties are crucial for effective management of 3PL relations(Stank et al., 1996). Information exchange is important even in the pre-contracting

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period, when the buyer attempts to assess the capabilities of the potential supplier(Bienstock, 2002). Communication channels in multiple organizational levels areestablished in order to cover the strategic as well as operational information needs.In many instances, joint meetings are also established to review the provider’sperformance and solve any arising problems (Boyson et al., 1999). More seldom,inter-organisational teams and committees are formed with the aim of facilitatinginformation exchange between contracting parties and/or improving businessprocesses (Huiskonnen and Pirttila, 2002).

5.2.3 Performance measurement. Performance measurement systems appear to beinstrumental for assessing the extent of 3PL success and identifying correctiveaction 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 servicelevels. Examples of such measures include delivery timeliness and accuracy, order fillrates and inventory turns (Wilding and Juriado, 2004). Performance metrics can also beused by LSPs for benchmarking purposes (Stank et al., 1994; Sum and Teo, 1999).

Additional practices for management and control of 3PL relations include carryingout customer satisfaction surveys, gaining access to LSP information systems, jointlyplanning and implementing performance improvement projects and organising 3PLforums where the client organisation shares information with regard to logisticsstrategy objectives (Boyson et al., 1999; Wilding and Juriado, 2004). The role of ITsystems as safeguarding mechanisms in the shipper-3PL provider relationship hasbeen stressed by Bourlakis and Bourlakis (2005).

5.3 Success factorsThere have been many studies so far investigating success factors for 3PLpartnerships (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, whichappear to be common to those presented in the wider inter-firm partnership andstrategic 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;


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. 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 modelsVarious prescriptive partnership models have been proposed in the literature. Bagchiand 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 importantstage and shippers must make sure that potential suppliers are well-informed abouttheir needs because research has revealed a difference in perceived alliance formationmotives 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 serviceand competitive advantage) of 3PL collaboration. Factors such as asset specificity andenvironmental capacity (i.e. demand/supply ratio for 3PL services) have a positiveeffect on the formation of collaborative relations, whereas high transaction volume andhigh industry concentration are negatively related to 3PL partnerships (Stank andDaugherty, 1997).

Certain relationship characteristics (e.g. asset specificity and communication) andcustomer attributes (e.g. size of firm) are positively associated with relationshipoutcomes such as customer retention and performance improvement (Knemeyer andMurphy, 2005). In the same vein, Knemeyer et al. (2003) have empirically investigatedthe level of partnership development in the context of 3PL. Moore and Cunningham(1999) apply a social exchange perspective, linking the effectiveness of 3PL relationswith high levels of equity, commitment and trust among shippers and LSPs.

Whatever their starting point of analysis or theoretical perspective, all frameworksinclude a relationship evaluation stage. A feedback mechanism is also incorporated inorder to adjust the relationship objectives and adapt processes. Some of them do notconsider specific 3PL characteristics. Even worse, researchers who apply suchframeworks 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 ameans to achieve competitive advantage, by gaining access to external resources andcapabilities (Gentry and Vellenga, 1996; Sinkovics and Roath, 2004). Collaborative 3PLrelations can lead to new competence development and innovation, provided thatpartners openly exchange information and share their knowledge and skills(Halldorsson and Skjoett-Larsen, 2004). Organisational learning is thought to be animportant quality which facilitates innovation and 3PL service improvement(Chapman et al., 2003; Panayides, 2007; Panayides and So, 2005).

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6. The network level: logistics triads and networksCurrent research focuses on dyadic LSP-client interactions. However, theboundary-spanning role of logistics (Mentzer et al., 2004) and the importance ofcustomer service for 3PL arrangements are reflected in many studies, which eitherimplicitly or explicitly discuss the client’s customer interface, i.e. the treatment extendsbeyond the dyad to consider larger networks.

6.1 Logistics triadsMaltz and Ellram (1997) argue that there are two important interfaces that need to beassessed before outsourcing the logistics function: the LSP-client and the LSP-finalcustomer 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 thedyad. In line with McGinnis et al. (1995), the 3PL provider represents the third party toa transaction (the first and second being the buyer and the seller) and fulfils part or allof the logistical needs related to that transaction in a way that a triad of exchangerelations is formed (Figure 2).

There are a few studies that explicitly discuss the formation of logistics outsourcingtriads. Bask (2001) argues that the term 3PL implies a triadic link among suppliers,their customers and LSPs. Larson and Gammelgaard (2001) investigate thepreconditions, benefits and barriers to the formation of collaborative relationsamong buyers, sellers and 3PL providers. Carter and Ferrin (1995) have illustrated theimpact of trilateral collaboration on the reduction of transport costs. Moreover, Gentry(1996a, b) has studied the role of carriers in strategic buyer-supplier alliances andconcluded that LSPs mainly have operational responsibilities and are not involved instrategic 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, thedesign of 4PL/LLP solutions entails that the LSP acts as a single point of contactwithin the client’s supply chain (van Hoek and Chong, 2001). The 4PL provider isoften regarded as a non asset-based company which makes use of its supply chaindesign/planning capabilities and IT solutions and acts as a single interface betweenthe client and multiple (asset-based) LSPs (Skjoett-Larsen, 2000). Logistics providersalso develop horizontal networks in order to gain access to complementary resourcesand capabilities (Carbone and Stone, 2005; Lemoine and Dagnaes, 2003).

Figure 2.A logistics triad

Client Customer

LSP


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7. Directions for future researchThe proposed framework not only provides a conceptual map of 3PL studies, but alsohelps in identifying further research opportunities. Five generic propositions regardingfuture 3PL research are formulated and elaborated upon in the following.

7.1 Focus on network researchThe review has revealed a knowledge gap in relation to the design and implementationof 4PL/LLP contracting arrangements. Existing studies focus on conceptualising 4PLand 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 amongsupply chain processes and relationships should be taken into account when designingand implementing 3PL offerings. It is proposed that network theory (Hakansson andSnehota, 1995) provides a framework for mapping activity and resource/capabilitydependencies and tracking their evolution over time. Such an approach wouldpotentially offer insights about the dynamics of outsourcing and service designdecisions (e.g. customer base change and impact on logistics service design).

Existing studies of logistics triads and networks do not seem to add any insightsthat are intrinsically supra-dyadic, i.e. emergent properties that cannot exist at thedyad level. For example, they focus on supply chain collaboration issues but do notexamine the implications of indirect relationships and mediating roles that arenecessarily part of 3PL and 4PL. It is suggested here that 3PL/4PL phenomena couldoffer considerable insights to existing network research. For instance, empiricalresearch in 4PL contracting would potentially contribute to a better understanding ofthe formation of inter-firm networks, including the motives, contingencies andprocesses of network development (Ebers, 1997).

7.2 Focus on normative researchFurther normative research is needed to provide practitioners with tools andframeworks for decision-making. On this front, two suggestions are offered:

(1) Outsourcing decision framework. Existing research simply lists factors anddrivers that impact on the outsourcing decision. A normative framework isneeded that will address the impact of buyer operational characteristics(product, process and supply chain-related) on the scale and scope of

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outsourcing and the type of 3PL relationship required. For example, specialproduct handling requirements might drive investments in dedicatedfacilities/equipment/staff and development of long-term contractual relationsas a result.

(2) Selection criteria framework. Selection criteria in the literature do not take intoaccount organisational and operational contingencies and special buyerrequirements. It is proposed that a framework is developed to examine theimpact of buyer’s internal (centralised vs local decision-making; composition ofthe buying team) and external (position in the supply chain; supply chain scopeof 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 researchshould be linked to a stronger theoretical foundation for 3PL. This is addressed indetail below.

7.3 Focus on theory-based researchExisting studies that adopt a TCE approach to explain the outsourcing decision focuson asset specificity as their main construct and pay little attention to (or at best take forgranted) the actual costs of defining what is to be exchanged, writing contracts andmeasuring performance. They also fail to include production costs in their analysis.It is suggested that such “mundane” transaction costs (Baldwin and Clark, 2003) can beimportant in determining the boundaries of the firm, given the prominence ofcost-efficiency criteria for logistics outsourcing.

Asset specificity only partly explains the “do or buy” decision and future researchshould explicitly consider those costs, incorporate service production costs in theanalysis and also examine the relationship between them, bearing in mind thatthe decision should be made based on the minimization of the sum of production andtransaction costs. For instance, high transaction costs ex-ante (e.g. detailedspecification and standardisation of processes/interfaces) can be offset by aproportionally higher reduction in service production costs and ex-post co-ordinationand frictional costs (e.g. contract re-negotiation) in a way that makes outsourcingeconomical (Langlois, 2005).

The acquisition of external resources/capabilities and logistics expertise is oftencited 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 buyerside suggesting that firms can acquire the necessary resources, develop unique assetsand achieve superior logistics performance through 3PL relations (Sinkovics andRoath, 2004). An exception is Halldorsson and Skjoett-Larsen (2004) who stress thedevelopment 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 clientrelationships, adapt, reconfigure and transfer capabilities in an industrywhich service innovation and customisation is seen as a means of achievingcompetitive 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 competencesand associated service offerings. Moreover, the impact of past and currentinvestment/divestment choices of the buyer on the scale and scope of outsourcingcould be investigated.

Two overarching conclusions are offered in connection with the proposition formore theory-based research:

(1) The relationship between 3PL and theory should be a bi-directional one; notonly systematic application of theoretical perspectives can help build sounderexplanations about 3PL phenomena, but also empirical research into 3PL offersopportunities for extension and refinement of existing theory of a more genericnature.

(2) Integration and cross-fertilisation of theoretical perspectives can help provide amore robust explanation of 3PL covering the outsourcing process in its entirety,from outsourcing decision to design, implementation and evolution of suchrelationships (Halldorsson et al., 2003).

7.4 Focus on empirical research in 3PL design/implementationMore specifically, two suggestions for future research are made:

(1) Empirical research should be directed towards contractual practices and thedevelopment of performance measurement systems in 3PL. Existing literatureregarding 3PL contractual design is mainly conceptual in nature and furtherempirical evidence is needed about the type of contracts, charging mechanismsand fee structures applied, the level of detail in respect of service specification andthe extent of inclusion of penalty/incentive clauses. Such data would potentiallyreveal whether and how contractual design matches the characteristics of thedeal and the broader relationship (Collins, 1999). In other words, there is a need toexamine (empirically) whether contracts are important in terms of relationshipmanagement or represent only part of the business deal and the client-3PLprovider relationship. Empirical research should also focus on performancemeasurement in 3PL relationships, looking at issues such as the impact of thecontract/charging mechanism on what is being measured (e.g. open-bookcontracts often require detailed measurement systems) and potential distinctionsbetween contractual and operational KPIs. Also, despite the fact that serviceofferings grow in complexity and value added services are introduced (e.g.product installation), there is little evidence in the literature regarding thedevelopment of KPIs for such advanced services (van Hoek, 2001). Future studiesshould examine the extent to which metrics are developed for valued addedservices 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 buyeruncertainty; e.g. Bask, 2001), there is a need to re-visit how logistics capabilitiesand services are defined and designed in specific client-service providerrelationships as well as how they are re-packaged and evolve over time.

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Existing literature rather generally assumes that the buyer is responsible forspecifying services and also ignores the dynamics of service offering definition.Based on the above, it is proposed that empirical research should focus on theprocess (how) of service definition in 3PL relationships.

7.5 Focus on qualitative methods and triangulationThe review has revealed a dominance of survey research in 3PL. Surveys have beenparticularly 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; theypresent construct validity problems as they often focus on one-sided data and perceptionsof 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 togain a deeper understanding of the formation and evolution of 3PL relationships (Frankelet al., 2005). A qualitative research design facilitates data collection from several partiesand enables the capture of potentially crucial contextual information about theoutsourcing process (e.g. impact of broader supply chain strategy).

Existing studies appear to be cross-sectional in nature and tend to focus on specificstages of the outsourcing process (e.g. outsourcing decision). It is suggested thatlongitudinal 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 ofthe process, from decision-making through to design, implementation andpost-contracting evaluation would offer rich data about dependencies among stagesand 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 findingsand enhance their validity. A proposed research design regarding the development of4PL solutions, based on triangulation, is shown in Figure 3. At the first stage focusgroup interviews with senior management of buyers and LSPs would investigate thedrivers and decision-making factors regarding 4PL adoption. Participants shouldrepresent different industries in order to identify specific market characteristics andcontingencies that could potentially affect the decision to adopt (or not) 4PL. As asecond step, in-depth case studies of 4PL design and implementation would offerinsights about the scope of service offering, contractual design, structure andmanagement of inter-firm relationships and the enablers and inhibitors of change.As a final stage, a post-implementation survey would focus on the performancebenefits and problem areas of 4PL adoption across different sectors.

Figure 3.A 4PL research proposal

based on triangulation

Focus group sessions

4PL drivers and decision-making

factors

In-depth case studies

4PL design and implementation

Survey research

4PL performance benefits and problem

areas

Feedback


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8. Concluding remarksIn conclusion, 3PL research is at an exciting stage. In many ways it has followed atypical pattern of development, beginning with relatively simple issues and adoptingan essentially descriptive approach. Now that a substantial body of literature exists inthe area, it is timely to extend the methods employed and the issues addressed to dealwith network phenomena and to progress with more normative considerations.Organisational and technological change, associated with globalisation and ICTdevelopments, mean that 3PL is a sector undergoing constant change, and so there isan excellent opportunity both to study an interesting sector for its own sake, and to use3PL as a vehicle for the generation of more generic insights into the dynamic behaviourof inter-organisational relationships and networks.

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About the authorsKonstantinos Selviaridis is a PhD candidate in the Department of Management Science,Lancaster University Management School. He is also a member of the Supply ChainManagement and Modelling Research Group within the department. He received a MScin Operations Management from Manchester School of Management, UMIST and a BSc inEconomics from the Aristotle’s University of Thessaloniki in Greece. Konstantinos is, in broadterms, interested in inter-organisational relationships and networks within operations andsupply chain management. More specifically, his research interests include third/fourth partylogistics (3PL/4PL), service procurement and contracting. His current research is focused on theprocess of service definition and design in 3PL and 4PL relationships. Konstantinos Selviaridis isthe corresponding author and can be contacted at: [email protected]

Martin Spring is Senior Lecturer in Operations Management in the Department ofManagement Science, LUMS, and convener of the Supply Chain Management and ModellingResearch Group. Previously he was a Senior Lecturer in Supply Chain Management at


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Manchester School of Management (MSM), UMIST. He spent about ten years working inmanufacturing industry, mostly in production engineering and production management roles.Following his PhD in operations strategy, supply chain management has been the focus of mostof his research and teaching. Taking a rather broad view of what constitutes supply chainmanagement, recent research interests have included risk in supply networks, power relations insupply chains, and the procurement of complex inter-organisational services like third-partylogistics, management consultancy and complex IT-based systems such as SAP. His currentresearch 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 beenpublished in a range of international operations management, design and supply chainmanagement journals. Martin sits on the national ESRC CASE Studentship awards panel andwas co-editor of the International Journal of Operations and Production Management from1999-2004. He was a Programme Director of the MSc in Operations Management, then Director ofPostgraduate Programmes at MSM, UMIST.

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third party logistics: a literature review and research agenda

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