Collaborative logistics management and the role of third-party service providers

Collaborative logistics management and the role of third-party service providers Gunnar Stefansson Division of Logistics and Transportation,Chalmers University of Technology,Go¨teborg,Sweden AbstractPurpose –This paper aims to derive and verify a collaborative framework that specifies the role of different parties in contemporary logistics setups.Design/methodology/approach –To prepare this paper,a study of the logistics literature has been conducted together with several case studies.The empirical evidence has been collected in Europe as well as in the USA.Different aspects of collaboration between organizations in logistics setups have been studied where the services and the activities have been analyzed to understand the characteristics of the role of third-party service providers.Findings –The results from the work cluster the different third-party service providers in three different groups:carriers,logistics service providers (LSPs)and logistics service intermediaries (LSIs).All of these parties have different roles and provide various services in outsourced logistics setups.A collaborative logistics management (CLM)model has been derived that embraces the role of the different parties,the information and material flows between them,the interface attributes and the information systems architecture.In this paper,a focus is mainly on the part of the model that reveals the role of the third-party service providers.Practical implications –The practical implications of the work has its foundation in that activities,performed by two parties,can be adapted to each other so that their combined efficiency is improved.The CLM model can be applied when designing and negotiating third-party services for specific logistics assignments.Originality/value –The paper offers a model of logistics collaboration between the different parties in contemporary,outsourced logistics setups.Keywords Transportation,Distribution,Third-party vendors,Distribution managementPaper type Research paperIntroduction The theme of this paper is collaboration in logistics and the role of third-party service providers typically participating in logistics setups.The term is used as a synonym throughout this paper for carriers,warehouse operators,third-party logistics service providers (LSPs),and any other type of logistics service intermediates (LSIs)such as forwarders or information processing service providers.Much has been written about relationships in logistics,primarily between the shipper and the receiver of the goods,not least within the marketing research area as well as within the logistics research area (Kraljic,1983;Christy and Grout,1994;Olsen and Ellram,1997;Bagchi and Virum,1998;Bensaou,1999;Gadde et al.,2003).However,the relations in the common triad setup,between the shipper and the carrier and between the receiver and the carrier,have rarely been covered (Gentry,1996;The current issue and full text archive of this journal is available at/0960-0035.htmIJPDLM36,276Received June 2005Revised September 2005Accepted September 2005International Journal of PhysicalDistribution &Logistics ManagementVol.36No.2,2006pp.76-92q Emerald Group Publishing Limited0960-0035DOI 10.1108/09600030610656413Larson and Gammelgaard,2001;Skjoett-Larsen et al.,2003).Larsson and Gammelgaard(2001)define the logistics triad as:A logistics triad is a cooperative,three-way relationship between a buyer of goods,thesupplier of those goods and a logistics service provider moving and/or storing the goods between buyer and supplier.The importance of the issue has been brought forward by Beire(1989)who introduced the logistics triad,consisting of shipper,carrier and receiver,as the“minimum unit of analysis”for logistics research.The parties taking over these activities are third-party service providers,carriers providing transportation service or LSPs providing transportation and warehousing services.In recent years these LSPs have been extending their service portfolio,with more complex activities than ever before and serving more customers than previously (Lieb and Kendrick,2003;Lieb and Bentz,2004).In addition to the above triad setups,new arrangements have been emerging during the last decade or so with yet one more party involved.This is a LSI,also referred to as fourth party LSP(4PL).These companies carry out the majority of the administrative activities but leave the physical activities to other contracted third-party service providers(Bumstead and Cannons,2002).The description above reveals a need for a framework or a model of relations between the parties that participate in contemporary logistics setups.Such a model provides a language that can recognize the role of the involved parties and the attributes in the relations between them.The purpose of this paper is to describe and analyze the role of different parties in outsourced logistics setups and the aim of the work is to develop a model of collaborative logistics management(CLM)that specifies the services provided by different parties.The paper consists offive chapters where introduction is followed by the chapter frame of references.Methodology chapter discusses the methodology used in collecting empirical evidences and the next chapter reveals the data collected and discusses the analysis.Finally in the last chapter,the contributions and implications are discussed. Frame of referencesA good framework contains topics that need to be involved to explain the researcher’s thoughts and shows how the selected topics are related.The main goal of this section is to establish a common language for the paper and explain terms and definitions that are used throughout the analysis later on.Entities in logistics systemsSjo¨stedt(1996)has worked out a model of transportation and logistics system,both for freight and passenger movement.In the freight model,four different entities or components are identified:goods,vehicles,facilities and infrastructure.This model is shown in Figure1.The four entities are associated by relationships:sourcing and distribution,land use,transportation andfinally traffic.Logistics activities take place in facilities located in relation to an infrastructure.These facilities are supplied with products by means of transportation.This transportation is carried out by vehicles,which results in traffic.Collaborativelogistics management77The north-east corner of the model represents transportation issues where vehicles are used for carrying out the activities while the south-west represents the logistics issues where activities are carried out in the facilities –warehouses,terminals and production facilities.Distribution structures .Products are moved from producers to final consumers or from producers to other manufacturers,respectively,by routes starting from factories,through intermediate nodes,altogether forming networks.Distribution involves a number of activities.It is possible to distinguish between at least four different ones:collection,distribution,storing and handling,as well as transport.A production,distribution and transportation network consists of nodes and a connection between these nodes,i.e.links.Figure 2shows a network structure with several entities,where products can visit on the way from the shipper (supplier)to the receiver (buyer).Figure 1.The transportation andlogistics systemFigure 2.A production,distributionand transportationnetwork SupplierIJPDLM36,278All of the above activities are subject to outsourcing to third-party service providers.Logistics activities.Logistics is a collection of functional activities that are repeated many times throughout the channel through which raw materials are converted into finished products(Ballou,1999).Today’s definitions of the term“logistics”are much wider in scope compared with thefirst definitions from the early1960s made by Bowersox and colleagues(Smykay et al.,1961).The most dominant definition of logistics is given by the Council of Logistics Management(CLM,2004): Logistics is that part of the supply chain process that plans,implements,and controls the efficient,effective forward and reverseflow and storage of goods,services,and related information between the point of origin and the point of consumption in order to meet customers’requirements.Not only has the scope grown,but also even the issues in question.Forwardflow has been complemented with reverseflow,flow with storage,and goods with not only services but also information.This makes the definition much more complete but at the same time more complex.Warehouse operation is an important part of logistics where products(raw material, parts,goods-in-process,finished goods)are stored at and between point of origin and point of consumption(Lambert et al.,1998).In addition to storage,there are two other major operations associated with warehousing:movement and information transfer (Lambert et al.,1998).Another term frequently used in association with warehousing is operation of distribution centers(DCs).Dawe(1995)compares warehousing with operation of DCs and concludes that the role of the DC is narrower,including receive and ship as the main activities–while receive,store,ship,and pick are part of the warehouse mbert et al.(1998)point out that the difference is that in warehouses all products are kept,while DCs only hold fast-moving products in much smaller quantity. In addition,in DCs the value-added services are mainly carried out.Terminals are facilities where load units are shifted between links in a transportation network.Examples of terminals are ports,crossing points of transport modes(e.g.between road and rail),and facilities specialized in fast throughput of load units which makes cross-docking possible.Examples of terminal activities are transshipments,coordination and cross-docking(Lumsden,2006).The terminal activities can take place in a warehouse or a DC.The terminal function may then be carried out as any other consolidation activity–the only difference is that the arriving good has a known receiver prior to arrival at the warehouse or DC and is not stored there.Transportation is in general said to be a physical movement of people and goods from one place to another.Transport is one of the major activities within logistics, where a creation of time and place utility is performed(Coyle et al.,1996).There is an interaction between distribution structures and transportation structures,where transport costs and performance are among the important factors in deciding the distribution structure.A distribution system can be efficient only if its collaboration with the transportation network is efficient(Fleischmann,1998;Daganzo, 1998).A decentralized distribution system fulfills the customer demand in a nearby area. The transport distances are short and relatively inexpensive,but instead there will be many warehouses,which leads to highfixed costs for facilities and equipment as well Collaborativelogistics management79as to variable costs for inventories and workforce wages.With the change from adecentralized distribution system to a centralized one,the transport distances will increase.The associated costs must partly be covered by reduced warehouse operation costs,as some economies of scale are reached and a huge amount of fixed capital and facility costs will disappear since the number of warehouses has decreased.Third-party services and service providersDuring the last two decades or so,the third-party service provider industry has changed dramatically (Sheffi,1990;Cooper,1994;Sink et al.,1996;Lieb et al.,1998;Lieb and Randall,1999;Lieb and Kendrick,2003;Lieb and Bentz,2004).Within the area of logistics,a substantial number of definitions can be found on issues related to third-party activities and the parties involved.Virum (1993)put forward the dominant “Nordic”definition of third-party logistics as:The services offered by a middleman in the logistics channel that has specialized in providing,by contract,for a given time period,all or a considerable number of logistics activities for other fingley et al.(1999)gives the following definition of a third-party service provider:A company that provides multiple logistics services for its customers,whereby the Third-party logistics provider is external to the customer company and is compensated for its services.The degree of outsourcing varies and the outsourced activities differ greatly in complexity.The third-party logistics arrangements cover straightforward arm’s-length relationships involving everything from a few,rather simple logistics activities to advanced logistics solutions including value-added activities such as merge-in-transit setups.To define the different levels of third-party logistics,a stage or level model can be used.A few of these have been put forward earlier.Halldorsson and Skjoett-Larsen (2004)have proposed a model with four different steps:market exchanges,customized logistics solutions,joint logistics solutions,and in-house logistics solutions.This stage model indicates three different levels of outsourced services,and one of these is market exchanges.The “true”level of outsourced logistics services then becomes two in the end,where one is based on customized solutions that are developed around the customers’demand and the other is based on joint logistics solutions.Delfmann et al.(2002)put forward a model of different types of LSPs in regard to their services.In this model the standardization of the services provided by the LSPs makes out the type of operators.The first LSP cluster provides standardized services taken out of several core activities,like transportation and warehouse services.The second cluster provides bundled services,where the standard services are put together in packages that fulfill the customer demands.The third and last cluster of services compromises the ones that are really customized.Literature,mainly from the US,introduces concepts of more advanced activities that are solely based on administrative services.The concept of a 4PL was introduced a few years ago by Andersen Consulting (now:accenture).The definition given by Andersen Consulting is (Bumstead and Cannons,2002):IJPDLM 36,280An integrator that assembles the resources,capabilities and technology of its own organization and other organizations to design,build and run comprehensive supply chain solutions.Most4PL companies have no assets like warehouse facilities,ownfleet,etc.and they provide services to the customers in the form of responsibility and knowledge of how to fulfill the customer requirements.The physical movement of the goods is outsourced to other third-party service providers.To simplify the terminology in this work,the term LSI is used for operators that provide only administrative services to their customers,such as4PL,forwarders, web-marketplaces,etc.Collaboration in logistics activitiesThere are many types of interorganizational relationships.Barringer and Harrison (2000)mention six:joint ventures,networks,consortia,alliances,trade associations, and interlock directories.In recent years,there has been an intensive discussion about relationships in logistics and particularly in supply chain management,as the relations between companies form the basis for supply chain management setups.Bhatnagar and Viswanathan(2000)report on strategic alliances between manufacturingfirms and global LSPs.The strategic alliance is defined“as the one that yields cost benefits to both parties and where both parties utilize the competence of the other partner to enhance their competitive position.”Collaboration between companies participating in supply chain setups is generally believed to increase efficiency and decrease costs. This applies particularly to collaboration on forecasts,as companies spend valuable resources on responding to unexpected conditions(Andarski,1998;Stank and House, 2001).However,the potential for increased efficiency does not stop with collaboration on forecasts;companies create increased value by collaborating on knowledge, resources,promotions,placed orders,etc.which is equally valuable(Doz and Hamel, 1998;Skjoett-Larsen et al.,2003).Stank and House(2001)point out that collaboration is a process of decision-making among interdependent parties and those parties include the carriers and the LSPs.MethodologyThe empirical evidences for this work comes from a third-party service provider study that involved a multiple-case study design withfive different cases included.One setup with transportation services,three setups with cross-docking and value-added services andfinally,one setup which includes an operator administrating the transportation and warehouse activities.The purpose of the study was tofind out the role of various providers in different setups and what services they offer.The study objects are carriers and LSPs but to support a cross-case study analysis, at least one customer setup of the involved operators was included.Schenker International,Schenker AB in Sweden and Schenker A/S in Denmark,were inquired about their services for Dell Computers in Ireland,and for Grundfos A/S in Denmark. Celexor in Sweden was inquired about their administrative services towards IKEA in Sweden.Finally,DSC Logistics in the US was questioned about its logistics services, mainly warehouse services,for Kimberly-Clark in the Chicago area.Collaborativelogistics management81The case studies were conducted with semi-structured interview techniques,addressing open-ended questions to one or more respondents.The interviews were followed up by on-site observations and comparison with existing documentation.The units of analysis are:.the services that the company provides;.the flow of material in the chosen logistics setup;and.the activities involved in the service setup.The criteria for interpreting the case study results are to analyze how different services include different kinds of activities.Different measures have been taken in regard to the quality of the case study.For the construct validity,multiple sources of evidence were used.A triangulation was done in all the cases,and interviews were completed with direct observation and review of documents.These documents included,among other things,the companies’Internet sites to confirm the service portfolio.To ensure external validity,multiple cases of operators,that represent the LSP market well,were chosen.An analytical generalization can only be at best done for companies that work in the same domains –LSPs which provide value-added services including warehouse and transportation operation.Case study explanations were done and sent prior to the interviews to the respondents.The explanations included guidelines in the form of a table where the most important factors were shown.In addition,the case studies are well documented.This should make it possible to re-conduct the study with similar results and thereby make the reliability satisfactory.Empirical evidences and analysisThe results of the case study are presented in this chapter together with an analysis of the empirical evidences.The chapter begins with describing the inspected setups and makes a general reflection on contemporary distribution setups.An analytical model of production,distribution,and transportation networks is presented before turning to the analysis of the different service providers.Finally a discussion on customized services is disclosed.The distribution setupsThe Grundfos distribution setups –a Schenker case .The setup includes replenishment of the DCs in Europe from one of their factory.From Bjerringbro,Denmark,two trucks with two drivers drive a fixed route with a fill rate of 70-95percent each time.For fulfilling customer orders,the products are picked up by Schenker from the DCs and moved to a Schenker terminal.The products are consolidated in the cross-docking terminal and from there sent directly to customers without stopping at the local sale unit in each involved country.A second case was studied as well involving direct deliveries to large customers,both from the factories and from the DCs.The Dell distribution setup –a Schenker case .The Dell Computer case involves a distribution of computers from the factory in Limerick in Ireland and peripherals from a warehouse in Tilburg,the Netherlands,to customers in the Scandinavian countries through a terminal in Copenhagen.The products arrive at Schenker’s terminal inIJPDLM 36,282Copenhagen and are merged there according to customers’orders before continued distribution to end customers in the Scandinavian countries.The Kimberly-Clark distribution setup–a DSC case.In this case,the warehouse service is analyzed.Kimberly-Clark sends a full truckload of hygiene products to a DSC logistics warehouse where the products are stored.When shipping orders arrive from Kimberly-Clark to DSC Logistics,the availability is checked and products picked according to the retailer’order.The shipment is then packed in line with specifications and shipped to the retailer,Wal-Mart in this case,which receives it and verifies the products.The IKEA distribution setup–a Celexor case.In this case,a totally outsourced distribution setup is analyzed.Celexor is responsible for coordinating replenishment from nine Swedish suppliers and for reaching minimum volume requirements to15 stores and11DCs within North-Western Europe.The distribution setup includes a cross-docking terminal that a large portion of the shipments go through.The logistics and distribution modelsReorganizing distribution structures has resulted in considerable savings and from the literature proof of decreased inventories,decrease in warehouse operation costs, increased delivery performance and decrease in average lead time can be found (Aitken,1994;Cooper,1994;Abrahamson and Brege,1995;Fernie,1999;Koster,2002; Lim et al.,2003).Those changes have been achieved by eliminating intermediate DCs, both regionally and locally,resulting in decreased operation costs.The trend towards a more centralized distribution structure results in more transportation work and in a need for more sophisticated transportation network structures.The design of the transportation network is one of the most important criteria when designing distribution structure(Fleischmann,1993;Boutellier and Kobler,1998).The transportation network mustfit the requirements of the distribution system,and often the network must be capable of serving large areas of Europe within24hours (Abrahamsson,1997).This has induced many producers and distributors to use third-party service providers to take over some or all of the logistics activities in certain areas instead of carrying out transportation in their ownfleet and logistics services in private warehouses.This setup also gives the producers and the distributors an opportunity to postpone activities such as labeling for specific markets, commercialization of products,etc.until delivery is scheduled.Sjo¨stedt’s model(Woxenius and Sjo¨stedt,2003)focuses on entities and relations between them.The model has inspired the analysis of the different roles of the third-party service providers by the classification of thefield in logistics,on one hand,and transportation on the other.In the transportationfield,movements of goods are made by physical transports that in turn generate traffic.The goods can go through terminals on its way from shipper to receiver where an important distinction is done;the terminal function is a part of the transportationfield and not the logisticsfield.In the logisticsfield, manufacturing,storage and delivery is done and forwarding is carried out by distributing goods when needed.The warehouse function(including DC)is important for this work as the value-added services take place there.Goods that go through terminals can be characterized by having a dedicated receiver and a stated delivery time,i.e.in cross-docking the shipment has a known address and must be delivered on a specific date and time.In warehousing,that does not have to be true,as goods are stored for shorter or longer time without a known receiver or delivery time.First,when a delivery order arrives,Collaborativelogistics management83the goods are allocated to a receiver and the associated warehouse and distribution activities can begin.The production-distribution-transportation network model has been developed to analyze the roles of the third-party service providers and is shown in Figure 3.At left a traditional distribution setup where no consolidation or cross-docking terminals are used.Instead,the products are transported from the production sites (P1,P2,P3)with full load unit to a warehouse or a distribution center (DC2),often closeto the receiver,before the last distribution activity takes place.From these warehouses,the products are distributed in less than truckloads (LTL)to customers (C1,C2,C3...)by predetermined multiple-stop routes.The setup at right includes a terminal where various activities can take place.The products are transported from the producers (P1,P2,P3)to a warehouse or distribution center (DC2)by a full load unit haulage.Even full load units are moved to the terminal (T1)from various warehouses or distribution centers (DC1,DC2,DC3)where the cross-docking takes place.In a straightforward setup,only cross-docking is done,where load units such as pallets are shifted from an incoming dock to an outgoing dock and consolidated with other load units that have arrived from other warehouses or distribution centers (DC1and DC3).From the terminal (T1),a full truckload (FTL)or LTL is shipped to one customer (C1)and possibly to some more customers,if the goods designated to one customer did not fill the truck.Some other models including such a hierarchy structure exist (Borg,1992;Wandel et al.,1994).Wandel et al.(1994)had in their first model three layers,infrastructure,transport flow and material flter development of the model introducedFigure 3.The production-distribution-transportation networkmodel,PDTmodel LTL = Less than Truck Load IJPDLM 36,284information infrastructure and flow layers.Lumsden (2006)has developed the model further and added a layer,the monetary layer,in addition to some features like complexity,involved parties,outsourcing issues,etc.These models have in common a layer structure as the PDT model above,but none describes the hierarchy of the product path from production to customer as is done in the PDT model.The various functions,described in the above models,include activities that require a dedicated operator to perform,and several opportunities for the third-party service providers emerge.In the lower half of the right PDT model,opportunities arise for carriers.Carriers perform the transport in the transport structure and even some of the terminal functions if desired,especially moving load units between transport modes.The LSPs can perform higher up in the model by taking over activities in the distribution network structure,as well as in the transportation network structure,by running warehouses and DCs and by using these for terminal functions in the transportation network structure.The operations of third-party service providersThe roles of third-party service providers varies according to the level of outsourcing,from only transportation services to complete integrated-logistics value-added services and global management of the customers’logistical setups (Cooper,1994;Sink et al.,1996;Lieb et al.,1998;Lieb and Randall,1999;Delfmann et al.,2002;Lieb and Kendrick,2003;Langley et al.,2004;Lieb and Bentz,2004).Results from the case study suggest a three-stage model for the logistics third-party service providers including:a carrier,a LSP,and a LSI.This three-stage model,the CLM model,is shown in Figure 4.Figure 4.The CLM model,CLM modelSource: Stefansson (2004)Information flowInterface Collaborative logistics management 85。