Graduation thesis international business economics factors influencing choices of using third party logistics service providers of manufacturing companies in ho chi minh city

HO CHI MINH CITY CAMPUS ---***---GRADUATION THESIS Major: International Business Economics FACTORS INFLUENCING CHOICES OF USING THIRD-PARTY LOGISTICS SERVICE PROVIDERS OF MANUFACTURING C

HO CHI MINH CITY CAMPUS

-*** -GRADUATION THESIS Major: International Business Economics

FACTORS INFLUENCING CHOICES OF USING THIRD-PARTY LOGISTICS SERVICE PROVIDERS

OF MANUFACTURING COMPANIES IN HO CHI

LIST OF ABBREVIATIONS

LIST OF FIGURES

LIST OF TABLES

CHAPTER 1: INTRODUCTION TO FACTORS INFLUENCING CHOICES

OF USING THIRD-PARTY LOGISTICS SERVICE PROVIDERS OF

CHAPTER 2: THEORETICAL BASIS AND RESEARCH MODELS OF

LOGISTICS SERVICE PROVIDERS OF MANUFACTURING COMPANIES

2.1 Overview of third-party logistics service provider 11

2.1.2 The role of third-party logistics in supply chain of manufacturing companies12

2.1.3 Types of services offered by third-party logistics service provider 14

2.2 Theoretical basis for factors influencing choices of using third-party logistics services of manufacturing companies in Ho Chi Minh city 17

2.2.2 A model for strategic supplier selection by Joseph Sarkis and Srinivas Talluri

2.2.3 The five-stage model of third-party logistics buying process by Harry Sink

2.3 Previous empirical researches on factors influencing choices of using third-party logistics of manufacturing companies 22

2.3.1 Selection of Third-Party Logistics (3PL): A hybrid approach usinginterpretive structural modeling (ISM) and analytic network process (ANP) by

2.3.2 A framework for evaluating third-party logistics by Ganesh Vaidyanathan

2.3.3 Applying analytic network process (ANP) in logistics service providerselection – a case study of the industry investing in Southeast Asia by Kai-Ying

2.3.4 3PL selection criteria in integrated circuit manufacturing industry in Taiwan

by Bang-Ning Hwang, Tsai-Ti Chen, and James T Lin (2016) 312.3.5 Summary of factors in related empirical research 33

CHAPTER 3: RESEARCH MODELS ON FACTORS INFLUENCING CHOICES OF USING THIRD-PARTY LOGISTICS SERVICE PROVIDERS

3.2.1 Proposed research model and research hypotheses 36

3.3.1 Method of collecting information and determining sample size 40

3.4.2 The measurement scale for service factor 453.4.3 The measurement scale for cost factor 453.4.4 The measurement scale for quality assurance factor 45

3.4.6 The measurement scale for intangibles factor 463.4.7 The measurement scale for dependent variables 47

CHAPTER 4: RESEARCH OUTCOMES AND DISCUSSION ON FACTORS INFLUENCING CHOICES OF USING THIRD-PARTY LOGISTICS SERVICE PROVIDERS OF MANUFACTURING COMPANIES IN HO CHI

4.1.2 Cronbach’s Alpha coefficient of reliability analysis 50

4.1.6 Detecting violations of regression assumptions 60

CHAPTER 5: RECOMMENDATIONS FOR THIRD PARY LOGISTICS

5.1.1 Opportunities 68

5.2 Recommendations for third-party logistics operating in Ho Chi Minh City 71

5.2.1 Control cost and offer competitive price 71

Abbreviation Meaning

3PL Third-party logistics

4PL Fourth-party logistics

5PL Fifth-party logistics

AHP Analytical Hierarchy Process

ANP Analytical network process

ANOVA Analysis of variance

ASEAN Association of Southeast Asian Nations

CAGR Compound annual growth rate

CMR Customer relationship management

DEMATEL Decision making trial and evaluation laboratoryDTT Delivery turnaround time

EBPS Electronic bill payment solution

EDI Electronic data interchange

EFA Exploratory factor analysis

FAA Federal aviation administration

FAHP Fuzzy analytical hierarchy process

FDA Food and drug administration

FTP File transfer protocol

GDP Gross domestic products

IC Integrated circuit

ISM Interpretive structural modeling

ISO International organization for standardizationKMO Kaiser-Meyer-Olkin

KPI Key performance indicator

IT Information technology

LPI Logistics performance index

MNCs Multinational corporations

TEU Twenty-foot equivalent unit

TOPSIS Technique for Order of Preference by Similarity to Ideal SolutionUSD United States dollar

VIF Variance inflation factor

VPN Virtual private network

XML Extensible markup language

Figure 1.1: LPI overperformers and underperformers 2Figure 2.1: Relationship of 3PL provider in the supply chain of manufacturer 12Figure 2.2: Summary of logistics activities in the supply chain 13Figure 2.3: Detailed graphical representation for strategic supplier selection 18Figure 2.4: The five stages of third-party logistics buying process 20

Figure 3.2: Proposed research model for the thesis 37Figure 4.1: Scatterplot of standardized residuals 61

Table 2.1: Classification of 3PL service providers based on type of activity 11Table 2.2: Types of services offered by 3PL service providers 14Table 2.3: Shipper views of needed IT-based capabilities by 3PLs 16Table 2.4: 3PL service providers selection criteria 23Table 2.5: Summary of classification of variables 24Table 2.6: Performance, service and quality assurance criteria details 27Table 2.7: Information technology, costs and intangibles criteria details 28Table 2.8: Dimensions and criteria for 3PL selection by Chen and Wu 29Table 2.9: Summary of factors in previous empirical research 33

Table 3.2: Measurement scale for performance factor 44Table 3.3: The measurement scale for service factor 45Table 3.4: The measurement scale for cost factor 45Table 3.5: The measurement scale for quality assurance factor 46Table 3.6: The measurement scale for IT factor 46Table 3.7: The measurement scale for intangibles factor 47Table 3.8: The measurement scale for dependent variables 47

Table 4.2: Demographic characteristics of the respondents 49Table 4.3: Cronbach’s Alpha for Performance factor 51Table 4.4: Cronbach’s Alpha for remaining factors 52Table 4.5: Cronbach’s Alpha for dependent variables 53

Table 4.7: Exploratory factor analysis for dependent variable 56

First and foremost, the author would like to send his utmost regards to thelecturers of Foreign Trade University, Ho Chi Minh campus, who have beenaccompanying the author on his 4 years here The author is grateful for all theexperiences and guidance received at Foreign Trade University in Ho Chi Minhcity

Secondly, the writer would like to give his sincere gratitude to his supervisor,Mrs Nguyen Thi Thu Ha (Ph.D.), for all her support and precious guidance, as well

as other lecturers who have assisted and instructed the author in this research work.Without her support and dedicated involvement throughout the process, this thesiswould not be completed

The author would also like to bestow his gratitude to all corporations whoprovided him with the opportunities to contact and gain realistic information fromtheir employees and managers Especially, without the dedication of respondents inspending time and effort answering the questionnaire, the writer would not havegained the most relevant assessment regarding the situation of the industry, as well

as perceptions and market analysis of industry insiders

Finally, despite the time and effort invested in researching and completing thepaper, there remains inevitable errors due to the limitation in specialized knowledgeand experience The author, thus, heartily welcomes all comments and contributionsfor future improvements of the topic

Ho Chi Minh City, May 2019

The author

Nguyễn Việt Hưng

CHAPTER 1: INTRODUCTION TO FACTORS INFLUENCING CHOICES OF USING THIRD-PARTY LOGISTICS SERVICE PROVIDERS OF MANUFACTURING

COMPANIES IN HO CHI MINH 1.1 The necessity of the research

In-house or outsource for the supply chain has always been a critical strategy

of the key decision makers of an organization Each side has its advantages andincurred risks associated At the same time, the state of the market has pushed therelevancy of supply chain to the forefront more than ever, thanks to the growth ofbuying power, e-commerce, booming customer demands and the technology rate ofdevelopment Especially for third-party logistics (3PL) service providers, thecompetition has never been fiercer As manufacturers shift focus to their own corecompetencies, such as market share, product development, marketing, 3PLsoutsourcing is an inevitable choice for securing a strong supply chain to thebusiness

Global 3PL market size analysis comments that the global market size isestimated at USD 865 billion in 2018, with a CAGR of 9% Asia Pacific is expected

to lead the global 3PL market not only in terms of value but also growth rate Thegrowth in the region will be driven by huge amount of trade flow in China andSouth East Asia In tune with the trend of outsourcing logistics activities amongmanufacturers, many Vietnamese enterprises agree that selecting the appropriatethird-party logistics service provider is becoming an increasing undisputed practice

Figure 1.1: LPI overperformers and underperformers

Source: World Bank, 2018

Logistics activities in Vietnam is on the rise with the acceleration of importand export activity According to the bi-annual report from World Bank, Vietnamplaces at 39 globally on the LPI (Logistics performance index), a 25 positionincrease from 2016 The figure 1.1 illustrates the performance of countries ofsimilar income The data suggests that Vietnam is an overperformer of this quartile.Compared to countries from the same geological position, Vietnam places atnumber 3 in ASEAN, preceded only by Singapore and Thailand

The 2019 Agility emerging markets logistics index place Vietnam at the 10thmost promising logistics market, one spot higher than Thailand The contractlogistics and domestic express markets of Vietnam are around 750 million USD invalue, accompanied by healthy growth rates Port capacity of Vietnam stands at anannual rate of 11 million TEU, and the sea freight market is estimated to grow at a15.3% CAGR over the five years to 2022 About 90% of imports and exports intoVietnam transport via sea with about 500-600 million tons / year It is expected that

by 2020, goods through seaports will reach 1,1 billion tons Vietnam also places 4th

in the international logistics opportunities sub-category With the ongoing tensionbetween the U.S and China, a 56,1% of respondents say that South East Asia willreap benefit

In Vietnam, in 2018, logistics industry saw a 12-14% growth, due to the rise ofthe entire economy as well as special attention and appropriate policies from theGovernment The industry reality shows that the world's highest revenue logisticscorporations are also the leading units in providing comprehensive package logisticscontracts In Vietnam, this trend is similar, with foreign 3PL logistics providers(currently the highest logistics business model in Vietnam) such as DHL Logistics,Damco, FedEx, APL … being market-leading businesses thanks to the advantages

of equipment, management technology and additional value-added services On theother hand, Vietnam's exports are mainly processed goods, so the services related tologistics provided to these export-producing enterprises are mainly undertaken byforeign companies due to their concerns of domestics 3PLs

Some Vietnamese logistics enterprises such as Tân Cảng Sài Gòn, Gemadept,Vinafco and Transimex are actively developing 3PL service models and are strongenterprises in terms of ownership of fixed assets and providing mechanical services.copy Currently, Vietnam logistics enterprises only meet 1/4 of logistics marketdemand and are stopping to provide services for some initial stages of logisticsservice chain, the service is still simple, not highly integrated, only a few largelogistics companies have a closed service chain Vietnam logistics enterprises aremainly small and medium-sized enterprises, providing unilateral supply services inthe territory of Vietnam such as forwarding services, packaging services,warehousing and customs services Meanwhile, internationally integrated servicesare all provided by foreign logistics enterprises

Vietnam actions towards improvement of logistics have been significant.Changes in policies and procedures are the biggest upsides in the effort to promoteVietnam logistics competitiveness Also, infrastructure is more concerned, but it issuggested that rate of development needs to be pushed for in 2019 Developmenttrend in logistics service supply in Vietnam will be the cooperation betweenlogistics enterprises to share profits from exploiting the advantages of infrastructureand transport, as well as increasing the competitiveness to reach higher levels of

logistics services, aiming to provide 3PL, 4PL and 5PL services in the future, asshown in the 2018 3PL study (Langley, 2018).

Acknowledging the necessity, especially in Ho Chi Minh City, the author

decided to conduct a research on the topic of “Factors influencing choices of using

third-party logistics service providers of manufacturing companies in Ho Chi Minh city” The topic does not only provide suggestions for 3PL service providers

in Ho Chi Minh city to improve their operations and customer services, but alsoprovide basis for further study of related issues surrounding the 3PL outsourcedecisions of different types of firms as well The author proposes a 3PL serviceproviders selection and evaluation model and focuses on manufacturing companiesoperating in Ho Chi Minh city as the research subject Through survey andquestionnaires, the author collects information to determine the key trends ofmanufacturers when they look for a 3PL service provider Analytical networkprocess method will be applied to deal with dependent problems and evaluate theinterdependence between criteria in quantitative approach Insights will beextracted, and solution will be suggested to assist decision makers in assessing therelative ranking of logistics service providers

1.2 Literature review 1.2.1 International research

Over the years, a greater amount of attention has been given to the selection of

a 3PL provider Few studies have been devoted to identifying 3PL selection criteria

in the literature, including, Meade and Sarkis (2002) Bottani and Rizzi, (2006);Bagchi and Mitra (2006); McGinnis et al., (1995); Qureshi et al., (2008); Jharkhariaand Shankar, (2007); Yan et al (2003; Langley (2004) Below is a summary ofsome significant researches to the author in order of time of release

In a study, “Selection criteria for providers of third-party logistics services: anexploratory study”, by Menon et al (1998), “on-time shipments and deliveries”,

“meet/exceed promises”, “availability of top management support”, “error rates”,

“responsiveness”, “creative management”, “financial stability” and “meet

performance/quality requirements” were identified as the criteria for selecting 3PLservice providers.

Onto the 21st century, a study, “A framework for evaluating third-partylogistics”, by Vaidyanathan (2005) provided a comprehensive framework with a set

of factors that can be used to evaluate a 3PL service provider This includes 5factors: “information technology”, “quality”, “cost”, “services”, “performance,intangibles”

In another study by Thakkar et al (2005), “Selection of third-party logistics(3PL): a hybrid approach using interpretive structural modeling (ISM) and analyticnetwork process (ANP)”, a list of 15 criteria for the 3PL selection were identified,namely: “sound financial background”, “previous experience”, “trained logisticspersonnel”, “readiness to work under the brand name of contract givingorganisation”, “necessary certifications”, “readiness to enter into a long-termcontract”, “geographical coverage”, “proactiveness in system design”,

“trustworthiness”, “attitude toward open-book accounting”, “readiness to workunder a computerised system”, “flexibility”, “margins provided to contractor”, and

“attitude toward hygienic practices”

In their research paper “A fuzzy TOPSIS methodology to support outsourcing

of logistics services”, Bottani and Rizzi (2006) proposed 12 factors for their model.They are “breadth of service”, “business experience”, “characterization of service”,

“compatibility”, “financial stability”, “flexibility of service”, “performance”,

“price”, “physical equipment and information systems”, “quality”, “strategicattitude”, “trust and fairness”

From the paper “An integrated model to identify and classify the key criteriaand their role in the assessment of 3PL services providers”, Qureshi et al (2008)suggested ten criteria, including: “IT capability”, “flexibility”, “quality ofmanagement”, “financial stability”, “compatibility”, “reputation”, “long-termrelationship”, “surge capacity”, “size and quality of assets”, and “geographicalreach and range of service”

In their research “FAHP sensitivity analysis for selection of third-partylogistics (3PL) service providers”, Kasture et al (2008) considered five majorcriteria, when choosing the 3PL service provider including “logistics capability”,

“logistics service quality”, “logistics information capacity”, “potential fordevelopment” and flexibility” For each major factor, sub-factors were included Forinstance, logistics throughput capability, technology capacity, equipment capacity,and maintenance cost were included under the logistics capability factor

Chen and Wu (2011) in their research “Applying analytic network process inlogistics service provider section – A case study of the industry investing inSoutheast Asia” considered numerous factors for logistics provider selection forelectronic companies in Southeast Asia Amongst those factors was “price”,

“enhanced operational efficiency”, “delivery performance”, “flexibility”,

“developing long-term relationships”, “financial conditions”, “industry reputation”,

“employee performance”, “on-time delivery”, and “surge capability”

Govindan et al (2016) in their research “A grey DEMATEL approach todevelop third-party logistics provider selection criteria” approached the problem byapplying grey decision-making trial and evaluation laboratory (DEMATEL) His set

of factor consists of “service quality”, “on time delivery performance”, “flexibility

in operation”, “cost of services”, “customer service”, “logistics informationsystem”, “financial stability”, “reputation”, “geographic location”, “technologicalcapability”, “performance history”, and “human resource policies.”

In the literature review papers on criteria and method used in the 3PL serviceproviders selection topic in 2014, Aicha Aguezzoul pointed out, through analysis of

67 articles on 3PL selection, some interesting statistics on the criteria of this topic.The most commonly used criteria are: “cost”, “relationship”, “services”, “quality”,

“information/equipment system”, “flexibility and delivery”, represent 79,59% ofcriteria The other 20,41% of criteria are “professionalism”, “financial position”,

“location”, and “reputation”

“responsiveness”, “quality assurance”, “reliability”, “empathy”, “tangibles”, and

“price”

Hoang Quoc Huy (2016), with his graduation thesis “Nghiên cứu các yếu tốảnh hưởng đến quyết định lựa chọn dịch vụ logistics của khách hàng tổ chức tạicông ty tnhh đầu tư thương mại vận tải Thái Dương, Hải Phòng” has concluded onfive factors They are “reliability”, “responsiveness”, “IT systems”, “price”, and

❖ Secondly, the author conducts in-depth study on factors influencingchoices of 3PL service providers by referring to previous empiricalresearches regarding the topic, therefrom proposing the model andhypotheses for the topic

❖ Thirdly, the author estimates the influence of the factors by conductingpreliminary survey, then conduct the official research by distributingonline and offline questionnaires and analyze the results

❖ Finally, with the conclusions from preceding chapters, the writerpresents advantages and disadvantages in Ho Chi Minh City market for3PL service providers; offers suggestions for these organizations tocome up with the most suitable business strategies, which may result in

a rise in profits by enhancing recent customer’s satisfaction, as well asattracting new customers

1.4 Subject and scopes of the research

The subject of this research is that factors that significantly impact the choice

of 3PL service providers of manufacturing companies in Ho Chi Minh City

For the scopes of the research, regarding the content of this research, thewriter only investigates the subjective viewpoints of manufacturing companies inVietnam due to limitation in time and resources

Scope of this research in terms of geographical location is limited tomanufacturing companies which operate in Ho Chi Minh City, being the recentcustomers 3PL service providers The reason for choosing Ho Chi Minh City isbased on its performance as the driver of the country Ho Chi Minh city continues to

be the leading region in economics performance of Vietnam in 2018, attributing to24,16% of the total outcome of Vietnam In terms of sea transport, along with VungTau, Hai Phong, Quang Ninh, goods going through ports of these city range from19,57 to 25,4 million tones, according to Vietnam Maritime Administration Also,35%-40% of containers comes from ports of Ho Chi Minh, while 90% of containersare transported between Ho Chi Minh city and ports Ho Chi Minh city isconsidered an emerging logistics center of Asia

For time scope, the research about the topic of “Factors influencing choices of

using third-party logistics service providers of manufacturing companies in Ho Chi Minh city” is conducted within the period of 4 months from February 2019 to May

2019, in which the survey will be carried out in March and April The time scope ischosen based on the result of Vietnam logistics report (Ministry of Industry &Trade, 2018), in which 73% of logistics firms asked says that the industry will see atwo-digit increase in 2019 The other 23% agrees that the growth will be below 10%

and no negative answers received The logistics industry is visioning a positiveoutlook for 2019, and this research will help 3PL service providers identify theneeds of the customers to achieve the expected results.

1.5 Research methodology

The writer uses the analysis and synthesis qualitative research method, withthe first step is collecting primary and secondary data Primary information isobtained through in-depth interviews with experts and survey distribution tomanufacturers in Ho Chi Minh City The information is then processed andanalyzed with regression analysis Meanwhile, secondary data is collected fromofficial and reliable sources domestically and globally Textbooks, official journals,researches, newspaper articles, reports and data collected by General StatisticsOffice of Vietnam and other authorities and agencies in Vietnam are utilized

Secondly, the processing of collected data starts with amendments to thequestionnaires after acquiring insights from industry insiders After the officialresearch, Microsoft Excel is used to eliminate inappropriate responses from theprimary information Subsequently, the author uses IBM SPSS Statistics 20software to get the desired results Cronbach’s Alpha coefficient of reliability test iscarried out, followed by exploratory factor analysis The purpose is to evaluate thevalidity of the measured variables and independent variables on the choice of 3PLservice providers

Lastly, the author uses multiple linear regression analysis to figure out thesignificance of the proposed hypotheses The results are analyzed to determine theimportance as well as the level of influence of each factor on manufacturer’s choice

1.6 New contribution of the research

First and foremost, despite the growth of the 3PL market of Vietnam, thenumber of researches regarding the topics are surprisingly insignificant Therefore,the study will give a different point of view of the problem in choosing 3PL serviceproviders Secondly, the available studies regarding the choice of 3PL serviceproviders yield varied results Additionally, demographics of Vietnamesemanufacturing companies are different from their counterparts from developed

countries, thus the findings from foreign studies cannot be directly applied to theeconomic situation of Vietnam Thirdly, the industry outlook for logistics changes

by the year, that is why this study is needed to provide updated point of view ofmanufacturers to their choices

This research will propose a new insight into how 3PL service providers caneffectively operate in Vietnam market, as well as provide them a more localperspective by presenting specific factors influencing Vietnamese’s manufacturers

in the strategic decision-making

1.7 Research structure

This graduation thesis is constructed with five chapters:

Chapter one: Introduction to factors influencing choices of using third-party logistics service providers of manufacturing companies in Ho Chi Minh city

Chapter two: Theoretical basis and research models of factors influencing choices of using third-party logistics service providers of manufacturing companies

in Ho Chi Minh city

Chapter three: Research models on factors influencing choices of using third-party logistics service providers of manufacturing companies in Ho Chi Minh city

Chapter four: Research outcomes and discussion on factors influencing choices of using third-party logistics service providers of manufacturing companies

in Ho Chi Minh city

Chapter five: Recommendations for third party logistics service providers operating in Ho Chi Minh city

Summary of chapter 1

In the first chapter, the author overviews the information on the decision topursue the topic and the overall structure of the thesis Then, through the literaturereview on the matter of selection and evaluation of 3PL service providers, theauthor points out his expected contributions to the topic, with hopes to provide newinsights fitting the economic overview of Vietnam, and Ho Chi Minh city

In the next chapter, the author discusses the theoretical basis and reviewsprominent researches on the topic of selection of 3PL service providers ofmanufacturing companies.

CHAPTER 2: THEORETICAL BASIS AND RESEARCH MODELS OF FACTORS INFLUENCING CHOICES OF USING THIRD-PARTY LOGISTICS SERVICE PROVIDERS

OF MANUFACTURING COMPANIES IN HO CHI MINH

CITY 2.1 Overview of third-party logistics service provider

2.1.1 Definition of third-party logistics

Firstly, the author goes over definitions of other authors Some define 3PL bygranting it with a large scope of activities McGinnis et al (1995) define 3PLactivities as logistical activities that can be provided or required by either a buyer or

a seller Another definition of 3PL characterizes it as an external organization thatperforms all or part of a producer's or consumer's logistical functions (Coyle et al,2003) By contrast, Murphy and Poist (1998) propose a narrower and moreexclusive definition of 3PL, saying that it is a long-term, mutually beneficialalliance between a shipper and a logistics provider that offers various logisticsservice and functions Similarly, Bagchi and Virum (1996) refer to 3PL as along-term partner that provides all or a considerable number of logistics activitiesfor the shipper From the given definitions, the author agrees with the opinion that3PL is a long-term partner to the manufacturer, whose relationship goes beyond theusual transaction basis towards a win-win situation that both parties can prosper.Currently, 3PL service providers can be divided by the types of activities theyoffer (Coyle et al., 2003) Table 2.1 shows the type of and examples of 3PLproviders

Table 2.1: Classification of 3PL service providers based on type of activity

Transportation based Damco, VN post, GHN, GHTK, FedEx, UPS

Distribution based DHL, Damco, Vinalines, Vinafco

Forwarding based APL, Kuehne + Nagel, Germadept, DB Schenker,

Panalpina, CEVA LogisticsFinancial based Shinyo Logistics, ViFreight

Information based Smartlog, Logiva, Abivin Route

Source: Compiled by the author, 2019

2.1.2 The role of third-party logistics in supply chain of manufacturing companies

For manufacturing companies, supply chain management is an integral part oftheir business Many choose to manage the supply chain themselves (insourcing),while others are opting for third-party logistics service provider to handle thisprocess (outsourcing) To reduce costs, companies are turning to 3PL serviceproviders for their resources, scope of operation, scalability, and their eminentexecution of warehousing, distribution and transportation Another explanation tothe choice of logistics outsourcing is that 3PL can enhance the logistics procedure

by allowing the firms to concentrate on their basic adequate qualities that probablydecreases the production cost and enhances the customer satisfaction (Tang andChen, 2013)

Figure 2.1: Relationship of 3PL provider in the supply chain of

manufacturer

Source: Nemoto and Tezuka, 2002

The figure above describes the role of 3PL and manufacturers, modeled on asupply chain of manufacturing industry In the alliance of SCM, Manufacturer Aand Supplier B have a principal-agent relationship In the alliance of 3PL,Manufacturer A and 3PL provider D also have a principal-agent relationship Theyhave to be cooperative in order to enjoy economies of scale and scope and have to

be flexible enough to revise the contract or to switch partners (Nemoto and Tezuka,2002)

For logistics, it is often referred to as an integrated function in the supply

chain The supply chain consists of many different activities, with different types of

operation, using different systems and geographically dispersed (Waters, 2003).Currently, manufacturer divides the supply chain into parts, including planning,procurement, manufacturing, and logistics For firms that have no expertise insupply chain management, decision to outsource a 3PL service provider caneffectively improve the supply chain if they are able to aggregate supply chain

assets or flows to a higher level than a firm itself can (Chopra, 2013) The figurebelow summarises the logistics services and their positions in the supply chain as aseries of distinct activities necessary in the supply chain of a manufacturingcompany.

Figure 2.2: Summary of logistics activities in the supply chain

Source: Waters, 2003

2018 3PL study (Langley, 2018) shows that both parties are moving awayfrom a transactional relationship and more toward meaningful partnerships withshippers relying on 3PLs to provide innovative solutions and a true competitiveadvantage However, there is a gap between the percentages of shippers that think

of themselves as “strategic” buyers of 3PL services (43%), with only 31% of 3PLsfeeling customers manage them like a strategic partner Additionally, 74% ofshippers indicate they have formal plans to manage 3PL relationships but only 42%

of 3PLs say formal plans to manage relationships exist More 3PLs (79%) thanshippers (64%) reported that they have been involved in projects where the ability

to execute quickly was directly impacted by lack of complete, accurate, andconsistent information having been provided by the shipper

2.1.3 Types of services offered by third-party logistics service provider

Table 2.2: Types of services offered by

3PL service providers

Selected manufacturing activitiesProduct marking, labeling, packing, and assembly/installationProduct modification, repair and maintenance

Customer

service

Freight bill payments and auditingOrder management and fulfillmentHelp desk and consulting servicesCarrier selection and rate negotiationLetter of credit review and complianceCustomer brokerage

Export licensing assistance and custom clearanceManagement and performance reports

Transportation

Pickup and delivery and cross docking servicesFleet operations and overseas distributionDomestic and international transportationRoute, and network optimization

Distribution strategy developmentIntermodal services

Reverse logistics (defective, repair, return)

Source: Compiled by the author, 2019

Through developments, 3PLs has grown from basic services to complexconsulting and execution Table 2.2 provides a detailed list of services from a 3PL

From the inescapable connection of logistics and the supply chain of manufacturingcompanies, 3PL service providers have been consistently offering services to matchthe need and goal of their clients From one off services and activities, 3PL serviceproviders are now shifting towards large, multi-year arrangement with various types

of services

With the scorching heat of competitions among 3PL service providers, there is

an upward demand for catching up with the latest trends and expand servicesportfolios Not only that, the increasing competitions also prove to be beneficial tothe clients, the manufactures, as they will receives many more options to optimizetheir supply chain and reduce costs simultaneously 2018 defines some of the trendsfor years to come

❖ Value-added services and transparency come as the leading trends for3PLs The core values of this trend are that the strength of relationshipbetween the clients and the 3PLs are borne on these In return, servicesand transparency increase the loyalty and confidence of clients to the3PL service providers

❖ Analytics and automation show their importance to the clients evenmore these days The advent of technology facilitates the managementand procedure of logistics and supply chain thanks to successfulintegration, costs, labor, manual work are greatly reduced, and workspeed is boosted Virtual reality or automatic vehicles are some of thefuture logistics solutions, especially the blockchain technology

❖ Last-mile delivery is becoming the norm due to the efficiency ofshipping powerhouses like UPS and Amazon At this point, they havealready developed specialized services for not only fast but also reliable

in delivery directly to the customer Last-mile delivery is the finalelement of the shipping process that leaves a certain impression aboutthe shipping provider in the customers mind Even if there is failure,3PL service providers are responsible for the consequences andcustomers’ experience That’s why, investing in better service and

technology to improve the last step of shipping is pivotal to business offuture 3PLs.

To adapt to growing demand in IT service of shippers, 3PL service providersare continuously improving their capability Below are the new types of servicessought after by clients of 3PL services providers, drawn from the 2018 3PL study(Langley, 2018) Table 2.3 reports on consensus on necessary IT services

Table 2.3: Shipper views of needed IT-based capabilities by 3PLs IT-based Services

Percentage Reported

by Shippers

Percentage Reported by Providers

Warehouse/distribution center management 70% 72%

Transportation management (Planning) 63% 79%

Visibility (Order, shipment, inventory, etc.) 61% 80%

Transportation management (Scheduling) 59% 75%

EDI data interchange (Orders, advanced shipment

Web portals for booking, order tracking, inventory

Global trade management tools (e.g., Customs

processing and document master guild table) 35% 37%

Customer relationship management (CMR) 31% 60%

Advanced analytics and data mining tools 27% 54%

Cloud-based systems 25% 42%

2.2.1 Transaction-cost economics by Oliver E Williamson (1979)

First, the author looks into the theory of transaction-cost economics by Oliver

E Williamson (1979) and how it is the basis for 3PL service providers selection.Transaction Cost theory might be one of the most important organisation theoriesbecause it is one of the main perspectives in organisational studies There has beenresearch on the interlink of this theory and supply chain paper (Schwabe, 2013),which answers the question: how transaction cost economics; a multidisciplinaryactivity that binds economics with features of organization theory and crosses withcontract law can supplement the management of supply chain

In his paper, Williamson suggests three dimensions that constitutetransactions, namely “uncertainty”, “the frequency of transactions repetitions”, and

“the degree of durability transaction-specific investment” Uncertainty is deemedthe critical attribute He also argues that these three dimensions are applied tocommercial transactions of all kinds

Williamson suggests the market governance: the main governance structurefor nonspecific transactions of both occasional and recurrent contracting Marketsare especially effective when recurrent transactions are contemplated, since bothparties need only consult their own experience in deciding to continue a tradingrelationship or, at little transitional expense, turn elsewhere Being standardized,alternative purchase and supply arrangements are presumably easy to work out.Nonspecific but occasional transactions are ones for which buyers (and sellers) areless able to rely on direct experience to safeguard transactions against opportunism

He also proposes rating services or the experience of other buyers of the same good.Given that the good or service is of a standardized kind, such experience rating, byformal and informal means, will provide incentives for parties to behaveresponsibly.

Applying this theory is an institutional way to reduce transaction costs incommerce It is the fundamental governance structure for broad based transactionswhich can be repetitive or periodic, in a standardized manner that is simple to agree

on contracts concerning supply plans

2.2.2 A model for strategic supplier selection by Joseph Sarkis and Srinivas Talluri (2002)

After studying on the transaction costs and the market governance structure,the author looks into the basis for evaluation via strategic supplier selection JosephSarkis and Srinivas Talluri presented a framework that considers issues of bothshort-term and long-term in the strategic evaluation of suppliers, where the basicbuyer-supplier relationship no longer applies With two group factors, the decisionprocess is depicted in the detailed graphic shown in the figure 2.3 The figuresuggests that the strategic supplier selection employs the planning horizon,organizational factors, and strategic performance metrics

Figure 2.3: Detailed graphical representation for strategic supplier

selection

Source: Sarkis and Talluri, 2002

The planning horizon incorporates the dynamic and competitive nature of anyorganization Using the planning horizon into a decision model will integrateevolving strategies and directions of the organization, which might be critical for

strategic decisions For example, managerial decision makers want to make surethat long-term issues are covered from a strategic perspective, but short-term risksmay cause a barrier such that the long-term horizon may never be reached Thus,incorporating both short-term and long-term considerations is important Tomaintain some simplicity in the model, the contrasting characteristics of short-termversus long-term planning horizons is applied.

The strategic performance metrics cluster focuses on four major metricsincluding cost, quality, time, and flexibility These metrics are comprised ofoperational measures that organizations use to manage their processes Within each

of these metrics, there are tangible and intangible factors that may be used in theirevaluation Each of these major strategic performance metrics can be furtherevaluated through their components or sub factors The organizational factorscluster contains three sets of factors: culture, technology, and relationship Theseelements focus less on the competitive factors associated with operational measuresand more on the capabilities and characteristics of the organizations that will formthe partnership Amongst the seven factors and metrics considered, there are further

31 sub-factors These sub-factors are chosen based on the dimension and theirimplied effect on the decision of strategic supplier

Overall, this article provides the initial step in the process of supplier selectionprocess For this study, the model sets a great example for the author to consider thefactors necessary to his proposed research model The proposed methodology hasseveral advantages over traditional methods utilized for supplier evaluation Theselection process effectively considered strategic, operational, tangible, andintangible measures in the evaluation process The proposed methodology can beutilized for supplier benchmarking and process improvement, supplier negotiationpurposes, allocation of order quantities, and decisions regarding supplierdevelopment initiatives These issues need to be further investigated as an extension

to this study

2.2.3 The five-stage model of third-party logistics buying process by Harry Sink and John Langley Jr (1997)

After reviewing on the basis for strategic partner selection, the author looksinto the buying process designed for 3PL service providers As manufacturingcompanies involve more deeply in the evaluation and utility of service of 3PLprovider, the framework was born out of the need for guidance in the purchasingprocess for 3PL

Below is the figure 2.4 illustrating the buying process developed by HarrySink and John Langley Jr (1997) The process shows a guidance for industrialbuyers in establishing a logistical alliance with an external supplier

Figure 2.4: The five stages of third-party logistics buying process

Source: Sink and Langley, 1997

Overall, the purpose of the process is to present a managerial framework forthe acquisition of 3PL services This activity is a strategic undertaking that require adecision-making process Figure 2.4 provides the 5-step process suggested by HarrySink and John Langley Jr

❖ First step, identify need to outsource logistics, begins by recognizing

that outsourcing is a viable management option to solve a problem orenhance an opportunity

❖ Develop feasible alternatives, the second step, involves a make-or-buy

analysis that includes all relevant costs A proper identification of totallogistics cost is difficult, as these expenses often are spread through-outthe organization Also, highlighting these costs can shed lights on thebenefits of outsourcing Once this information has been confirmed, itshould be presented to the firm’s executive to solidify organizationalcommitment to the concept

❖ Step three, evaluate candidates and select supplier, begins with the

establishment of selection criteria Quality, cost, capacity, and deliverycapability traditionally are used However, it is typically more rigorous.References provided by current customers, cultural compatibility,financial strength, the depth of management expertise, operation andpricing flexibility, and information system capabilities playpredominant roles

❖ In implement service, the step encompasses the initiation or

implementation of the logistical alliance The written transition planshould be mutually prepared by the buyer and the seller Also, training

of management representing both parties is the adoption should bephases in time to achieve and safeguard service and targets.

❖ Finally, ongoing service evaluation, is the step that happens only when

the alliance is in effect The outcome of this phase determines whetherthe buyer will seek and alternative solution, replace the incumbentsupplier, bring the services back in-house, or renew the existingcontract Service requirements should mirror the customer servicepolicy established by the purchaser for its customers Timely reviews ofcost should also be accomplished, such as timely or quarterly.Assessment methods must include both qualitative and quantitativetools Reviews should be conducted by a team composed of buyerpersonnel who regularly interact with the supplier and are qualified toevaluate every aspect of the relationship

2.3 Previous empirical researches on factors influencing choices of using third-party logistics of manufacturing companies

2.3.1 Selection of Third-Party Logistics (3PL): A hybrid approach using interpretive structural modeling (ISM) and analytic network process (ANP) by Jitesh Thakkar and associates (2005)

The first empirical research is from Jitesh Thakkar and associates, published in

2005 Thakkar et al (2005) believes that to ensuring outsourced distribution networkachieve the requested level of performance requires an analytical approach forevaluating the alternative third-party logistics services In this paper, a list of 26criteria for evaluating 3PL service providers is proposed As the use of 3PL serviceproviders is becoming prevalent, the relationships between parties with 3PL are,thus, more complex than traditional logistics supplier relationships and they areregarded as strategic alliances

They argue that ownership of capabilities has considerably faded inimportance, replaced by a company’s ability to control and make the most of critical

capabilities In this new era of capability sourcing, companies’ value chaindecisions will increasingly shape their organizations and determine the kinds ofmanagerial skills needed to acquire and develop in order to survive, grow, andcompete Hence, decisions about outsourcing are strategic in nature and theexorbitant cost of undoing should be considered as well The study demonstrates theuse of a logical and structured approach to reduce the risks of poor investmentdecisions Despite the proposed approach being computationally intensive, thebenefits of risk reduction will outweigh the costs and time incurred.

Most of the real-time obstacles involve assessment of several subjectiveparameters that, by nature, are interdependent For instance, proactiveness andreadiness of a contractor to share experiences in system reconfiguration could bedependent on margins provided to the contractor, the level of trained logisticspersonnel, the 3PL’s experience, financial background, and so on However, acontractor’s willingness to share experiences in system reconfiguration may lead tothe establishment of a long-term relationship After focused survey, interviews anddiscussions, the authors found 15 criteria most suitable, shown in table 2.4 below

Table 2.4: 3PL service providers

NC Necessary certifications like income tax, sales-tax, clearance,

certification for quality standards, and so onTLP Trained logistics personnel

ACN Availability of computer network/Adaptation of IT

FLX Ability to react to changing needs (flexibility)

LTC Readiness and ability to enter into long-term contract

GC Geographical coverage

RSE Proactiveness and readiness to share experiences in system

design and system reconfigurationTRW Trustworthiness

MC Margins provided to contractor by organization

AOBA Attitude toward open-book accounting

AHP Attitude toward hygienic practices

RCS Readiness to work under a computerized system

Source: Thakkar et al, 2005

To capture this interdependence, Thakkar et al decided to use techniquesinterpretive structural modeling (ISM) which may be found more useful ISM is anappreciated methodology for identifying and summarizing relationships amongspecific items that define an issue or problem to prioritize the criteria, analyticnetwork process (ANP) is used by the authors For case, the authors developed ahybrid approach of ISM and ANP for the selection of third-party logistics serviceproviders

For this research, the results divide the factors into four groups, namelyautonomous variables, dependent variables, driver variables, and linkage variables.The results are as below

❖ FBG (sound financial background) and PE (previous experience) arekey criteria with maximum driver powers, followed by TLP (trainedlogistics personnel)

❖ On the other hand, RWBN (readiness to work under the brand name ofcontract giving organization) and NC (necessary certifications) areweak drivers They are relatively disconnected from the system Thus,they are the autonomous variables

❖ LTC (readiness to enter into long-term contract), GC (geographicalcoverage), RSE (proactiveness in system design), TRW(trustworthiness), AOBA (attitude toward open-book accounting), and