Selection criteria for providers of third-party logistics services: An exploratory study

Journal of Business Logistics, 1998 by Menon, Mohan K, McGinnis, Michael A, Ackerman, Kenneth B

Since deregulation of the freight transportation industries, buying logistics services has become similar to the purchase of other types of industrial services. This exploratory study examines selection criteria for logistics service providers and how these criteria are affected by the firm's competitiveness and external environment. Lessons for practitioners, teachers, and researchers are provided.

Until 1978 United States domestic for-hire freight transportation was subject to economic regulation. Rates charged, market entry and exit, and levels of service were administered by the Interstate Commerce Commission (for trucks and rail) and the Civil Aeronautics Board (for air freight). As a result, the buying of logistics services was inhibited by the ability of providers to offer integrated service packages. Since deregulation of air freight in 1978 and rail and truck in 1980, most of the regulatory restrictions have disappeared, and processes for purchasing domestic for-hire logistics services have become similar to those for buying other types of industrial services. In addition, pressures to increase the efficiency and effectiveness of purchasing processes and supplier performance have influenced the buying of transportation and other logistics services. Third-party logistics services which emerged as a significant topic in the literature in the middle 1980s,1 refers to a for-hire provider performing logistics activities for the buyer or seller of raw materials, goods in process, or finished products. The third party performs services that might be done by the buyer or seller, is actively engaged in the movement of goods and information relevant to the transaction, but does not take title. Thirdparty logistics services cover a wide range of products.2 One directory lists more than 1,500 providers in Canada, Mexico, and the United States.3

The outsourcing of logistics services and selection criteria for providers have been examined in the literature. Maltz concluded that service concerns drive private warehouse use, logistics managers do not see an inherent cost advantage of third-party use, and they are reluctant to use third parties due to perceived service shortcomings.4 La Londe and Maltz found that logistics outsourcing is driven more by perceived service differences than by cost.5 In Lieb's study, users of logistics services reported positive effects on logistics costs and system performance, customer satisfaction, and employee morale.6 Finally, McGinnis, Kochunny, and Ackerman concluded that the outsourcing decision is not due to any generalized advantage or disadvantage and that third-party selection should focus on the user's market needs.7

The objectives of this exploratory study were to examine the criteria for selecting third-party logistics services providers and how the firm's competitiveness and external environment affect these criteria. The following section reviews the relevant literature. Next, the research methods are discussed, and five hypotheses are developed. The results and discussion section addresses provider selection criteria, describes the roles of organizational strategy and the external environment, tests the hypotheses, and develops five propositions based on the results. The final section provides insights for logistics practitioners, teachers, and researchers regarding the selection providers of third-party logistics services.

BACKGROUND

Insights from Freight Transportation Choice

The literature on freight transportation choice developed over the last thirty years provides some insights that may be relevant to the selection of third-party logistics services providers. While service is usually more important than freight rates when selecting carriers, priorities differ among service variables, and freight rates are more important than service in some user segments.8 McGinnis concluded that carrier choice selection is a constrained optimization decision whereby freight rates are minimized subject to a dynamic array of reliability, transit time, damage, shipper market conditions, carrier considerations, and product characteristic constraints.9 Finally, Murphy and Farris concluded that carrier selection models do not adequately address the goals of time-based logistics strategies.10

One study identified seven factors relevant to transportation choice.11 These are (in descending order of explained variance percentage) speed and reliability ( 14.8%), loss and damage (9.4), inventories (8.4), freight rates (7.5), market competitiveness (5.6%), company policy and customer influence (5.2), and external market influences (4.7). All seven scales were used as dependent variables to explain freight transportation market segments.12 Three scales (speed and reliability, loss and damage, and freight rates) were used as dependent variables to explain shipper modal usage patterns.13

The questionnaire items used as dependent variables in this study were based on the above literature and the authors' insights gained from informal conversations with third-party users and providers over time.