Selecting Logistics Service Providers: Key Factors & Decisions

Introduction

Logistics plays a pivotal role in the integration of supply chains within industries. As the market has rapidly become more global and continues to progress in that direction, logistics is now perceived as a significant area where industries can reduce costs and enhance customer service quality. Today, many companies are pursuing the outsourcing of their logistics operations to what are referred to as third-party logistics service providers in order to bring products and services to market more rapidly. For this reason, there is a growing tendency for manufacturing corporations to outsource their logistics activities to meet their increasingly complex logistics service requirements. This tendency has heightened the significance of third-party logistics service providers. In the contemporary economic environment, many entities regard these logistics service providers as more proficient and cost-effective in fulfilling their partial or full logistical requirements (Akman and Baynal, 2014).

The selection of logistics service providers is an intricate multi-criteria decision-making issue that encompasses both quantitative and qualitative conditions, some of which can conflict with one another, and is essential to enhancing the competitiveness of companies. It is a significant function of logistics departments, as it leads to substantial savings for the organization. When selecting an appropriate logistics service provider, logistics managers may be uncertain whether the selection will fully satisfy the needs of the organization. This paper discusses the various factors that must be considered when selecting logistics service providers and how consignors make decisions regarding the choice of logistics services.

Literature Review

There is a growing trend toward logistics outsourcing in the international market. According to research conducted by Lambert, Stock, and Ellram (1998), logistics outsourcing can be defined as the utilization of a third-party provider for complete or partial firm logistics operations. In line with this definition, Rabinovich et al. (1999) defined logistics outsourcing relationships as long-term and short-term agreements or associations between manufacturing and service firms and third-party logistics providers. Furthermore, Lieb (1992) pointed out that third-party logistics involves the utilization of external companies to undertake logistics functions conventionally performed within an organization. Third-party logistics service providers deliver a range of logistics services to their clients, including direct transportation, warehouse operations and management, shipment planning and consolidation, logistics information system management, carrier selection, rate negotiation, product returns, fleet management, cataloging, packing, order processing and fulfillment, product installation, inventory management, and customer spare parts management (Akman and Baynal, 2014).

Similarly, Sohail and Sohal (2003) defined third-party logistics as the utilization of external companies to undertake logistics functions that have traditionally been performed within a company. In this context, third-party logistics is understood to encompass the activities carried out by an external company in the best interests of a client organization, and these activities include at minimum the delivery and management of multiple integrated logistics services. These services are provided in a unified manner rather than on a standalone basis. According to the Council of Supply Chain Management Professionals, a third-party logistics provider is defined as a company that offers multiple logistics services for use by consumers, and these services are ideally integrated together by the provider (Akman and Baynal, 2014).

According to a survey conducted by Forrester Research, approximately 80 percent of Fortune 500 companies have outsourced transportation services, roughly 55 percent have outsourced their distribution services, and 46 percent have opted for outsourcing in their manufacturing activities. Taking this into account, the logistics sector has surpassed the $50 billion mark globally. Third-party logistics service providers can be defined as external suppliers that perform some or all of a corporation's logistics functions (ERP Academy, 2018). Logistical functions released to third-party firms include services such as transportation, storage, and distribution. These functions require a high level of business investment, and therefore selection demands thorough prior examination. Third-party logistics services focus largely on transportation and warehousing, and these providers should have professional experience in each service area (Chen and Wu, 2011).

Factors to Consider When Selecting Logistics Service Providers

The decisions linked with supply chain management encompass both the short-term and long-term periods. Strategic decisions deal with corporate policies and the general design and structure of the supply chain. Operational decisions, by contrast, address the day-to-day activities and issues of an organization and must take into account the strategic decisions already in place. For this reason, it is essential for an organization to ensure that its supply chain is structured through long-term planning while simultaneously attending to everyday operational activities. In general, companies must decide which logistics service providers to use. The contracts made with logistics service providers can frequently be worth substantial sums of money and involve a significant portion of an organization's operations; therefore, selecting the right partners is critically important. Several distinct factors must be taken into consideration when making this selection.

One of the fundamental factors to consider is the cost and service level of a logistics service provider. There are a relatively small number of reliable logistics service providers operating internationally, and these providers have varying cost structures for their clients. However, not all of them have equally strong operational satisfaction rates across international routes. Some may offer superior service between specific ports at high prices, while others may offer inferior service on the same routes at lower prices. Therefore, when selecting a logistics service provider, it is essential to consider both competitive service quality and acceptable cost. It can be challenging to designate a single logistics service provider for an international operation, and it is important to seek the optimum balance between cost and benefit (Satellite Trans, 2018).

The most pivotal capability an international logistics service provider must offer is the ability to scale operations in line with a company's growing and evolving needs. Bi-directional scalability will have a direct impact on the effectiveness of a company's supply chain. Every company strives to grow, potentially expanding internationally, yet every firm also experiences fluctuations in demand. When demand declines — for whatever reason — a logistics service provider must be able to scale down operations quickly to curtail costs while maintaining efficient flow of goods. Conversely, when demand increases, the provider must be capable of managing sudden spikes smoothly and without disruption. Businesses encounter growing pains from time to time, but a proficient and experienced logistics service provider that offers comprehensive services and has experience managing sudden growth will add considerable value to a supply chain (Flash Global, 2015).

Procurement and shipping may appear to be low-technology operations; however, logistics service providers are ultimately measured by the efficiencies they deliver. Logistics service providers that embrace leading-edge technology offer the greatest potential for optimization. In the contemporary business environment, technological developments such as cloud-based platforms and Internet of Things (IoT) devices have become prevalent and essential for successful operations. These technologies provide logistics service providers with greatly enhanced capabilities and greater control over supply chain processes. A top-tier logistics service provider will have state-of-the-art systems that enable them to supply a company with real-time data and feedback on supply chain operations and freight.

Furthermore, whether a company is evaluating a non-asset-based or an asset-based international logistics service provider, it should be offered a wide range of warehousing and shipping options suited to its operations. Options and alternatives create opportunity within a supply network. When a logistics service provider maintains extensive relationships with multiple suppliers, the company benefits from the provider's ability to select the lowest-cost option. This makes advanced technology platforms all the more important for managing those options, identifying the most effective solutions, and executing them without issue (Flash Global, 2015).

The unexpected failure or dissolution of an international logistics service provider can have serious adverse consequences for a business and its customers. With this in mind, partnering with a provider that has a history of financial stability and a reliable payment record will reduce the risk that the logistics provider will prove unreliable due to its own financial mismanagement. When evaluating potential logistics service providers, it is essential to request a list of their partners and to inquire about their payment history — specifically whether they have ever missed payments and, if so, the reasons for such circumstances. The manner in which a 3PL handles its business partners is a telling indicator of how it will treat a new client, and speaking with those partners directly can provide valuable perspective.

Beyond financial stability, it is important to investigate a logistics service provider's history of past transactions and to obtain references from both current and former clients. A thorough review of their general track record should be conducted. Key considerations include whether they retain multiple clients on a long-term basis, whether they have a reputation as an innovative and technologically advanced firm, and whether they are known for reliability and efficiency.

References for a third-party logistics provider should be strongly positive and easily verifiable. There should be outstanding recommendations attesting to the provider's value, and clients should be willing to speak openly about their outcomes as well as the provider's safety, flexibility, and dependability. References should also speak to the culture and character of the international 3PL. Whether dealing in goods or services, the logistics provider should be delivering a value proposition that goes well beyond mere efficiency. The ability to identify and capitalize on opportunities along the supply chain is a prime example of this added value (Flash Global, 2015).

Conclusion

A highly efficient, cost-effective, and free-flowing supply chain forms the basis of every successful company. It allows all other operations within the company to proceed without obstruction or concern about a shortage of materials, supplies, or parts. Selecting the right logistics service provider is therefore one of the most consequential decisions a logistics manager can make.

There are various factors to consider when making this selection, including cost, scalability, proven track record, innovativeness, and financial stability and payment history. A key decision-making approach frequently employed by logistics managers is to allocate a large share of the business to one primary carrier and a smaller share to a competing carrier. The advantages of this approach are twofold: it provides a contingency if problems arise with the primary carrier, and it keeps both carriers accountable by ensuring they are aware that an alternative is always available should their performance decline. Together, these factors and strategies provide a robust framework for effective supply chain management through well-chosen logistics partnerships.

References

Akman, G., & Baynal, K. (2014). Logistics service provider selection through an integrated fuzzy multicriteria decision making approach. Journal of Industrial Engineering, 2014.

Chen, K. Y., & Wu, W. T. (2011). Applying analytic network process in logistics service provider selection — a case study of the industry investing in Southeast Asia. International Journal of Electronic Business Management, 9(1).

ERP Academy. (2018). Outsourcing in logistics processes, 3rd party logistics service providers. Retrieved 25 August 2018 from: http://www.erpakademi.com/lojistik-sureclerinde-dis-kaynak-kullanimi-3-parti-lojistik-servis-saglayicilari.html

Flash Global. (2015). 6 factors to consider when selecting the right global 3PL partner for making your supply chain go global. Retrieved 25 August 2018 from:

Lambert, D. M., Stock, J. R., & Ellram, L. M. (1998). Fundamentals of logistics management. McGraw-Hill/Irwin.

Lieb, R. C. (1992). The use of third-party logistics services by large American manufacturers. Journal of Business Logistics, 13(2), 29.

Mangan, J., Lalwani, C., & Lalwani, C. L. (2016). Global logistics and supply chain management. John Wiley & Sons.

Rabinovich, E., Windle, R., Dresner, M., & Corsi, T. (1999). Outsourcing of integrated logistics functions: an examination of industry practices. International Journal of Physical Distribution & Logistics Management, 29(6), 353–374.

Satellite Trans. (2018). Choosing a logistic service provider. Retrieved 25 August 2018 from:

Sohail, M. S., & Sohal, A. S. (2003). The use of third party logistics services: a Malaysian perspective. Technovation, 23(5), 401–408.