Third Party Logistics: A Literature Review and Research Agenda

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Third party
Third party logistics: a literature logistics
review and research agenda
Konstantinos Selviaridis and Martin Spring
Department of Management Science, 125
Lancaster University Management School, Lancaster, UK
Abstract
Purpose – To provide a taxonomy of third party logistics (3PL) research and, based on that, to
develop a research agenda for this field of study.
Design/methodology/approach – The proposed 3PL research classification framework is based
on a comprehensive literature review, which concentrates on peer-reviewed journal papers published
within the period 1990-2005. A total of 114 academic sources have been retrieved and analysed in
terms of research purpose and nature, method employed, theoretical approach and level of analysis.
Findings – The review reveals that 3PL research is empirical-descriptive in nature and that it
generally lacks a theoretical foundation. Survey research is the dominant method employed, reflecting
the positivist research tradition within logistics. It identifies certain knowledge gaps and develops five
propositions for future research. It suggests that focus should be directed towards more normative,
theory-driven and qualitative method-based studies. It also argues that further empirical research in
relation to 3PL design/implementation and fourth party logistics services is needed.
Originality/value – This paper fulfils an identified need for a comprehensive classification
framework of 3PL studies. It essentially provides both academics and practitioners with a conceptual
map of existing 3PL research and also points out opportunities for future research.
Keywords Third party vendors, Distribution management
Paper type Literature review
1. Introduction
In recent years there has been a surge of academic interest and publications in the area
of third party logistics (3PL). This can be partly explained by the growing trend of
outsourcing logistics activities in a wide variety of industrial sectors (Transport
Intelligence, 2004). The continuing wave of consolidation within the 3PL industry has
also resulted in the emergence of large companies that have the capabilities to offer
sophisticated logistics solutions on a continental or even global scale. Such logistics
service providers (LSPs) strive to assume a more strategic role within the supply chain
of clients, expanding their scale and scope of operations.
Despite the growing interest in 3PL, the literature on this area appears to be
disjointed. Based on an extensive literature review (114 references), this paper aims to
offer a taxonomy of 3PL studies and point out opportunities for further research. In a
previous attempt, Razzaque and Sheng (1998) summarised the results of their literature
survey which also included articles from practitioner journals and the trade press.
For the sake of rigour, the present study concentrates only on refereed journal papers
published during 1990-2005. The International Journal of Logistics
Management
Vol. 18 No. 1, 2007
1.1 A note on definitions pp. 125-150
Terms such as “logistics outsourcing” “logistics alliances” “third party logistics” q Emerald Group Publishing Limited
0957-4093
“contract logistics” and “contract distribution” have been used interchangeably to DOI 10.1108/09574090710748207
IJLM describe the organisational practice of contracting-out part of or all logistics activities
18,1 that were previously performed in-house (Aertsen, 1993; Bowersox, 1990; Lieb, 1992;
Sink et al., 1996). Different definitions tend to emphasize different aspects of
outsourcing arrangements such as the service offering, nature and duration of
relationships, performance outcomes, extent of third party responsibility over the
logistics process and position/role in the supply chain.
126 3PL is usually associated with the offering of multiple, bundled services, rather than
just isolated transport or warehousing functions (Leahy et al., 1995). Contemporary
3PL arrangements are based on formal (both short- and long-term) contractual
relations as opposed to spot purchases of logistics services (Murphy and Poist, 1998).
In recent years, the term fourth party logistics (4PL) has also emerged to describe
more advanced contracting arrangements. Van Hoek and Chong (2001, p. 463) define
4PL as:
. . . a supply chain service provider that participates rather in supply chain co-ordination than
operational services. It is highly information based and co-ordinates multiple asset-based
players on behalf of its clients.
It is also noteworthy that some authors provide broad definitions of the 3PL
industry, including freight forwarders and shipping lines (Rao and Young, 1994).
Overall, it appears that 3PL terminology is overlapping and fails to take into account
the shippers’ industry-specific characteristics.
2. Method
A comprehensive literature review was conducted with the aim of constructing a
classification framework for 3PL studies and developing a research agenda for the
future. The review focused on refereed journal papers published within the period
1990-2005. The papers were primarily retrieved from logistics journals, although
publications were also found (through database searches) in supply chain
management, operations management and marketing journals.
2.1 Analysis of findings

The analysis of literature is based on multiple dimensions. Following Croom et al.
(2000), both content- and method-oriented criteria are used. The papers were firstly
classified according to their research purpose (descriptive vs normative) and nature
(empirical vs conceptual). The results indicate that most 3PL studies (60 per cent)
are empirical-descriptive in nature (Figure 1).
Empirical Conceptual
Descriptive 60% 9%
Figure 1.
Classification of 3PL
literature in terms of
research purpose and Normative 24% 7%
nature
In terms of the methods employed, although case-based research is also conducted, the Third party
majority (50 per cent – see Table I) are based on surveys, apparently reflecting the logistics
positivistic research tradition within logistics (Ellram, 1996; Gammelgaard, 2004;
Mentzer and Kahn, 1995).
3PL studies are weakly theorised, with 69 per cent of the papers having no
theoretical foundation and simply describing trends in the industry. This confirms
others’ views that logistics research lacks a theoretical basis (Kent and Flint, 1997; 127
Mentzer et al., 2004). Nonetheless, some work uses theories such as transaction cost
economics (TCE) and the resource-based view (RBV) of the firm to explain logistics
outsourcing. Relationship marketing approaches, network theory, agency theory,
competence theory, channel theory, political economy theory and social exchange
theory have also been applied to explain aspects of 3PL relations. However, their use
seems to be the exception rather than the rule and most of them are applied on a
piecemeal basis, without serving any broader research objective.
The level of analysis of 3PL research is also examined (Table II). In line with
Harland (1996) and Hakansson and Snehota (1995), studies are classified in terms of
three levels:
(1) the firm;
(2) the dyad; and
(3) the network.
The majority of studies (67 per cent) focus on the firm level, examining issues from
either the shipper’s or the LSP’s viewpoint (e.g. outsourcing decision). Regarding the
dyadic level, the literature concentrates on different aspects of the LSP-client
relationship (e.g. contracting). Very few studies (6 per cent) exist at the network level
(e.g. logistics triads).
3. An integrative framework for 3PL research

An integrative framework for 3PL research is proposed (Table III), based on the
identification of main themes within this area of study. Existing studies are classified
Methodology Per cent
Surveys (58) 51
Case studies (17) 15
Other secondary data (e.g. internet research) (13) 11.5 Table I.
Literature review (10) 9 3PL research
Multi-method research (9) 8 methods – frequency
Other (7) 5.5 and percentages
Level of analysis Percentage of studies Indicative topics
Firm 67 Outsourcing decision; selection criteria; 3PL growth Table II.

Dyad 27 3PL success factors; contracting; performance measurement Analytical level of
Network 6 Logistics triads; horizontal networks 3PL research
IJLM according to their research purpose and level of analysis. The framework offers a
18,1 taxonomy of past and current 3PL research and also helps in identifying gaps that
need to be addressed in the future. A detailed discussion of the relevant literature is
presented in the following.
4. The firm level

128 A wide range of issues are examined either from the client’s or the service provider’s
viewpoint.
4.1 Outsourcing decision

The decision to outsource (or not) logistics activities depends on a multitude of
variables, which refer to both internal and external considerations. Rao and Young
(1994) have identified factors such as centrality of the logistics function, risk and
control, cost/service trade-offs, information technologies and relationships with LSPs.
The concept of logistics complexity is also introduced to incorporate a number of
critical drivers that impact on the above identified factors. Product-related (e.g. special
handling needs), process-related (e.g. cycle times) and network-related (e.g. countries
served) drivers are believed to have an indirect influence in the outsourcing decision
(Rao and Young, 1994).
van Damme and Ploos van Amstel (1996) discuss four categories of considerations
related to economic viability, market issues (demand variability and customer service),
personnel/equipment availability and extent of supplier dependence. They also
identify several favourable conditions for outsourcing such as expanded assortment
and demand seasonality (van Damme and Ploos van Amstel, 1996). Hong et al. (2004b)
discuss determinants of outsourcing in terms of the shipper firm’s characteristics
(e.g. firm size). In the same vein, Daugherty and Droge (1997) link the logistics
outsourcing decision with the shipper’s organisational structure; organisations that
have decentralised “line activities” at the business unit level are expected to outsource
more in comparison to shippers that organise theirs centrally.
The “do or buy” decision is also affected by evaluation of cost/service trade-offs.
One important determinant of the decision is cost comparison between alternative
options. Costs associated with performing logistics activities in-house and investment
in capital assets is traded-off against service provider fees. The lowest cost solution
should then be selected (van Damme and Ploos van Amstel, 1996). However, cost is not
the single most important decision variable and logistics service issues are also
Firm Dyad Network
Descriptive Benefits/risks of outsourcing Formation and evolution of 3PL relations Logistics

Service offerings and usage Managing 3PL relations triads
3PL selection criteria Contracts 4PL/LLP
Growth strategies Information exchange
Performance measurement
Table III. 3PL success factors
An integrative Normative Outsourcing decision Partnership models
framework for 3PL Purchasing 3PL services
research 3PL services marketing
considered (La Londe and Maltz, 1992; McGinnis et al., 1995; Sarel and Zinn, 1992). For Third party
instance, Maltz (1994b) examined the relative impact of cost and service on the decision logistics
to outsource warehousing and found that organisations were reluctant to use
third-party warehousing due to customer service considerations.
Several authors have applied TCE theory to the logistics outsourcing decision.
For example, Aertsen (1993) argued that high asset specificity coupled with difficulties
in performance measurement should lead to in-house distribution. Maltz (1994a) found 129
that high asset specificity is associated with in-house warehousing, whereas high
transaction frequency leads to outsourcing. Skjoett-Larsen (2000) combined asset
specificity and uncertainty to create a framework for the outsourcing decision: 3PL
providers must be used in the case of medium-specific assets or in cases of high asset
specificity, but low uncertainty.
The decision to contract-out logistics can also be driven by resource and capability
considerations (Bolumole, 2001). Forming relationships with 3PL providers is an
efficient and effective means of achieving the required service without investing
heavily in assets and new capabilities (Persson and Virum, 2001; Stank and Maltz,
1996). In this way, shippers can focus on their core business. Furthermore, changes
in the business environment, increased competition, pressure for cost reduction and
the resulting need to restructure supply chains are often quoted as motives for the
formation of alliances with LSPs (Bagchi and Virum, 1996; van Laarhoven and
Sharman, 1994). Whatever the rationale for contract logistics, it is noted that the
outsourcing decision should be examined in the context of corporate and logistics
strategy at specific time periods (Fernie, 1999).
4.2 Benefits and risks of outsourcing

A variety of benefits and risks in relation to 3PL have been reported in the literature.
These can be classified as strategy-, finance- and operations-related. Outsourcing
non-strategic activities enables organisations to focus on core competence and exploit
external logistical expertise (Sink and Langley, 1997). 3PL providers can also
contribute to improved customer satisfaction and provide access to international
distribution networks (Bask, 2001). The most often-cited risks are associated with loss
of control over the logistics function and loss of in-house capability and customer
contact (Ellram and Cooper, 1990). However, it is usually the case that shippers employ
a mixed strategy regarding logistics and retain important logistics activities (e.g. order
management) in-house (Wilding and Juriado, 2004). While it is reported that users of
3PL enhance their flexibility with regard to market (investments) and demand (volume
flexibility) changes, lack of responsiveness to customer needs is also cited as a problem
of outsourcing (van Damme and Ploos van Amstel, 1996).
Logistics outsourcing offers many cost-related advantages such as reduction in
asset investment (turning fixed cost into variable), labour and equipment maintenance
costs (Bardi and Tracey, 1991). LSPs serve multiple customers and are able to utilize
capacity better and spread logistics costs, thus achieving economies of scale (van
Damme and Ploos van Amstel, 1996). However, cost reduction is not always realised
due to unrealistic fee structures proposed by service providers (Ackerman, 1996); and
even if realised, it can be offset by the provider’s margin (Wilding and Juriado, 2004).
Cost savings evaluation can be difficult due to the shipper’s lack of awareness of
internal logistics costs. Indeed, the outsourcing option may be chosen in order to give
IJLM an indication of in-house costs and serve as an external benchmark for logistics
18,1 efficiency (van Laarhoven et al., 2000).
Regarding operational advantages and problems of 3PL, evidence is contrasting.
Reported benefits include reduction in inventory levels, order cycle times, lead times
and improvement in customer service (Bhatnagar and Viswanathan, 2000; Daugherty
et al., 1996; Wong et al., 2000). However, other authors cite problems with respect to
130 service performance, disruption to inbound flows, inadequate provider expertise,
inadequate employee quality, sustained time and effort spent on logistics, loss of
customer feedback and inability of 3PL providers to deal with special product needs
and emergency circumstances (Ellram and Cooper, 1990; Gibson and Cook, 2001;
Sink and Langley, 1997; Svensson, 2001; van Laarhoven et al., 2000). Despite gaining
access to logistics information systems (Rao et al., 1993), shippers appear to be
dissatisfied with service provider’s IT capabilities and prefer to rely on in-house
systems instead (van Laarhoven et al., 2000).
4.3 Service offerings and usage

The review reveals a mismatch between supply and demand for logistics services
(Murphy and Poist, 2000). Evidence from recent industry surveys indicates that while
LSPs expand their offerings to include information systems, consulting, contract
manufacturing and even purchasing and financial services, there is a low uptake of
such services and buyers in general prefer to outsource transport- and
warehouse-related functions (Lieb and Bentz, 2005a; Lieb and Kendrick, 2003; Lieb
and Randall, 1999).
The literature appears to focus on the demand-side of 3PL; a large number of studies
focus on the extent of 3PL usage across specific countries/regions and industries.
A series of annual surveys conducted in the USA by Lieb and colleagues (Lieb, 1992;
Lieb and Bentz, 2004, 2005b; Lieb et al., 1993; Lieb and Miller, 2002; Lieb and Randall,
1996) is a well-known example. Main issues examined by such studies include services
used, usage rate, contract renewal rates, outsourcing costs and geographical spread of
services. Generally speaking, findings indicate the prominence of transport, warehouse
and administration-related (e.g. freight payment) services and confirm the continuing
growth of logistics outsourcing (Ashenbaum et al., 2005; Lieb and Bentz, 2005b;
Murphy and Poist, 1998).
Research regarding 3PL usage also includes experience from specific countries or
industries. Country-specific studies appear to stress the prominence of transport
and warehousing services and also identify other activities with growth potential
(e.g. freight bill auditing/payment, see Min, 2002). Examples include:
.
Australia (Dapiran et al., 1996; Sohal et al., 2002);
.
China (Hong et al., 2004a);
.
Malaysia (Sohail and Sohal, 2003);
.
Mexico – US border (Maltz et al., 1993);
.
New Zealand (Sankaran et al., 2002); and
.
Singapore (Bhatnagar et al., 1999).
Fernie (1999) reports a low uptake of 3PL service in the UK retail sector, whereas
Wilding and Juriado (2004) submit that firms within the European consumer goods
industry use both in-house and contract logistics, with transportation and overflow Third party
storage to be the most-often outsourced services. Evidence also suggests that shippers logistics
outsource services in bundles (e.g. warehousing and inventory control) by combining
activities that share common transactional elements and information flows (Maltz and
Ellram, 2000; Maltz et al., 1993; Rabinovich et al., 1999).
Overall, there appears to be weak demand for value-added solutions such as
information systems, 4PL and manufacturing-related services (van Hoek, 2000b, c; 131
van Hoek and Dierdonck, 2000). Most client organisations perceive such activities as
too important to outsource and express their reservations about LSP capabilities
in those areas. It is even suggested that such services are supply-driven and do not
reflect the shippers’ needs (Wilding and Juriado, 2004). The bulk of logistics services
bought still remains in the areas of transportation and warehousing.
4.4 Purchasing 3PL services

Two main issues are identified regarding procurement of 3PL services:
(1) normative purchasing frameworks; and
(2) 3PL selection criteria.
4.4.1 Purchasing frameworks. Three main frameworks for procurement of logistics

services have been identified. Andersson and Norman (2002) compare the purchasing
process between commoditised (e-freight exchanges) and advanced logistics
services. They find that definition of service requirements appear to be more
difficult, criteria for 3PL selection extend far beyond price considerations and contracts
are much more detailed when buying advanced logistics solutions (Andersson and
Norman, 2002).
In contrast, Sink and Langley (1997) emphasize process issues such as need
identification, top management commitment, formation of cross-functional buying
team, development of selection criteria and service implementation. Bagchi and Virum
(1998) also emphasize process, but their framework is wider in scope than the previous
two, dealing with post-contracting issues such as performance measurement and goal
redefinition (Bagchi and Virum, 1998).
All these models emphasize need awareness as the starting point of the process.
However, Sink and Langley’s (1997) and Bagchi and Virum’s (1998) models assume
that the buyer is responsible for service definition and also extend to post-contracting
issues such as service implementation and performance measurement. On the other
hand, Andersson and Norman (2002) draw a distinction between purchasing of
commodity and advanced logistics services, arguing that a different approach (in terms
of time and effort requirements) is appropriate in each case. Generally speaking, all
three models appear to present many similarities to generic purchasing frameworks
(Baily et al., 1998).
4.4.2 Selection criteria for 3PL providers. Several criteria for LSP choice have been
discussed in the literature; typically, these include cost, service quality and reliability,
flexibility, responsiveness to requests and financial stability. Some criteria are
developed with specific client needs in mind, while others are common for all
circumstances (Bagchi and Virum, 1996). There is contrasting evidence on the relative
importance of price; some authors (van Laarhoven and Sharman, 1994) rank it as top
criterion, while others argue that service performance and quality requirements
IJLM precede discussions about rates (Crum and Allen, 1997; La Londe and Maltz, 1992;
18,1 Menon et al., 1998).
Qualitative factors such as supplier reputation, references from clients and response
to information requests are used for the initial screening of candidate service
providers (Sink and Langley, 1997). Moreover, prior experience of the client’s industry,
its regulations and products types are perceived as important selection factors by
132 buyers (Aghazadeh, 2003; Sink et al., 1996; van Damme and Ploos van Amstel, 1996).
Overall, the criteria cited seem to apply to all 3PL purchasing circumstances,
irrespective of buyer characteristics and special requirements. A rare exception is
Meade and Sarkis (2002), who present special factors pertaining to third party reverse
logistics services (e.g. reverse logistics functions and process).
4.5 Marketing of 3PL services

Berglund et al. (1999) have identified several factors facilitating the rise of the 3PL
market. On the demand side, key drivers include reduction in asset intensity, reduction
of labor costs and restructuring of distribution; on the supply side, industry
deregulation and declining profit margins in basic services are among the reasons for
growth. Some authors have explained how transportation firms developed into 3PL
providers by expanding their service offerings to differentiate themselves from
competition (Sheffi, 1990; Virum, 1993). Overall, the evolution of the 3PL market is
explained with reference to three distinct phases (Berglund et al., 1999; Hertz and
Alfredsson, 2003):
(1) In the 1980s, many transportation and warehousing firms have developed into
3PL providers (e.g. Exel Logistics and Frans Maas).
(2) In the early 1990s, firms that specialise in express parcel deliveries entered the
market (e.g. DHL, TNT, UPS and FedEx).
(3) In the late 1990s, companies originally specializing in financial services,
IT services and management consulting entered the market by developing
competences in information systems and supply chain planning (e.g. Andersen
Consulting).
IT systems are increasingly being used to offer real-time information to clients and
enhance visibility for supply network members (Lewis and Talalayersky, 2000; Piplani
et al., 2004; Sauvage, 2003). Concepts such as 4PL and lead logistics provider (LLP)
have also been introduced with the aim of covering reported demands for
trans-national logistics solutions and integrated management of supply chains
(Skjoett-Larsen, 2000; van Hoek and Chong, 2001).
Nevertheless, much confusion remains regarding the marketing of logistics
services. Logistics operators often claim that they can do everything, without in fact
possessing the capabilities to match their value propositions (Bask, 2001; Sink et al.,
1996). Consequently, various classifications of LSPs have been proposed,
distinguishing principally between asset-based and non-asset based LSPs (Razzaque
and Sheng, 1998; Sheffi, 1990). Asset-based providers own physical assets such as
truck fleets and warehouses and focus on the management and execution of transport
and warehouse-related activities. Non-asset based firms rely on human expertise and
information systems and offer management-oriented services, sub-contracting
physical distribution activities to asset-based companies.
Berglund et al. (1999) have noted the gradual shift from asset-based to system Third party
(non-asset) based providers and distinguished between “service” (offering low cost, logistics
specific competitive services to many clients) and “solution” (customized and complex
services to a few key customers) providers. Hertz and Alfredsson (2003) classify LSPs
in terms of their abilities for general problem solving (co-ordination) and the extent of
adaptation to client needs. Persson and Virum (2001) present a typology of 3PL
vendors in terms of service complexity and degree of asset specificity. Based on RBV 133
theory, Lai (2004) has proposed a typology of LSPs in terms of their service capabilities
and performance results.
Bolumole (2003) presents a framework for evaluating the supply chain roles of LSPs,
arguing that certain elements of the client’s strategy shape the outsourcing decision and
requirements, which in turn influence the role of 3PL providers within the supply chain
(Bolumole, 2003). However, it seems to be static in nature (e.g. shippers with external
supply chain orientation may also outsource due to cost efficiency advantages).
4.6 Growth strategies

In a highly competitive sector cost reduction, market segmentation and service
differentiation are the main ways of improving 3PL performance and profits
(Panayides, 2004; Sum and Teo, 1999). In addition, environmental changes and the
introduction of new technologies have an impact on LSP strategic planning
(Hum, 2000). For example, e-commerce and its implications for logistics operations
should be fully understood by 3PL firms (Delfmann et al., 2002; Gudmudsson and
Walczuck, 1999).
LSPs employ a variety of growth strategies. Important means of expansion include
mergers and acquisitions (M&As), joint ventures, strategic alliances, piggybacking
(i.e. following the client’s expansion and establishing new operations in foreign markets)
and organic growth (Stone, 2001, 2002). Consolidation is the main feature of the industry
and large, multi-national firms start to emerge. Main reasons for M&As include economies
of scope, expanded geographical coverage, acquisition of specialized capabilities and
requirements for investment in IT and equipment (Carbone and Stone, 2005).
Both vertical (shipper-LSP) and horizontal (among LSPs) alliances are set up
mainly with the aim of getting access to complementary resources and capabilities.
In particular, horizontal alliances among LSPs are deemed necessary for the
development of cross-border logistics solutions (Carbone and Stone, 2005; van Hoek,
2000a). Some authors though question the effectiveness of Pan-European and global
logistics operators and they argue for the existence of local, medium-sized 3PLs that
better serve customer needs in foreign markets (Evans, 2000).
5. The dyad level: inter-organisational relationships in 3PL

Existing literature suggests that the nature of 3PL relationships (i.e. transactional or
collaborative) is a function of service offering composition, contract duration and the
client’s motivation for outsourcing.
5.1 Formation and evolution of 3PL relations

There are many examples of partnerships between LSPs and manufacturers/retailers
in the logistics literature (Bhatnagar and Viswanathan, 2000; Bowersox, 1990;
House and Stank, 2001). It is suggested that such partnerships develop gradually,
IJLM as the number of outsourced activities increases over time. Shippers often adopt an
18,1 “increasing scope” strategy (van Laarhoven et al., 2000) in respect of their relationships
with LSPs. According to this practice, buyers are looking for specific solutions at the
initial stages of the relationship in order to test the provider’s capabilities (van Damme
and Ploos van Amstel, 1996). However, over time, the scope of the relationship
increases and the offering expands to include more value-added and customised
134 solutions (Sink et al., 1996).
The nature of the relationship also depends on the client’s rationale for outsourcing
(Bolumole, 2001). The role of LSPs is limited to operational issues when the shipper
sees the outsourcing option as the means to achieve cost savings. But when the
outsourcing decision is made due to resource considerations, the 3PL provider is seen
as a strategic partner who has a critical role in the customer’s supply chain strategy
(Bolumole, 2001).
5.2 Management of 3PL relationships

The design and implementation of 3PL relations appears to be problematic. Often-cited
difficulties include lack of understanding of client’s supply chain needs, lack of
adequate expertise in specific products and markets, unrealistic customer expectations,
inadequate description of services and service levels, lack of logistics cost awareness
by the client and lack of 3PL innovation (Ackerman, 1996; Ellram and Cooper, 1990;
Wilding and Juriado, 2004). In response to such problems the literature focuses on
issues such as 3PL selection, contracting, information sharing between client-LSP and
performance measurement systems. In relation to service provider choice, the buyer
organization should create a comprehensive list of selection criteria that extend beyond
price considerations (Section 5.4.2). These issues are now considered in turn.
5.2.1 Contracts. The preparation of contracts is important to the success of 3PL
relationships (Boyson et al., 1999). In the literature, there are two opposing views about
the role of formal contractual agreements. While the majority of authors seem to agree
that the existence of formal contracts is necessary for the management and control of
3PL relations, it is also argued that detailed contracts can also be perceived as
an indication of lack of trust (Lambert et al., 1999). According to the literature
(Andersson and Norman, 2002; Boyson et al., 1999; Logan, 2000) a typical 3PL contract
includes:
.
contract term (i.e. number of years);
.
costs per activity;
.
service and activities description;
.
service levels;
.
bonus payment for excellent performance;
. penalty clauses for service failures;
.
allocation of roles and responsibilities, risks and insurance costs; and
.
contract termination clause.
5.2.2 Information exchange. Frequent communications and information sharing

between the contracting parties are crucial for effective management of 3PL relations
(Stank et al., 1996). Information exchange is important even in the pre-contracting
period, when the buyer attempts to assess the capabilities of the potential supplier Third party
(Bienstock, 2002). Communication channels in multiple organizational levels are logistics
established in order to cover the strategic as well as operational information needs.
In many instances, joint meetings are also established to review the provider’s
performance and solve any arising problems (Boyson et al., 1999). More seldom,
inter-organisational teams and committees are formed with the aim of facilitating
information exchange between contracting parties and/or improving business 135
processes (Huiskonnen and Pirttila, 2002).
5.2.3 Performance measurement. Performance measurement systems appear to be
instrumental for assessing the extent of 3PL success and identifying corrective
action in case of service failures (van Hoek, 2001; Wilding and Juriado, 2004).
The establishment and continuous monitoring of key performance indicators (KPIs)
related to logistics services allows users to compare achieved with expected service
levels. Examples of such measures include delivery timeliness and accuracy, order fill
rates and inventory turns (Wilding and Juriado, 2004). Performance metrics can also be
used by LSPs for benchmarking purposes (Stank et al., 1994; Sum and Teo, 1999).
Additional practices for management and control of 3PL relations include carrying
out customer satisfaction surveys, gaining access to LSP information systems, jointly
planning and implementing performance improvement projects and organising 3PL
forums where the client organisation shares information with regard to logistics
strategy objectives (Boyson et al., 1999; Wilding and Juriado, 2004). The role of IT
systems as safeguarding mechanisms in the shipper-3PL provider relationship has
been stressed by Bourlakis and Bourlakis (2005).
5.3 Success factors

There have been many studies so far investigating success factors for 3PL
partnerships (Lambert et al., 1999; Leahy et al., 1995; Murphy and Poist, 2000; Tate,
1996; van Laarhoven et al., 2000). The list below summarises these factors, which
appear to be common to those presented in the wider inter-firm partnership and
strategic alliances literature:
.
common goals and compatible interests;
.
compatibility of information systems;
.
compatibility of organisational culture and routines;
.
customer orientation;
.
expert knowledge in specific markets/products/processes;
.
financial stability of service provider;
.
frequent communications and information exchange;
.
joint investment for achieving relationship objectives;
.
joint planning, management and control of 3PL relationship;
.
mechanisms for dispute resolution;
.
power balance between contracting parties;
.
provider ability to stay updated with respect to new technologies;
.
risk and reward sharing;
IJLM .
service level improvement/reduction of distribution costs;
18,1 .
service provider flexibility and responsiveness;
.
top management support; and
.
understanding client’s supply chain needs.
5.4 Logistics partnership models

136 Various prescriptive partnership models have been proposed in the literature. Bagchi
and Virum (1998) identify three distinct phases:
(1) need awareness phase;
(2) planning phase; and
(3) evaluation phase.
The starting point is the identification of the need for outsourcing. This is an important
stage and shippers must make sure that potential suppliers are well-informed about
their needs because research has revealed a difference in perceived alliance formation
motives between LSPs and their customers (Whipple et al., 1996).
Gardner et al. (1994) identify key stages in the 3PL partnership building process,
including partner selection and relationship design and evaluation. Lambert et al.
(1999) emphasize main drivers for relationship formation (e.g. asset/cost efficiencies),
facilitating factors (e.g. compatibility of culture), main partnership components
(e.g. joint planning and control) as well as outcomes (e.g. improved customer service
and competitive advantage) of 3PL collaboration. Factors such as asset specificity and
environmental capacity (i.e. demand/supply ratio for 3PL services) have a positive
effect on the formation of collaborative relations, whereas high transaction volume and
high industry concentration are negatively related to 3PL partnerships (Stank and
Daugherty, 1997).
Certain relationship characteristics (e.g. asset specificity and communication) and
customer attributes (e.g. size of firm) are positively associated with relationship
outcomes such as customer retention and performance improvement (Knemeyer and
Murphy, 2005). In the same vein, Knemeyer et al. (2003) have empirically investigated
the level of partnership development in the context of 3PL. Moore and Cunningham
(1999) apply a social exchange perspective, linking the effectiveness of 3PL relations
with high levels of equity, commitment and trust among shippers and LSPs.
Whatever their starting point of analysis or theoretical perspective, all frameworks
include a relationship evaluation stage. A feedback mechanism is also incorporated in
order to adjust the relationship objectives and adapt processes. Some of them do not
consider specific 3PL characteristics. Even worse, researchers who apply such
frameworks to 3PL relationships do no appear to provide any justification for doing so.
These frameworks also suggest, either implicitly or explicitly, that 3PL alliances are a
means to achieve competitive advantage, by gaining access to external resources and
capabilities (Gentry and Vellenga, 1996; Sinkovics and Roath, 2004). Collaborative 3PL
relations can lead to new competence development and innovation, provided that
partners openly exchange information and share their knowledge and skills
(Halldorsson and Skjoett-Larsen, 2004). Organisational learning is thought to be an
important quality which facilitates innovation and 3PL service improvement
(Chapman et al., 2003; Panayides, 2007; Panayides and So, 2005).
6. The network level: logistics triads and networks Third party
Current research focuses on dyadic LSP-client interactions. However, the logistics
boundary-spanning role of logistics (Mentzer et al., 2004) and the importance of
customer service for 3PL arrangements are reflected in many studies, which either
implicitly or explicitly discuss the client’s customer interface, i.e. the treatment extends
beyond the dyad to consider larger networks.
137
6.1 Logistics triads
Maltz and Ellram (1997) argue that there are two important interfaces that need to be
assessed before outsourcing the logistics function: the LSP-client and the LSP-final
customer interface. The LSP is positioned between the client and its customers,
potentially having a crucial role in handling end-customer information and feedback.
In this sense, the relevant unit of analysis becomes the inter-firm triad, rather than the
dyad. In line with McGinnis et al. (1995), the 3PL provider represents the third party to
a transaction (the first and second being the buyer and the seller) and fulfils part or all
of the logistical needs related to that transaction in a way that a triad of exchange
relations is formed (Figure 2).
There are a few studies that explicitly discuss the formation of logistics outsourcing
triads. Bask (2001) argues that the term 3PL implies a triadic link among suppliers,
their customers and LSPs. Larson and Gammelgaard (2001) investigate the
preconditions, benefits and barriers to the formation of collaborative relations
among buyers, sellers and 3PL providers. Carter and Ferrin (1995) have illustrated the
impact of trilateral collaboration on the reduction of transport costs. Moreover, Gentry
(1996a, b) has studied the role of carriers in strategic buyer-supplier alliances and
concluded that LSPs mainly have operational responsibilities and are not involved in
strategic planning of the supplier-customer alliance.
6.2 Logistics networks (4PL/LLP)

Various forms of sub-contracting are also considered in the literature. In particular, the
design of 4PL/LLP solutions entails that the LSP acts as a single point of contact
within the client’s supply chain (van Hoek and Chong, 2001). The 4PL provider is
often regarded as a non asset-based company which makes use of its supply chain
design/planning capabilities and IT solutions and acts as a single interface between
the client and multiple (asset-based) LSPs (Skjoett-Larsen, 2000). Logistics providers
also develop horizontal networks in order to gain access to complementary resources
and capabilities (Carbone and Stone, 2005; Lemoine and Dagnaes, 2003).
Client Customer
Figure 2.
LSP
A logistics triad
IJLM 7. Directions for future research
18,1 The proposed framework not only provides a conceptual map of 3PL studies, but also
helps in identifying further research opportunities. Five generic propositions regarding
future 3PL research are formulated and elaborated upon in the following.
7.1 Focus on network research

138 The review has revealed a knowledge gap in relation to the design and implementation
of 4PL/LLP contracting arrangements. Existing studies focus on conceptualising 4PL
and pointing out its difference from 3PL, without reaching a common definition.
Further, empirical research should be directed towards these phenomena, in particular:
.
rationale and main drivers for 4PL solution development;
.
enablers and inhibitors regarding the design and implementation of 4PL;
.
scope of service offering;
. structure and management of 4PL networks;
.
management of intra- and inter-organisational (supply chain) change;
.
extent of solution standardisation and transferability (to other clients);
.
profit and risk-sharing in 4PL; and
.
empirical examination of the role of 4PL providers as supply chain integrators.
By definition, 3PL create linkages and interdependencies in the supply chain

(McGinnis et al., 1995). Logistics services are regarded as “component” services
(Axelsson and Wynstra, 2002) and thus interdependencies and interfaces among
supply chain processes and relationships should be taken into account when designing
and implementing 3PL offerings. It is proposed that network theory (Hakansson and
Snehota, 1995) provides a framework for mapping activity and resource/capability
dependencies and tracking their evolution over time. Such an approach would
potentially offer insights about the dynamics of outsourcing and service design
decisions (e.g. customer base change and impact on logistics service design).
Existing studies of logistics triads and networks do not seem to add any insights
that are intrinsically supra-dyadic, i.e. emergent properties that cannot exist at the
dyad level. For example, they focus on supply chain collaboration issues but do not
examine the implications of indirect relationships and mediating roles that are
necessarily part of 3PL and 4PL. It is suggested here that 3PL/4PL phenomena could
offer considerable insights to existing network research. For instance, empirical
research in 4PL contracting would potentially contribute to a better understanding of
the formation of inter-firm networks, including the motives, contingencies and
processes of network development (Ebers, 1997).
7.2 Focus on normative research

Further normative research is needed to provide practitioners with tools and
frameworks for decision-making. On this front, two suggestions are offered:
(1) Outsourcing decision framework. Existing research simply lists factors and
drivers that impact on the outsourcing decision. A normative framework is
needed that will address the impact of buyer operational characteristics
(product, process and supply chain-related) on the scale and scope of
outsourcing and the type of 3PL relationship required. For example, special Third party
product handling requirements might drive investments in dedicated logistics
facilities/equipment/staff and development of long-term contractual relations
as a result.
(2) Selection criteria framework. Selection criteria in the literature do not take into
account organisational and operational contingencies and special buyer
requirements. It is proposed that a framework is developed to examine the 139
impact of buyer’s internal (centralised vs local decision-making; composition of
the buying team) and external (position in the supply chain; supply chain scope
of outsourcing, i.e. inbound/outbound/after-market; geographical scope)
characteristics on the development and subsequent use of 3PL selection criteria.
In addition to decision-making frameworks, the advancement of normative research

should be linked to a stronger theoretical foundation for 3PL. This is addressed in
detail below.
7.3 Focus on theory-based research

Existing studies that adopt a TCE approach to explain the outsourcing decision focus
on asset specificity as their main construct and pay little attention to (or at best take for
granted) the actual costs of defining what is to be exchanged, writing contracts and
measuring performance. They also fail to include production costs in their analysis.
It is suggested that such “mundane” transaction costs (Baldwin and Clark, 2003) can be
important in determining the boundaries of the firm, given the prominence of
cost-efficiency criteria for logistics outsourcing.
Asset specificity only partly explains the “do or buy” decision and future research
should explicitly consider those costs, incorporate service production costs in the
analysis and also examine the relationship between them, bearing in mind that
the decision should be made based on the minimization of the sum of production and
transaction costs. For instance, high transaction costs ex-ante (e.g. detailed
specification and standardisation of processes/interfaces) can be offset by a
proportionally higher reduction in service production costs and ex-post co-ordination
and frictional costs (e.g. contract re-negotiation) in a way that makes outsourcing
economical (Langlois, 2005).
The acquisition of external resources/capabilities and logistics expertise is often
cited as a driver for outsourcing, but there has been little theoretical explanation so far.
Existing studies, adopting a RBV approach, are static in nature and focus on the buyer
side suggesting that firms can acquire the necessary resources, develop unique assets
and achieve superior logistics performance through 3PL relations (Sinkovics and
Roath, 2004). An exception is Halldorsson and Skjoett-Larsen (2004) who stress the
development of inter-firm processes and capabilities through 3PL partnerships.
Two directions for research are suggested:
(1) Broader application of the dynamic capabilities perspective (Dosi et al., 2000)
focusing on how (and to what extent) 3PLs learn from existing client
relationships, adapt, reconfigure and transfer capabilities in an industry
which service innovation and customisation is seen as a means of achieving
competitive advantage.
IJLM (2) In connection with the above, the relevance of the path dependency concept
(Teece et al., 2000) should be examined.
18,1
Future research should consider how past choices of 3PLs regarding their processes,
capabilities and positions influence current and future development of competences
and associated service offerings. Moreover, the impact of past and current
140 investment/divestment choices of the buyer on the scale and scope of outsourcing
could be investigated.
Two overarching conclusions are offered in connection with the proposition for
more theory-based research:
(1) The relationship between 3PL and theory should be a bi-directional one; not
only systematic application of theoretical perspectives can help build sounder
explanations about 3PL phenomena, but also empirical research into 3PL offers
opportunities for extension and refinement of existing theory of a more generic
nature.
(2) Integration and cross-fertilisation of theoretical perspectives can help provide a
more robust explanation of 3PL covering the outsourcing process in its entirety,
from outsourcing decision to design, implementation and evolution of such
relationships (Halldorsson et al., 2003).
7.4 Focus on empirical research in 3PL design/implementation
More specifically, two suggestions for future research are made:
(1) Empirical research should be directed towards contractual practices and the
development of performance measurement systems in 3PL. Existing literature
regarding 3PL contractual design is mainly conceptual in nature and further
empirical evidence is needed about the type of contracts, charging mechanisms
and fee structures applied, the level of detail in respect of service specification and
the extent of inclusion of penalty/incentive clauses. Such data would potentially
reveal whether and how contractual design matches the characteristics of the
deal and the broader relationship (Collins, 1999). In other words, there is a need to
examine (empirically) whether contracts are important in terms of relationship
management or represent only part of the business deal and the client-3PL
provider relationship. Empirical research should also focus on performance
measurement in 3PL relationships, looking at issues such as the impact of the
contract/charging mechanism on what is being measured (e.g. open-book
contracts often require detailed measurement systems) and potential distinctions
between contractual and operational KPIs. Also, despite the fact that service
offerings grow in complexity and value added services are introduced (e.g.
product installation), there is little evidence in the literature regarding the
development of KPIs for such advanced services (van Hoek, 2001). Future studies
should examine the extent to which metrics are developed for valued added
services and develop classification frameworks of KPIs accordingly.
(2) Given the increasing complexity and uncertainty in the 3PL market
(i.e. development of complex offerings, confusing service marketing and buyer
uncertainty; e.g. Bask, 2001), there is a need to re-visit how logistics capabilities
and services are defined and designed in specific client-service provider
relationships as well as how they are re-packaged and evolve over time.
Existing literature rather generally assumes that the buyer is responsible for Third party
specifying services and also ignores the dynamics of service offering definition. logistics
Based on the above, it is proposed that empirical research should focus on the
process (how) of service definition in 3PL relationships.
7.5 Focus on qualitative methods and triangulation

The review has revealed a dominance of survey research in 3PL. Surveys have been 141
particularly useful for identifying trends and practices in the 3PL market (e.g. Lieb series).
However, they appear to be less effective when studying inter-firm relationships; they
present construct validity problems as they often focus on one-sided data and perceptions
of the phenomena under study or are based on mismatched service provider-user pairs
(Murphy and Poist, 2000). Hence, case studies and qualitative methods should be used to
gain a deeper understanding of the formation and evolution of 3PL relationships (Frankel
et al., 2005). A qualitative research design facilitates data collection from several parties
and enables the capture of potentially crucial contextual information about the
outsourcing process (e.g. impact of broader supply chain strategy).
Existing studies appear to be cross-sectional in nature and tend to focus on specific
stages of the outsourcing process (e.g. outsourcing decision). It is suggested that
longitudinal research is needed to address the process in its entirety. For instance,
a single multi-year case study (Leonard-Barton, 1990) examining the various stages of
the process, from decision-making through to design, implementation and
post-contracting evaluation would offer rich data about dependencies among stages
and help integrate various issues that are often addressed in isolation in the literature.
In connection with the above, it is suggested that a triangulation research strategy
(Jick, 1979), combining quantitative and qualitative methods, would integrate findings
and enhance their validity. A proposed research design regarding the development of
4PL solutions, based on triangulation, is shown in Figure 3. At the first stage focus
group interviews with senior management of buyers and LSPs would investigate the
drivers and decision-making factors regarding 4PL adoption. Participants should
represent different industries in order to identify specific market characteristics and
contingencies that could potentially affect the decision to adopt (or not) 4PL. As a
second step, in-depth case studies of 4PL design and implementation would offer
insights about the scope of service offering, contractual design, structure and
management of inter-firm relationships and the enablers and inhibitors of change.
As a final stage, a post-implementation survey would focus on the performance
benefits and problem areas of 4PL adoption across different sectors.
Focus group sessions

4PL drivers and
decision-making
Feedback factors
Survey research In-depth case studies Figure 3.

4PL performance 4PL design and A 4PL research proposal
benefits and problem implementation based on triangulation
areas
IJLM 8. Concluding remarks
18,1 In conclusion, 3PL research is at an exciting stage. In many ways it has followed a
typical pattern of development, beginning with relatively simple issues and adopting
an essentially descriptive approach. Now that a substantial body of literature exists in
the area, it is timely to extend the methods employed and the issues addressed to deal
with network phenomena and to progress with more normative considerations.
142 Organisational and technological change, associated with globalisation and ICT
developments, mean that 3PL is a sector undergoing constant change, and so there is
an excellent opportunity both to study an interesting sector for its own sake, and to use
3PL as a vehicle for the generation of more generic insights into the dynamic behaviour
of inter-organisational relationships and networks.
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About the authors

Konstantinos Selviaridis is a PhD candidate in the Department of Management Science,
Lancaster University Management School. He is also a member of the Supply Chain
Management and Modelling Research Group within the department. He received a MSc
in Operations Management from Manchester School of Management, UMIST and a BSc in
Economics from the Aristotle’s University of Thessaloniki in Greece. Konstantinos is, in broad
terms, interested in inter-organisational relationships and networks within operations and
supply chain management. More specifically, his research interests include third/fourth party
logistics (3PL/4PL), service procurement and contracting. His current research is focused on the
process of service definition and design in 3PL and 4PL relationships. Konstantinos Selviaridis is
the corresponding author and can be contacted at: k.selviaridis@lancaster.ac.uk
Martin Spring is Senior Lecturer in Operations Management in the Department of
Management Science, LUMS, and convener of the Supply Chain Management and Modelling
Research Group. Previously he was a Senior Lecturer in Supply Chain Management at
IJLM Manchester School of Management (MSM), UMIST. He spent about ten years working in
manufacturing industry, mostly in production engineering and production management roles.
18,1 Following his PhD in operations strategy, supply chain management has been the focus of most
of his research and teaching. Taking a rather broad view of what constitutes supply chain
management, recent research interests have included risk in supply networks, power relations in
supply chains, and the procurement of complex inter-organisational services like third-party
logistics, management consultancy and complex IT-based systems such as SAP. His current
150 research centres on more general questions of how services are traded in supply networks.
His work has been funded by the EPSRC and the Teaching Company Directorate, and has been
published in a range of international operations management, design and supply chain
management journals. Martin sits on the national ESRC CASE Studentship awards panel and
was co-editor of the International Journal of Operations and Production Management from
1999-2004. He was a Programme Director of the MSc in Operations Management, then Director of
Postgraduate Programmes at MSM, UMIST.
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Third Party Logistics: A Literature Review and Research Agenda

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2.1 Analysis of findings

3. An integrative framework for 3PL research

Methodology Per cent

Level of analysis Percentage of studies Indicative topics

Firm 67 Outsourcing decision; selection criteria; 3PL growth Table II.

4. The firm level

4.1 Outsourcing decision

Firm Dyad Network

Descriptive Benefits/risks of outsourcing Formation and evolution of 3PL relations Logistics

4.2 Benefits and risks of outsourcing

4.3 Service offerings and usage

4.4 Purchasing 3PL services

4.4.1 Purchasing frameworks. Three main frameworks for procurement of logistics

4.5 Marketing of 3PL services

4.6 Growth strategies

5. The dyad level: inter-organisational relationships in 3PL

5.1 Formation and evolution of 3PL relations

5.2 Management of 3PL relationships

5.2.2 Information exchange. Frequent communications and information sharing

5.3 Success factors

5.4 Logistics partnership models

6.2 Logistics networks (4PL/LLP)

7.1 Focus on network research

By definition, 3PL create linkages and interdependencies in the supply chain

7.2 Focus on normative research

In addition to decision-making frameworks, the advancement of normative research

7.3 Focus on theory-based research

7.5 Focus on qualitative methods and triangulation

Focus group sessions

Survey research In-depth case studies Figure 3.

About the authors

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