IJRIM
Volume 3, Issue 1 (March 2013)
(ISSN 2231-4334)
PERFORMANCE MEASUREMENT VARIABLES IN THIRD PARTY LOGISTICS (3PL) – A LITERATURE REVIEW Smriti Asthana*
ABSTRACT Liberalisation and Globalisation in marketplace have emerged as the binding force in shaping the business strategies of individual organisations. The organisations, today, compete as an integral part of the supply chain rather than individual entities. This study of performance measurement variables of Third Party Logistics (3PL) organizations explores the performance measurement variables and the relationship between 3PL service providers and supply chain partners (both upstream and downstream). Through this paper the researcher has made an attempt to highlight the importance of performance measurement variables over other factors like developmental strategies, success factors etc which had been the prime focus of earlier researches. Keywords: Third party Logistics, Service Quality, Organisational effectiveness, Relationship Management, Performance Measurement.
*Research Scholar, Birla Institute of Technology Management, Greater Noida, U.P. International Journal of Research in IT & Management http://www.euroasiapub.org
17
IJRIM
Volume 3, Issue 1 (March 2013)
(ISSN 2231-4334)
INTRODUCTION With liberalisation, the manufacturing and trade activities have become cross - country and cross - continental resulting in wide use of maritime and air transport in international trade. International Logistics has elements of trade supply chain such as stock management, material handling, getting good cleared from customs, loading and shipping of cargo etc thus covering both outbound and inbound services. The trade supply chains have become geographically intricate and there is an increasing dependence on competent transport intermediaries making it essential for the supply chain organizations (service providers) to develop strategies that make available differentiated value to the customer at optimum cost. (Indian Logistics Industry Snippets, 2009) Globalisation and emerging technological advancements have led Third party logistics (3PL) to become an important source of competitive advantage, especially for supply chain organisations. To maintain a competitive advantage in 3PL, firms must enhance their ability to plan, take action, manage, and control product services and information from supplier to customer and vice- versa as an integrated process, rather than maintaining a series of discrete functions. From a service partner perspective, 3PL is a value-added process that is purposely used to enhance organizational cooperative advantages and to provide low-cost product or service differentiation and focused strategies. However, due to lack of measurement of 3PL service performance to manage service vendors the same might get undermined. For service providers, outstanding performance is reflected in 3PL service outcomes that are tangibly and intangibly defined by their operations. ( Y.S.Man, 2006)
LITERATURE REVIEW Third Party Logistics (3PL) "A firm [that] provides multiple logistics services for use by customers. Preferably, these services are integrated, or "bundled" together, by the provider. Among the services 3PLs provide are transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding." (The Council of Supply Chain Management Professionals glossary, Updated February 2010) Logistics Outsourcing has received increasing attention from researchers and practitioners in recent times. Outsourcing companies act as third party service providers, and help to increase the efficiency and effectiveness of a company’s logistics function (Christopher, 1992). Third party logistics (3PL) is defined as the outsourcing of logistics activities to other companies, International Journal of Research in IT & Management http://www.euroasiapub.org
18
IJRIM
Volume 3, Issue 1 (March 2013)
(ISSN 2231-4334)
such as transportation, warehousing, inventory management, distribution, and other valueadded services (for example, pick-and–pack, assembly, repairs, and re-conditioning) (Lau, 1999). Field (1998) defined 3PL service providers as companies that provide a range of logistics services to outsourcing companies to co-ordinate the transfer of goods from one place to another. Literature on the logistics industry is in abundance in the form of survey-based empirical research and reviews of the existing literature from the users’ perspective. However, it is still scarce from the perspective of logistics service providers (LSP). Since the 1980s, along with the trend to outsource non-core activites (Sink and Langley, 1997), companies have increasingly turned to third-party logistics providers (3PL) both in the USA (Lieb and Randall, 1996; Rabinovich et al., 1999; Knemayer and Murphy, 2004) and in Europe (Van Laarhoven et al., 2000). 3PL services help to achieve the strategic objectives by concentrating more on core competency of the main business. The study by Sahay and Mohan, 2006, has cited substantial growth in various financial indicators using services of 3PL, for instance, various improvements in sales revenue by 13.5%, working capital by 12.3%, returns on assets by 10%, capital assets reduction by 10%, production cost reduction by 10.5%, labor cost reduction by 10.0%, and logistics cost reduction by 15%. 3PL users depend on 3PL service providers to secure capacity and gain agility (Hannon, 2005) who not only provide core services like supplying right quality product. Performance Measurement The literature on performance measurement has evolved ever since its emergence in the 1980s. Historically, when organizations were small and operations simple, the primary performance measurement was done on the basis of the cash flow of the organization. From the late nineteenth century until the 1930s, theoretical and practical methods of management accounting were established, and standards were widely applied (Maskell, 1991). Traditional management accounting techniques became the accepted method of performance measurement for manufacturing plants and their distribution operations. As performance measurement research progressed, some researchers (Pursell, 1980) focused on the performance measurement of the entire business unit (typically division level and plant level) and examined performance criteria, standards, and measures. However, the older body of performance measurement literature lacks cohesion (Lockamy and Spencer, 1998) According to Neely (1995) Performance measurement is a popular issue that is widely discussed but rarely defined. Hence, it becomes necessary to introduce certain relevant definitions of performance measurement. International Journal of Research in IT & Management http://www.euroasiapub.org
19
IJRIM
Volume 3, Issue 1 (March 2013)
(ISSN 2231-4334)
Performance refers to the nature and quality of an action that an organization carries out to accomplish its principal missions and functions for the generation of profit (Sink, 1991). Performance measurement is a metric that can be used to quantify performance. It is an analytical tool in the performance measurement process that records measures, displays results, and determines subsequent actions (Rose, 1995). Generally, performance measures have financial or non-financial and tangible (hard) or intangible (soft) classifications. Financial performance measures tend to focus on the resultant impact in financial symbols of production activities, such as logistics activities, whereas non-financial performance measures tend to focus directly on actual production activities, such as investment turnover, defect ratio, and lead time (Polakoff, 1992). Performance Measurement of Third Party Logistics (3PL) Service Providers Performance is an inveterate theme in management paradigms. It includes strategic and operations management, and is of interest to both academic scholars and practicing managers. Performance is defined as the evaluation of constituents using efficiency, effectiveness, or social referent criteria to measure how well an organization meets the aspiration levels of constituents (Thompson, 1967; Friedlander and Pickle, 1968). Several observations can be made from the literature on supply chain performance measurement. A great deal of attention has historically been placed on individual measures, rather than on systems of measurement (Beamon, 1999), and many of the existing studies are prescriptive in nature and emphasize the attributes that good metrics and measurement systems should have (Bourne et al., 2000). Keebler et al. (1999) indicated that relatively few firms measure the performance of the logistics supply chain, especially logistics outsourcing. This is because the systems perspective is seldom adopted and very little empirical research exists on supply chain performance measurement from a broader system perspective, such as organizational performance measurement. Business performance measurement has always been a managerial priority, attracting increasing interests of both among academicians and managers. Managers persistently measure business performance and request performance-related information. Performance measurement is integral to the successful execution of managerial duties. It helps in the transference of the complex reality of performance into a sequence of communicable symbols that can be reproduced under similar circumstances (Lebas, 1995). The Organizational theory cites context – structure – output relationship as the major corporate function that achieves organizational success. It reveals both conceptual and International Journal of Research in IT & Management http://www.euroasiapub.org
20
IJRIM
Volume 3, Issue 1 (March 2013)
(ISSN 2231-4334)
empirical association between 3PL service providers, supply chain partners, and 3PL organizational performance measurement and explores the links between the determinants of the logistics outsourcing service quality of supply chain partners (suppliers or customers) and the identification in terms of organizational structure of the inter-firm relationship between 3PL providers and customers, which in turn is linked to tangible and intangible outcomes of organizational performance. (Y.S. Man, Feb 2006). Performance measurement Variables To study the performance measurement of the 3PL service providers the variables discussed in this study are service quality, organizational effectiveness and relationship management. Service Quality Quality has been defined as ‘fitness for use’ and those product features which meet customer needs and thereby provide customer satisfaction (Juran and Godfrey, 1999). Service quality has emerged as an important area in the sustainability and growth of the business and its various dimensions have been explored by various academicians and researchers at the national and international levels. Service quality and customer satisfaction are related concepts that are used synonymously by practitioners. However, empirical and theoretical research supports the view that the two concepts are different and that the quality performance leads to customer satisfaction. (Rosen and Surprenant, 1998; Olsen, 2002). Organizational effectiveness A good organizational structure achieves organizational effectiveness in 3PL service providers (Elmuti, 2002). The structure-output relationship (Y.S.Man, 2006) develops a research model to identify the relationship between 3PL service providers and their supply chain partners. The relationship has elements like productivity, financial performance and market share, cycle time, customer service, and reputation and goodwill (Beamon, 1999; Thomas, 1999; Mentzer et al., 2000; Carr and Person, 1999; Elmuti, 2002; Lai et al., 2004; Reiner, 2005). Effectiveness and Efficiency are the two basic parameters determining the organizational performance. Effectiveness is the extent to which production functions are accomplished and customer requirements met. Efficiency is a measure of how economically the organization’s resources are utilized in accomplishing functions. From a quantitative perspective, performance is related to the dimension of scale, and means that, generally, it can be quantified in a variety of dimensions. Performance targets are only meaningful when they can be expressed quantitatively (Macleod et al., 1997). International Journal of Research in IT & Management http://www.euroasiapub.org
21
IJRIM
Volume 3, Issue 1 (March 2013)
(ISSN 2231-4334)
Relationship Management In addition to the context-structure-output framework (Y.S.Man, 2006) relationship management, an external factor, also affects the organizational performance of the 3PL service providers. Most of the previous studies have focused on outsourcing and have therefore taken customers’ perspective on 3PL relationships (Lieb and Kendrick, 2002). A good relationship management, such as one that involves guanxi, trust and commitment among supply chain partners, enhances 3PL organizational performance (Elmuti, 2002).
CONCLUSION This study of 3PL organizational performance measurement explores service quality, organizational effectiveness, and relationship management between 3PL service providers and their supply chain partners (upstream and downstream). Through this study the researcher has made an attempt to fill in the gap in the literature by providing an insight on the business performance measurement and management of logistics outsourcing.
REFERENCES 1. Beamon B. M. (1999). Measuring supply chain performance, International Journal of Operations and Production Management, 19(3), 275-292. 2. Bourne, M., Mills, J., Wilcox, M., Neely, A., and Platts, K. (2000). Designing, implementing and updating performance measurement systems, International Journal of Operations and Production Management, 20(7), 754-771. 3. Christopher, M. L. (1992). Logistics and Supply Chain Management, London: Pitman. 4. The Council of Supply Chain Management Professionals glossary, Updated February 2010. 5. Elmuti, D. (2002). The perceived impact of supply chain management on organizational effectiveness, Journal of Supply Chain Management, 2002(2), 49-57. 6. Field, L. S. (1998). How to fine lost dollars, Freight Management, 11, 16-22. 7. Keebler, J. S., Manrodt, K. B., Durtsche, D. A., and Ledyard, D. M. (1999). Keeping Score: Measuring the Business Value of Logistics in the Supply Chain, Oak Brook, IL: Council of Logistics Management. 8. Langley, C. J., Holcomb, Jr., and Mary, C. (1992). Creating logistics customer value, Journal of business Logistics, 13(2), 1-27. 9. Lau, (1999). Importance of third party logistics, Shippers Today, 22(1), 51-53.
International Journal of Research in IT & Management http://www.euroasiapub.org
22
IJRIM
Volume 3, Issue 1 (March 2013)
(ISSN 2231-4334)
10. Sink, D. S. (1991). The role of measurement in achieving world-class quality and productivity management, Industrial Engineering, June. 11. Sahay, B.S. and Mohan, R., 2006. ‘Third-party logistics practices: an Indian perspective’. International Journal of Physical Distribution and Logistics Management, 36 (9), 666-689 12. Y.S.Man ‘Performance Measurement and Management of Third Party Logistics: An Organisational Theory approach’. February 2006.
International Journal of Research in IT & Management http://www.euroasiapub.org
23
