selection of third-party logistics (3pl): a hybrid ... use of third-party logistics (3pl) providers...

A supply chain consists of all theparties involved, directly orindirectly, in fulfilling a customerrequest. Suppliers, customers, andother third-party providers shareinformation and plans in order tomaximize the efficiency andcompetitiveness of the overallsupply chain (Ellram and Cooper,1990). Each organization has adistinctive role to play andseamless transactions and valueaddition by each partner decidesthe overall competitiveness of onesupply chain over others. Therelative position of differententities in the value chain helps

them decide their own core andnoncore functions. Even if a firmhas the available resources toperform a particular task, anotherfirm in the supply chain maysometimes be better suited toperform that task because of itsrelative strategic position in thesupply chain. Best-in-classcompanies are proactively seekingto build responsive and resilientsupply chains that can withstandthe impact of major disruptionsand catastrophes—withoutaffecting the end customer andwithout incurring excessiverecovery costs (Elkins et al., 2005).

The use of third-party logistics (3PL) providers is becoming prevalent. Therelationships associated with 3PL are typically more complex than anytraditional logistics supplier relationships and they are truly strategicalliances. These relationships have become a popular way to enhance anorganization’s flexibility in meeting rapidly changing market conditions,focus on core competencies, and develop long-term growth strategies.This study offers an understanding of the criticality of various 3PLselection issues and provides a list of 26 selection criteria. Using the real-life case of KVIC (Khadi and Village Industry Commission, India) organicfood sector, it proposes a hybrid approach of interpretive structuralmodel (ISM) and analytic network process (ANP) for a proper selection of3PL service providers. This paper discusses the implications of the resultsin a real-life context. Further, managerial insights developed through theuse of ISM- and ANP-based complementary approaches uncover the scopefor improvements in the quality of supply chain practices. This papersummarizes the developed understanding of supply chain practices andidentifies a few inherent limitations of the used approach.

Selection of Third-PartyLogistics (3PL): A Hybrid Approach UsingInterpretive StructuralModeling (ISM) andAnalytic Network Process(ANP)

32Supply Chain Forum An International Journal Vol. 6 - N°1 - 2005 www.supplychain-forum.com

Jitesh ThakkarAssistant Professor of Mechanical Engineering,

A. D. Patel Institute of Technology, Anand, India [email protected]

S. G. DeshmukhProfessor of Mechanical Engineering, Indian Institute of Technology, Delhi.

[email protected]

A. D. GuptaAssociate Professor of Mechanical Engineering,

Indian Institute of Technology, [email protected], [email protected],

Ravi ShankarAssociate Professor in the Department of

Management Studies, Indian Institute of Technology,[email protected]

AcknowledgementWe would like to thank anonymous

reviewers and the editor for theirvaluable and constructive

suggestions.

AcknowledgementWe would like to thank anonymous

reviewers and the editor for theirvaluable and constructive

suggestions.


Most opportunities for costreduction and/or valueenhancement lie in the interfacebetween supply chain partners(Christopher, 1996). Maltz andEllram (1997) explain thatcompanies outsource logisticsactivity clusters to improve theircustomer service capabilities andreduce costs (Lynch, 2000) in theinterface of the logistics activities.Proper management of interfacerelationships determines theultimate success of the outsourcingarrangement. The dynamics ofchange and organizational issuesassociated with supply chainrelationships are an importantsubject for study because theydirectly influence the “make-or-buy” decision (Jones, 1987).Success is determined by trust,cooperation, shared risk, andmutually agreeable goals. A growthin the number of outsourcingpartnerships has contributed tothe development of more flexibleorganizations, based on corecompetencies and mutuallybeneficial longer-term relationships(Rabinovich et al., 1999; Hertz andAlfredsson, 2003; McKinnon, 2003).

Outsourced logistics services aregenerally provided on a “third-party” basis. The first party is theconsignor, the second party is theconsignee (customer), and thethird-party logistics (3PL) provideris responsible for the physicaltransfer of products or servicesbetween them. Nowadays, the termlogistics services provider is widelyused to describe these 3PLcompanies. 3PL is a way ofextending the logistics organizationbeyond the boundaries of thecompany. Depending on the firm

and its positioning in the industry,the terms contract logistics andoutsourcing are sometimes used inplace of third-party logistics (Coyleet al., 2003).

Outsourcing is when anorganization obtains the benefitsfrom the provision of serviceswithout actually owning thephysical resources to generatesuch services. It is a new namegiven to the old decision-makingmodel called make or buy. Conklin(1994) asserts that no singleenterprise in today’s globalmarketplace is able to realizemarket opportunities in a timelyand cost-effective way, mainly dueto the lack of its workers’ solidskills and experience bases.Concentrating on what a companydoes best and leaving the rest topartners has led to the emergenceof the virtual corporation. It is nolonger merely a matter ofoutsourcing activities wheninternal resources fall short, but itis viewed as an enabler to businessstrategies formulated for attainingquick access to a market, obtainingmarket-leading performance, andreaching new customers.

In global competition, companiesprefer outsourcing to take benefitof the “best-in-class” companies fortheir routine business functions, sothat their whole focus andresources can be diverted to keyprocesses and core activities inwhich the impact will be felt bestby the customer (Leavy 2004;Anderson and Norman, 2002).Using this same strategy, NIKE hassustained leadership in the athleticfootwear industry. Outsourcingoffers companies the opportunity

to grow in market pressure withouta corresponding expansion inorganization size or bureaucracy(Leavy, 2004). The concept hasbecome popular as “scalingwithout mass.”

Currently, outsourcing services arebroadly classified in twocategories: IT outsourcing (ITO)and business process outsourcing(BPO). The outsourcing options forsmall and medium-sized industriescan be grouped into threecategories: (1) application serviceprovider (ASP), (2) businessservice provider (BSP), and (3)management service organization(MSO). The 3PLs are also classifiedas asset-based 3PL and nonasset-based 3PL (Alfrick and Calkins,1994). An activity-based classificationof 3PL is conceptualized by Coyle etal. (2003) and shown in Table 1.These services range from single-transportation activities tointegrated warehousing, distribution,and information managementactivities. The main factorsresponsible for this trend can besummarized as higher productvarieties, shortened product lifecycles, cost benefits achievedthrough economies of scale,intensive global competition,benefits of risk pooling throughcentralized distribution, and abetter utilization of high-costcapital infrastructure.A SWOT (strengths, weaknesses,opportunities, threats) analysis ofconsignor and 3PL is necessary todetermine where they havedistinguished skills and where theydon’t. Greater focus on capabilitysourcing can improve a company’sstrategic position by reducingcosts, streamlining organization,

Table 1Type of 3PL and Examples

and improving quality. Decidingwhether to outsource requires avisionary approach andconsideration of some precautionsdue to its strategic nature. Acomprehensive framework tofacilitate the outsourcing decisionis shown in Figure 1. The question is no longer whetherto outsource a capability or activitybut rather how to source everysingle activity in the value chain(Gottfredson et al., 2005). Astrategic framework for theselection of a function based onparameters of a proprietary natureof activity versus uniqueness ofbusiness process is developed byGottfredson et al. (2005) and shownin Figure 2.

The complexities involved invarious aspects such as motivationbehind outsourcing the function,perceived risks, short-term andlong-term benefits, and so on haveconverted the 3PL businessarrangement into a strategicalliance. Each alliance is unique, tobe experienced and built on mutualrespect and shared interest rather than on legal documents

and tight controls. This requiresconvergence of strategic goals anddivergence of competitive motivesof both parties. In a traditionalvariable cost environment, amanager’s focus was more onboosting profit by reducing the costof materials, wages, labor hours,and so on. In a fixed-cost game, thefocus switches to maximizing themarginal contribution to fixed cost;alliances provide the means toaccomplish this. Dyer and Singh(1998) argued that when firmscollaborate, they are often in aposition to generate relational rentsif they can share knowledge andresources. The whole paradigmdepicting necessary considerationsand required understanding atvarious stages of the outsourcingprocess is conceptualized in Figure 3.

Senior managers must conceive oftheir companies as a portfolio ofcore competencies rather that justa portfolio of business andproducts (Prahalad, 1993).Organizations’ competencies arecontinually changing from core toperiphery and periphery to core,meaning with time and changing

industry environments, organizationsacquire new competencies at theircore that were kept earlier at theperiphery and existing coreactivities now take place at theperiphery and become commonand nonproprietary in nature. Nowthese activities can be outsourcedand insourcing can be done to acquire new competencies.Thus, periodic reevaluation ofoutsourcing decisions is a strategicnecessity. Although it is oftenexpensive and difficult to bring anactivity back in-house, changes in core activities, technology, or strategy may require anorganization to review and reviseits decision (Burt et al., 2004).Companies are realizing more thancost reduction by outsourcingnoncore activities.

Boyson et al. (1999) have indicatedthat the success of outsourcingagreements depends heavily on themanagement skills of the firmsengaging the services of third-partylogistics providers. Although mostcompanies are structured to focuson their core competencies andcollaborate with partners oncapabilities that aren’t “core,”effective collaboration is still in itsinfancy. The main reason is that a“win-lose” competitive mindset stillprevails: domination rather thancooperation (Finley and Srikanth,2005). The complexity of logisticsoutsourcing decisions increasewith an increase in the number ofselection criteria (Meade andSarkis, 1998). Many researcher(McKinnon, 2003; Razzaque andSheng, 1998; Simchi-Levi et al.,2000; Lynch, 2000; Anderson andNorrman, 2002; Coyle et al., 2003)have defined various criteria forthe selection of logistics serviceproviders but little attention hasbeen given to understanding therelationships among the criteriaand using a multicriteria analyticaltool (Hertz and Alfredsson, 2003).Today, it is a common practice for companies to outsourcedistribution logistics functions atleast to some extent. Thus,ensuring that the distributionnetwork achieves the requestedperformance level calls foranalytical approaches forevaluating the alternative third-


Figure 1Outsourcing Decision

Figure 2Deciding Function for Outsourcing

(Source: HBR, Gottfredson et al., 2005)

party logistics service providers(Korpela and Lehmusvaara, 1999).

This work reports the real-life caseof KVIC (Khadi and Village IndustryCommission, India) organic foodsector and discusses the selectionof third-party logistics providers.Development of conceptualmodels, analytical treatment ofreal-life cases, and derivingmanagerial implications of theimprovement of supply chainpractices are the main outcomes. Ina focused way, the main objectivesof the research are to do thefollowing:• Develop conceptual understanding

of outsourcing and 3PL selectionaspects

• Identify various selection criteria for 3PL

• Develop a 3PL selection tool using an integrated hybrid approach ofISM and ANP models

• Derive managerial insights for performance improvement in thequality of supply chain practices

In the following sections, a list of 26third-party logistics selectioncriteria is derived with identifiedreferences and their relevance toreal life. This paper describes thecurrent issues involved in thesupply chain of the case companywith the existing supply chaindiagram depicting the role ofvarious partners, flow of materialand information, and inventorystatus at various stages. A hybridapproach of ISM and ANP isdeveloped as a unique solution forthe selection of third-party logisticsservice providers under theconsideration of all system-variableinterdependencies. The results arediscussed in detail for the real-lifecase and managerial insights intothe scope of improvement inquality of supply chain practicesare outlined. The paper ends with concluding remarks and adiscussion of some inherentlimitations of the described approach.

Third-Party LogisticsSelection Criteria

In general, the selection processinvolves the evaluation of differentalternative 3PL providers on somecritical criteria like cost,reputation, cycle time, quality ofservice, and so on. In Table 2, weshow an extensive list of 26 third-party logistics criteria.

This is a generalized list of 3PLselection criteria and hence it hasto be tailor-made for the chosencontext. Here, we have carried outa case analysis of KVIC (Khadi andVillage Industry Commission, India)organic food sector, which isconsidered a case organization, andis a statutory body created by anAct of Parliament (India) (No.61 of1956 and as amended by Act No. 12of 1987). The broad objectives thatKVIC have set before it are (1) thesocial objective of providingemployment, (2) the economic


Figure 3Paradigm of Outsourcing


Table 2Type of 3PL and Examples

Criteria Reference Relevance SN


objective of producing saleablearticles, and (3) the wider objectiveof creating self-reliance among thepeople and building up of a strongrural community spirit. A typicalsupply chain of KVIC organic foodsector is presented in Figure 4.

The main issues involved in the KVICsupply chain include the following:• Heavy reliance on third-party

logistics as a majority of thematerial management function isoutsourced

• Invested a huge amount of money in IT, but internal staff and third-party logistics had a lowmotivation to use thecomputerized set-up, which hadpreviously yielded very lowbenefits

• In the recent past the organization had tried many third-partylogistics service providers butnone had performed perexpectations, which resulted inheavy frustration of sales outletsand customer dissatisfaction.

On the focused survey, interviewsand discussions with theorganization’s top- and middle- levelmanagement employees found 15criteria most suitable from the list of26 (Table 2) for the 3PL selection.Initially, the ISM model developsrelationships among these criteria tounderstand the involved intricacies.Based on the model outcomes, theANP model is formulated to prioritizevarious third-party logistics serviceproviders. A scrutinized list of 15criteria for a case company is givenbelow. Brackets indicate criteriaabbreviations and the number useduniformly throughout the document. Sound financial background (FBG)(1); previous experience (PE) (2);readiness to work under the brandname of the contract-givingorganization (RWBN) (3); necessarycertifications (NC) (4); trainedlogistics personnel (TLP) (5);availability of computer network(ACN) (6); ability to react to thechanging needs—flexibility (FLX) (7);readiness to enter into a long-termcontract (LTC) (8); geographicalcoverage (GC) (9);proactiveness/readiness to shareexperiences in system design andreconfiguration (RSE) (10);Trustworthiness (TRW) (11); marginsprovided to contractor (MC) (12);

attitude toward open-bookaccounting (AOBA) (13); attitudetoward hygienic practices (AHP)(14); readiness to work under acomputerized system (RCS) (15).

Interpretive Structural Modelingfor Third-Party LogisticsSelection

Interpretive structural modeling(ISM) is an appreciated methodologyfor identifying and summarizingrelationships among specific itemsthat define an issue or problem. Itprovides a means by which a groupcan impose order on the complexityof the items (Mandal and Deshmukh,1994). The method is interpretive inthat the group’s judgment decideswhether and how items are related; itis structural in that, on the basis ofthe relationship, an overall structureis extracted from the complex set ofitems; and it is modeling in that thespecific relationships and overallstructure are portrayed in a digraphmodel (Sage, 1977).

Most of the real-life problems involveassessment of a number ofsubjective parameters that arebasically interdependent in nature.For example, proactiveness andreadiness of a contractor to

share experiences in systemreconfiguration could be dependenton margins provided to thecontractor, the level of trainedlogistics personnel, the 3PL’s pastexperience, financial background,and so on. However, a contractor’swillingness to share experiences insystem reconfiguration may lead tothe establishment of a long-termrelationship. To capture thisinterdependence, techniques likeISM may be found more useful. A fewof the outstanding features of thetechnique include (1) incorporatingexperts’ subjective judgments andtheir knowledge base in the mostsystematic manner, (2) providingample opportunity for revision ofjudgments, and (3) computationalefforts involved are far less forcriteria ranging from 10 to 15numbers and can be used as a handytool in real-life applications. A flowdiagram portraying the various stepsof ISM is shown in Figure 5.

Structural Self-InteractionMatrix (SSIM)

For analyzing the criteria, acontextual relationship of “leads to”is chosen and an SSIM has beendeveloped as shown in Table 3. Foursymbols are used for the type of therelationship that exists between twosubvariables under consideration: V

Figure 4Supply Chain of KVIC Organic Food Sector


for the relationship from i to j but notin both directions; A for therelationship from j to i but not inboth directions; X for both directionrelationships, from i to j and j to i;and O if the relationship between thevariables does not appear valid.

Reachability Matrix

The SSIM has been converted into abinary matrix, called the initialreachability matrix (IRM) bysubstituting X, A, V, and O by 1 and 0.For example, if criteria i leads to

criteria j and criteria j leads tocriteria k then criteria i must lead tocriteria k. The process of bridgingthese gaps is known as transitivitycheck. After the transitivity check, afinal reachability matrix is obtainedas shown in Table 4. The varioussituations are summarized as below.

Entry in SSIM (i, j) V A X OEntry in 1 0 1 0reachability matrix (i, j)Entry in 1 0 1 0reachability matrix (j, i)

Classification of Criteria

Different criteria have been classifiedinto four sectors, namelyautonomous, dependent, linkage,and driver/independent, based ontheir driver power and dependence(Mandal and Deshmukh, 1994). Forexample variables in the firstquadrant are weak dependentpowers and weak driver powers;they are generally disconnected fromthe system and are calledautonomous variables. However,variables falling in the third(northeast) quadrant are linkagevariables with strong driver powersand strong dependent powers. Thesevariables are unstable. Any action onthese variables will have an effect on

Table 3Structural Interaction Matrix

Figure 5Methodology of ISM


the others and also provide afeedback effect on themselves.They can disturb the whole system.The second quadrant comprisesvariables that have weak driverpower and strong dependence.These variables are calleddependent variables. The fourthquadrant (northwest) includesdriver or independent variablesthat have strong driver power andweak dependence. The driverpower-dependence matrix andcriteria classification are presentedin Figure 6 and Table 5,respectively.

Level Partition and Canonical Matrix

From the reachability matrix, thereachability set and antecedent set(Warfield, 1974) for each criterionis found in Table 6. The reachabilityset consists of the element itselfand other elements, to which it mayreach, whereas the antecedent setconsists of the element itself andthe other elements, which mayreach to it. Then the intersection ofthese sets is derived for allelements. The element for whichthe reachability and intersection

sets are the same is the top-levelelement. The whole process ofpartitioning is based onestablishing the precedencerelationships and arranging theelements in a topological order.Then the reachability matrix isconverted into the canonical matrixformat by arranging the elementsaccording to their levels (Table 7).

Development of Digraph and Formation of ISM

From the canonical matrix form ofthe reachability matrix (Table 7),the structural model is generatedby means of vertices or nodes andlines of edges known as a directedgraph or digraph. Next, the elementdescriptions are written in thedigraph and called ISM (Figure 7).

Results Discussion

1. The final reachability matrix (Table 4) shows that FBG (soundfinancial background—1) and PE(previous experience—2) arekey criteria with maximumdriver powers. Next is TLP(trained logistics personnel—5).

2. Driver power–dependence matrix(Figure 6) reveals that RWBN(readiness to work under thebrand name of contract givingorganization—3) and NC(necessary certifications—4) areautonomous variables in the 3PLselection process. Thesevariables are weak drivers andweak dependents and arerelatively disconnected from thesystem.

3. Dependent variables are LTC (readiness to enter into long-term contract—8), GC(geographical coverage—9), RSE(proactiveness in systemdesign—10), TRW(trustworthiness—11), AOBA(attitude toward open-bookaccounting—13), and RCS(readiness to work undercomputerized system—15).These attributes are weakdrivers but strongly dependent.

4. There are three linkage variables that have strong driver power aswell as strong dependence. FLX(Flexibility—7), MC (marginsprovided to contractor—12),and AHP (attitude towardhygienic practices—14) areidentified as linkage variables.

Table 4Final Reachability Matrix


These variables are unstable innature and require specialattention. For example ifcontractors are not satisfied withthe margins they are beingprovided then they may adopt acasual way of working that willdisturb the functioning of theorganization and may result in thetermination of the contract.However, the company may thinkto further cut down the margins ormay impose some penalty on suchcontractors. Likewise, thesevariables may damage thereputation and brand name of theorganization and spoil the existingrelationship with the contractor.

5. Variables like FBG (sound financialbackground—1), PE (previousexperience—2), TLP (trainedlogistics personnel—5), and ACN(availability of computernetwork—6) are the strongdrivers. They condition the rest ofthe system and are calledindependent variables or drivers.

6. Dependent variables play a key role in 3PL selection whereasindependent variables areimportant from the systemimprovement and sustainabilitypoint of view. For the development

and betterment of the system, theorganization should suggest to the3PL and assist them in improvingin the independent factors. For theexpansion of business geographicalcoverage, proactiveness andtrustworthiness are very important.

Prioritization of Third-PartyLogistics Providers UsingAnalytic Network Process (ANP)

ANP (Saaty, 2001) is a comprehensivedecision-making technique that hasthe capability of including all therelevant criteria—tangible andintangible—in arriving at a decision.The approach is defined as anonlinear model that takes intoaccount the network relationshipamong various factors. ANP drawsattention to the analytic hierarchyprocess (AHP) by incorporatinginterdependencies without a need tospecify levels as in a hierarchy.However, it is built on the sevenpillars of AHP technique and servesas a starting point (Saaty, 1999). Itallows more complex interrelationshipsamong the decision levels andattributes. It addresses how todetermine the relative importance ofa set of activities in a multicriteria-

decision problem. Pairwisecomparisons of the alternatives aswell as pairwise comparisons ofmultiple criteria are the backbonefeatures of the process. Determiningthe effects of a network structure onthe degree of interdependence is thebiggest function of ANP. By relying oncontrol elements, the ANP parallelswhat the human brain does incombining different sense data as,for example, does the thalamus.

For the present case, we havedeveloped a hybrid approach of ISMand ANP (shown in Figure 8) for theselection of third-party logisticsservice providers. Accuracy ofoutcomes of the ANP model depends upon the consideredinterrelationships among selectioncriteria. Many approaches areadopted to group the variables andfind out relationships among them,but they heavily rely on subjectivejudgments and the feel of anindividual or group. Here, to reducethis interface error, we have adoptedan analytical approach of ISM togenerate the relationship inputs foran ANP model. The ANP model isformulated as shown in Figure 9.Relationships are complex andrequire many pairwise comparisons.To minimize the computationalefforts and maintain an accuracy ofprocess, a beta version of the ANPsoftware “Super Decision” is used foranalysis purpose. This modelprioritizes three third-party logistics service providers on the basis of incorporated relationshipsdeveloped through the ISM model. Acomprehensive description of all thethree logistics service providers isgiven below. Here, we have provideddummy names (third-party logisticsA, B, C) to maintain theconfidentiality of the selectionprocess.

Table 5Structural Self-Interaction Matrix (SSIM)

Figure 6Driver Power-Dependence Matrix


Table 6Levels of 3PL Criteria

Table 7Levels of 3PL Criteria

Description of Third-PartyLogistics A, B, C

Third-Party Logistics A: He hasworked in the same activity domainas KVIC with other parties for thelast five years and possesses a totalexperience of fifteen years inmanaging outsourced functioning.He has not acquired any quality

standards, but is ready to submitthe proofs of his hygienic workingpractices, income tax–sales taxclearance, and so on. A well-trainedlogistics personnel is his strengthbut he relies on other parties fortransportation and a computerfacility. Present and past clients’opinion of him is good ontransparency and trustworthiness

factor but he is rated low oncomputer know-how. He agrees on a lease amount with someconditions on margins provided tohim. Third-Party Logistics B: He is newto the business of case organizationbut possesses a total experience oftwelve years in outsourcing.Presently, he does not have a very

well-established logistics facility formanaging the total outsourcedfunction of KVIC but seems to bevery strong financially compared tothe two other contractors. He isalso offering the highest leaseamount without requiring anyspecial conditions. He appears tobe sound in computer set-up and iscapable enough to invest money forsystem advancement.

Third-Party Logistics C: He is in thesame business for the last ten yearsand possesses a well-trainedlogistics personnel and facility. Hisfinancial strength is found poorcompared to the other twocontractors. His present client hasgiven an overall good opinion ofhim but rated him poor on thedimension of timely delivery. Heoffers more lease amountcompared to contractor A but lessthan contractor B. He expects someconfidentiality on some businessperspectives like salaries of hisemployees, use of his own brandname, details of his other clients,and so on.

Using these situational insights, themodel accomplishes all thepairwise comparisons. Steps forformation of a super matrix andfinal synthesis of results are carriedout. The results of the synthesisprioritize three logistics serviceproviders A, B, and C withweightages of 0.24, 0.35 and 0.41,respectively.

Results Discussion

Results show that contractor C isthe best alternative with thehighest priority of 0.41. ContractorB is second. Even thoughcontractor B is new to the businesscompared to contractor A, hereceives higher priority and this isbecause of his better financialposition and motivation for long-term contract. However, contractorC has got good experience in thisbusiness and expects only somenegotiations on margins to beprovided to him by KVIC. Lookingat the analysis KVIC can considerproviding some higher margins orsome incentives on performancefor the establishment of a long-term contract anduninterrupted functioning ofbusiness. This will also establish awin-win situation for both parties.

Research Contributions

The main emphases of the researchare in building conceptualunderstanding, identifying criteriafor 3PL selection, developing anISM model, and prioritizingalternative third-party logisticsservice providers using ANP. Theused approach and its outcome douncover many hidden facts, andtheir usefulness can be extended tomany real-life issues. A few salientfeatures narrating usefulness ofresearch outcomes are summarizedbelow.

Usefulness of Model

• The model captures the judgmentsof experts and hence establishesan important basis of a decisionsupport system for 3PL selectionprocess. An integrated approach iscapable enough to consider thequalitative and quantitative criteriaand their interrelation-ships.

• Main outcomes of the model are a driver power–dependence matrixrelationship diagram (diagraph),and an ANP-based prioritization,which provides the basis forvalue sharing and so profit-sharing arrangements betweenconsignor and consignee.

• In a real-life situation, it provides the basis for consequence-basedanalysis of decision making and problem solving whileworking under an outsourcingarrangement.

• The model establishes a precedencerelationship and hence any kindof failure or risk analysis can becarried out with the help of


Figure 7ISM for 3PL Selection Criteria

Figure 8Hybrid Approach of ANP and ISM

decision tree–kind of technique ifprobability of occurrence can bedetermined for each success orfailure of each relationship.

• Relationships are intangible and relative in nature and hence arelooking for a total dependenceon specific criteria in which afuzzy, logic-based decision modelcan be conceptualized.

• If a similar kind of relationship can be established with 3PLcapabilities, then variance in the categories “needed” and“available” can be determined.This may be utilized as a basisfor profit-sharing based on thevalue added by each partner.

Impact on Quality of Supply Chain Practices

Interpretation of findings makesmore sense when we consider theirimplications on overall quality andeffectiveness of supply chainpractices. A few important one arehighlighted below.• Having understood the dependence-

conflicting goals of a supply-chainlike financial assistanceneed for product development,inventory optimization and so oncan be managed more effectivelyby offsetting the weaknesses of each other throughcomplementary skills.

• Level determination of criteria provides a strong basis forprogressive trust building inrelationship and hence slowlyconverts the business contractinto a strategic alliance.

• The development of a model is context specific and hencereflects the strategic needs of aparticular organization. Finding apartner with complementarycapabilities helps anorganization to improve itsrelative position in industry.

• Sometimes it may become difficultto find a single third-partylogistic service provider andhence knowing criteriarelationships and prioritizingvarious 3PLs on a commonground will help to evolve anarrangement like fourth-partyservice providers, who aremanaging the various 3PLs for acommon objective.

• Supply-chain time compression becomes possible throughconcurrent working, standardizationof processes, and effectiveinformation sharing. Establishedrelationships uncover theneeded dependencies ofpartners at various levels andhence project the points whereconcurrent working with adifferent degree of confidentialityin information sharing is needed.

• Under a value-added tax (VAT) arrangement, tax is calculated onthe actual value added by a firmor individual on goods andservices purchased from others.It is a tax based on an economicactivity rather than on endproducts. Model outcomes formthe basis for analyzing valueaddition by each partner ifparameters like flexibilityrequirements, conditions of a

long-term contract and expectedbenefits, margin considerations,needed reliability for a particularfunction, and so on can bequantified on a numerical scaleand hence suggest logical,dispute-free tax calculationunder a VAT system.

Managerial Insights

The model develops insights onreal-life managerial problems.Applicability of the model on somekey issues is discussed below.• The model uncovers the strengths

and weaknesses of the consignorand hence it is important toobserve proper gatekeeping inthe transfer of information andtechnological know-how becausetoday’s collaborator may turninto tomorrow’s competitor.

• It makes the managers more critical of evaluating 3PLs’ performanceson the basis of “what is needed”rather than “what is provided”and hence sets an appropriatebasis for even termination ofcontract if required.

• While working on core competencies,awareness of the weaknessesand selection of the right kind of 3PLs help the organizationto evolve with time andsimultaneously avoids overdependenceon 3PLs in long run.

• The model establishes a basis for a consequence kind of analysis incase of system-related failures ordisputes. Despite all theconsiderations in selecting thebest provider, users must planfor contingencies like abreakdown in negotiation,unexpected events like a changeof management at the providers’end, organizational problems,and so on. Therefore, the usermay have to sometimes rely on asuboptimal solution and musthave at least one more provideras a second choice (standby)while implementing a contractwith the first one. An integratedapproach of ANP and ISMprovides the basis forquantifying decisions thatinvolve change.

• The model’s relationships suggest necessary actions or agreementsto be made for initiating a newproduct development cycle on


Figure 9Super Decision (ANP) Model for 3PL Selection

the basis of the organization’sown dependence on 3PL and itsdegree of its readiness toparticipate.

• Resource sharing and allocation are the critical aspects ofworking in a joint venture. Themodel sets the criticality ofvarious criteria by defining theirpredecessors and hence thisknowledge could be utilized foreffective resource sharing

• Being aware of dependencies, managers can set deadlines forthe completion of tasks andmake realistic commitments totheir customers.

Concluding Remarks

This paper touches upon thevarious intangible and tangibleselection criteria of third-partylogistics service providers. Havingunderstood the nature of thisrelationship, this paper developsconceptual models for a real-lifecase analysis. A hybrid approach ofISM and ANP is a distinguishingfeature of this research work. Thispaper highlights implications ofresults from a managerial andoverall supply chain performanceimprovement point of view.

A developed common understandingsummarizes that it is no longerownership of capabilities thatmatters but rather a company’sability to control and make themost of critical capabilities. In thisnew era of capability sourcing,companies’ value chain decisionswill increasingly shape theirorganizations and determine thekinds of managerial skills they needto acquire and develop in order tosurvive, grow, and compete. Hence,decisions about outsourcing arestrategic in nature and the cost ofundoing will be exorbitant. Thisstudy demonstrates the use of a logical and structured approach to reducing the risks of poor investment decisions.Though a proposed approach iscomputationally intensive, thebenefits of risk reduction willoutweigh the costs and timerequired.Greater flexibility and responsivenessare the two obvious advantages ofoutsourcing, but rushing to

outsourcing has delivered muchless value than it might have beenexpected. Hasty decisions lead tothreats like reduction in control,loss of skills of internal personnel,low employee morale andperformance, insecurity ofinformation, and exploitation oflabor. To make the supply chainmore competitive, when there ismore than one function tooutsource, rating the 3PL forms thebasis for evaluating bids.

Limitations of the Approach

Though the proposed hybridapproach of ISM and ANP for third-party logistics selection is based onwell-tested algorithms forsystematic decision making, caremust be taken in itsimplementation. In applying thismodel the user has to makepairwise comparisons at variousstages. This requires thoroughunderstanding of the presentconditions of the organization andfuture goals. In many cases,comparisons are based on theperception of the decision maker,which may not be always true. It isnecessary to organize somebrainstorming sessions and groupdiscussions to get the feel ofexisting problems and the completepicture of the organization. Tocollect the responses of experts, aDelphi study can be conducted andproper consensus can be acquiredabout the problem under study. Inaddition, a number of criteria alsoplay an important role in thedevelopment of ISM. In the presentstudy only 15 criteria areconsidered for the purpose ofanalysis but more criteria can beincluded. The higher the number ofcriteria, the greater is thepossibility of having gaps insubjective judgments. Forexample, in the present case of 15criteria, 51 transitivities wereintroduced in the final reachabilitymatrix to fill the gaps (Table 4) andthese gaps increase exponentiallywith an increase in number ofcriteria. In addition to gaps existing in subjective judgments,computational difficulty alsoincreases with an added number ofcriteria, and in this case the needfor computers became inevitable.

In the present case, thecomputation of the ISM model iscarried out manually while thesoftware “Super Decision” was usedto formulate and analyze the ANPmodel. To reduce interface errorsand save computational efforts, auser-friendly, integrated softwareprogram could be developed as amanagerial decision-supportsystem.


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About the authors

Jitesh Thakkar is an AssistantProfessor in the Mechanical EngineeringDepartment at A.D.Patel Institute ofTechnology, Vallabh Vidyanagar, India.He secured Gold Medal in Bachelor ofEngineering (Mechanical) degreeprogramme from Sardar PatelUniversity, Vallabh Vidyanagar, thereputed University in Gujarat, India. Hejoined Indian Institute of TechnologyDelhi and did his M.Tech in IndustrialEngineering with rank position.Presently he is pursuing research workleading to Ph.D in the field of supplychain management at Indian Institute ofTechnology, Delhi.

S. G. Deshmukh is a professor in themechanical engineering department atIndian Institute of Technology, Delhi. Hehas a long teaching and researchexperience. His articles are published inmany reputed international journals likeInternational Journal of Operations andProduction Management, ProductionPlanning and Control, European Journalof Operational Research, InternationalJournal of Production Research etc. Hisareas of interest are supply chainmanagement, materials management,quality management, informationsystems, and system optimization.

A. D. Gupta is an associate professor inthe mechanical engineering departmentat Indian Institute of Technology, Delhi.He has a long teaching and researchexperience. His areas of interest arevalue engineering, quality control,management, and supply chainmanagement.

Dr. Ravi Shankar is an associateprofessor in the department ofmanagement studies at Indian Instituteof Technology, Delhi. His publicationshave appeared in many reputedinternational journals like EuropeanJournal of Operational Research,International Journal of ProductionResearch, Supply chain management:An international Journal etc. His mainareas of interest are supply chainmanagement, ERP, quality management,and operations management.


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