A STUDY ON MODELING OF SELECTION ISSUES IN THIRD AND FOURTH PARTY LOGISTICS SERVICE PROVIDERS

Abstract

The emerging new world order and the economic policies of liberalization and globalization have significantly altered business perceptions and its dynamics. To keep pace with changing business demands and regimes, logistics strategists are banked upon to design and develop entirely different arrays of business strategies. In line with this requirement, over the last decade, the logistics industry has witnessed the rise of third party logistics (3PL) service providers as a 'mantra' for outsourcing of non-core competency activities. Outsourcing of non-core activities to these 3PL service providers also lead to the improvement of organizational focus over its core expertise areas. In the meantime, a new concept of an asset free entity, called the Fourth Party Logistics (4PL) service provider also evolved. Fourth-party logistics was created by Andersen Consulting (since renamed as Accenture), which in the 1990s developed a new supply-chain business model. Andersen defined 4PL as an integrator that brings together the resources, capabilities, and technology of both its own organization and other organizations to design, build, and run "complete supply-chain solutions." The 4PL works horizontally across the whole supply chain and uses the services of 3PLs to provide end-to-end solutions for customers. Typically, the 4PL only owns IT systems and intellectual capital, and is therefore asset light (if not asset free). This allows it to be neutral in terms of asset allocation and utilization, with the ability to manage the supply chain process irrespective of which carriers, forwarders, or warehouses are used. With the 4PL concept gaining ground, there have been two completely new challenges to the logistics sector. First, the process of selection of Third Party logistics service providers (3PLs) by the shippers has evolved into the stage of selection (of the 3PLs) by the 4PL. Secondly, the choice of the 4PL itself presents significant challenge both to the academia and to the logistics industry. The present study is an early step in the above directions. The study attempts to model the selection issues of third party service providers under the modern-day 4PL and Lead Logistics Providers (LLP) environments. Now, in the new scenario, integration abilities have gained importance and so have the issues of IT enabled chain solutions, which 3PLs can gel with the competencies of the 4PL. For the 'integrator' in the 4PL/LLP concept, newer issues, like IT enabled facilities, end to end transparency of operations etc., have gained precedence over issues which were considered significant in the previous `Shipper-3PL Regimes'. Trust & collaboration are some of the important entities, which interest researchers in logistics outsourcing. At the same time, it is also pertinent to focus on issues in the selection of 4PL/LLP by the organization, which is outsourcing its non-core competency jobs to these integrators of the new-age logistics industry. Multiple criteria and multiple alternatives make the decision more complex. Thus, it warrants the need for various models, which can also be validated either by formal or by informal methods. The emergence of the 'integrator', the 4PL, has added to the already significant area of logistics outsourcing. The 4PL being an asset-light, IT centric entity in the chain, can not only make the chain lean but also help in achieving the much needed integration. The objectives of the present research are: • To develop an integrated model to identify and classify the key criteria and their role in the assessment of 3PL service providers by the 4PL/LLP integrators, using Interpretive structure modeling (ISM) . • To develop an Analytic Hierarchy Process (AHP) based model for the selection of 3PL service providers under 4PL/LLP environments. • To develop a framework for the selection of the best 3PL service provider under 4PL/LLP scenarios, using Fuzzy Analytic Hierarchy Process (FAHP), and compare its results with those obtained from discreet AHP modeling. • To develop a hybrid Analytic Hierarchy Process (AHP) - Data Envelopment Analysis (DEA) model for the above purposes, and highlight the ill effects of subjectivity in decision-making. • To deploy Taguchi's Loss Functions as a means of deciding the best 3PL under 4PL scenarios vi Research has been carried out with a detailed literature survey followed by several industrial visits to 3PL service providers and also to a select group of India based 4PL service provider. The detailed discussion with 4PL and 3PL service providers provided critical insight of the mechanisms followed in this sector. Based on the one-to-one interview and brainstorming session various analytical selection-models have been designed. A framework for the selection criteria is developed using an Interpretive Structure Modeling (ISM). This (ISM) is used to establish a relationship among various logistics input variables and outcome variables. In the initial stage, a basic AHP model has been designed to assist in the selection of 3PLs by the 4PLs and/or the LLPs. Validity of the proposed model, is evaluated using existing literature and also by calculating the consistency ratios of the pairwise comparison matrices. Consistency ratio is computed, according to the consistency index and random index (RI). The next approach used for determining the validity of the AHP model is by analyzing and interpreting the past data of selection, statistically. Finally, the validity of the model is tested by investigating whether or not the same results are found by different decision-making teams of a selected 4PLs. This initial AHP model has been used as a backbone for further derivative studies using fuzzy sets and fuzzy logic. Further, this model is compared against a hybrid model designed using integrated AHP and Data Envelopment Analysis (DEA) technique, i.e. the DEAHP model. This improvised model has the ability to negate the drawbacks of subjectivity in decision making which sets-in in most AHP models. Further, using Fuzzy Analytic Hierarchy Process (FAHP), a model has been designed for the selection of 3PL service providers by the LLPs / 4PLs. The FAHP model has the ability to incorporate the vagueness of expression of the human decision makers. It is found to be not in consonance with historical data available on selection issues but was found to be validated on the algorithm proposed by Mikhailov (2004). Finally, the validity of the fuzzy model is tested by investigating whether or not the same results are found by different decision-making teams of a vii selected 4PL. The fuzzy application presented herein was repeated by three different decision making teams, and similar results were reported The solutions for tomorrow's logistics managers need not be very complex. Yet, they have to be flexible and robust, both. The various models based on AHP, Fuzzy AHP (FAHP), Data Envelopment Analysis — AHP (DEAHP) and Taguchi's Loss Function Index presented in this research work have the potential to give sufficient choice to logistics managers to adopt them in the selection of service providers under fuzzy and rather complex logistics environments. No model or solution is correct in all scenarios. Hence, the logistics managers may modify the models presented in this study, by incorporating more criteria and alternatives (to fine-tune the decision accuracy and completeness). It is a firm belief that this research will contribute towards flexible, robust and industry friendly (read simple to understand and use in day-to-day operations), selection models in service providers operating under 4PL environments of tomorrow. viii