Primer Congreso de Logstica y Gestin de la Cadena de Suministro Zaragoza, 12 y 13 de Septiembre de 2007

A METHODOLOGY TO SELECT INTERNATIONAL THIRD-PARTY LOGISTICS PROVIDERS OF AN INTERNATIONAL SUPPLY CHAIN

D. Goebel F. Gildemir Agncia Nacional de Transportes Terrestres ANTT Abstract Fragmentation of production processes at global level has led to the outsourcing of logistics services and the contracting of Third-Party International Logistics Providers (TILP). To companies that adopt Supply Chain Management (SCM), analyzing the outsourcing companies to be prepared for a break in the Supply Chain is extremely necessary. Therefore, this paper proposes a methodological procedure to select a TILP, taking into account the strategic entrepreneurial thinking, observing production internationalization, using indicators that could converge to an index, and translating the systemic way in which SCM works. This procedure results in the contractors being prepared to negotiate with TILP in such a way that the contractors vulnerability to TILP is decreased. Keywords: Third-Party International Logistics Providers; Supply Chain Management

Resumen La fragmentacin de los procesos de produccin, a nivel global origin la subcontratacin de servicios logsticos y la contratacin de Proveedores Logsticos Internacionales (PLI). En las empresas que trabajan con Gestin de la Cadena de Suministro (SCM), los contratantes de los servicios deben evaluar bien a la empresa subcontratada, evitando que una ruptura en algn eslabn de la cadena de suministro afecte negativamente a todo el conjunto. En este trabajo se propone una metodologa para la seleccin de Proveedores Logsticos Internacionales, a partir de una visin estratgica de la empresa dependiendo de la etapa de internacionalizacin de la produccin en la que cada empresa se encuentra, utilizando indicadores que converjan en un ndice y traduzcan el comportamiento sistemtico del SCM. Mediante el uso de la metodologa el contratante de PLI estar preparado para negociar y disminuir la vulnerabilidad del contratante frente al contratado. Palabras clave: Proveedores Logsticos Internacionales; Gestin de la Cadena de Suministro 1. INTRODUCTION The increase in international trade in the past fifty years reflects the constant international specialization in production. Therefore, the growing fragmentation of production processes at global level has led to the outsourcing of logistics services and the contracting of ThirdParty International Logistics Providers (TILP) (Goebel, 2006). Berglunds market segmentation of Third-Party Logistics Providers (1999) classifies them as Service

Providers, which specialize in traditional logistics activities, such as transportation and warehousing, and Solution Providers, which specialize in managerial skills. Nevertheless, despite the fact that these companies have different dimensions and offer different services along the supply chain, their main concern often involves integrating the processes of their clients core-business, from the end user to the original supplier, providing them with services and information and adding value to the clients business. Thus, when hiring a TILP, companies should evaluate carefully the type of firm that will meet their needs. In a global market, Third-Party International Logistics Providers must be perfectly integrated with the supply chain for their services, whether as Service Providers or as Solution Providers, might harm links of the intercompany business process appointed by Lambert & Cooper (2000). Therefore, when choosing a TILP, the outsourcing company concerns itself with the ways in which it can identify whether the links of the intercompany business process will or will not be broken by the TILP hired. Such question may be answered by using indicators. Selecting indicators that do not affect negatively the whole and to choose a TILP that does not break any links of the supply chain is the aim of this methodological study. To that end, this paper is divided into another four sections, which discuss concepts of Third-Party International Logistics Providers (TILP) and Supply Chain Management (SCM), present definitions and methods to identify indicators and construct indices, formulate the methodological proposal, and present the conclusions of this paper. 2. SYSTEMIC VIEW AND SUPPLY MANAGEMENT CONCEPTS This section starts with the view that will guide this paper, detached from the systems theory. Next, it discusses the concepts of Supply Chain Management and International Logistics Providers. 2.1 Systemic View and Supply Chain Management The systems theory studies the environment, and the system itself, where exogenous and endogenous forces meet to form a complex set and where actions and reactions occur continuously. Whether it is an industrial facility, a warehouse or independent contractors, among others, the idea of a system is embedded since there are inlets, processing units and outlets. With the systemic view, one can foresee future events, wanted or unwanted, and guide decisions based on the understanding of the system, as well as monitor its operation. Bossel (1999) introduces a systems classification, which has been adapted by the authors of this paper in order to exemplify instances where the theory applies to logistics (Table 1), with various characteristics. Besides, it is possible that a given system will match a combination of the systems described in Table 1.

Systems Static Metabolic Selective Protective Self-organizer Not isolated Selfreproducible Sensitive Conscious

Characteristics Not interacting with the environment; not changing Demanding energy, matter and information to come into existence Responding selectively to challenges from the work environment Protecting themselves from adverse conditions Changing their systemic structure in order to adjust to changes in the work environment Changing their behavior when in systems contact with activities in other

Examples applied to logistics Oil and gas pipelines Ocean carriers and aircrafts ILP outsourcers; suppliers Suppliers and consumers Just-in-time companies; intelligent systems Economic enterprises such as supermarkets, bookstores Companies - head-offices and branches; franchise stores Decision-making staff; employees CEOs, top management

Reproducing systems which are similar to themselves Experiencing pain, emotions, etc Reflecting on their own acts and impacts

Note: Although it is necessary to use indicators that convey a systemic view, companies often view systems as if they were static. Table 1 - Types of systems (Adapted from Bossel, 1999) Regarding the systems in Table 1, it must be pointed out that a system does not operate by itself. Not only does it react to other systems, it is also immerse, sometimes in a certain setting, sometimes in another, and sometimes in several settings. According to Bossel (1999), these settings are presented in a variety of forms, namely: Normal, in which the system varies; Lack of Resources, in which the resources that the system requires are unavailable when and where the system is; Variety, which means that there are several processes and patterns in the setting; Changes, which means that the so-called Normal State is not stationary, that is, it may change into another state that will be considered normal in that particular situation; Other systems, which means that a system does not exist in and for itself. A supply chain is a system which consists of several sub-systems: decision-makers, TIPL companies, suppliers, consumers, among others. Each sub-system reacts differently to its surroundings and to the systems to which it is connected. Sometimes, the supplier can bargain with the consumer due to its market standing; sometimes, the consumer can gain advantages over the supplier due to his role in the market. Therefore, outsourcing decisions affect the whole setting. Each decision made has an impact on the future of the supply chain, for such decisions may lead to increases in product prices, distribution costs, production, and storage, among others. To illustrate how the systems involved in the supply chain work, the sub-section that follows presents definitions and concepts concerning Supply Chain Management 2.2 Supply Chain Management Supply Chain Management (SCM) is defined by several authors in different ways, according to the relationship between this area and logistics. According to Lambert &

Cooper (2000), the concept of SCM, adopted by the Global Supply Chain Forum (GSCF), is the integration of key business processes from end user through original suppliers that provide products, services, and information that add value for customers and other stakeholders. On the other hand, the Council of Logistics Management (2000) defines Logistics as that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services and related information from the point of origin to the point of consumption in order to meet consumers requirements. There is not, however, a consensus as to the relationship between the two concepts. Larsson & Halldorsson (2004) have classified the relationship between SCM and logistics from four perspectives: traditionalist, relabeling, unionist, and inter-sectionist. From the traditionalist perspective, SCM is seen as a small part of logistics, whereas the relabeling perspective regards SCM simply as a new label for logistics. The unionist perspective, on the other hand, sees logistics as a part of SCM. Finally, the inter-seccionist perspective regards SCM as being associated to the companys strategy, which permeates its business processes and channels. From the last perspective above, SCM comprises activities such as marketing, logistics, internal operations, procurement, and other areas related to the companys strategic plan which affect its medium- and long-term performance. Outsourcing international logistics services is directly connected with the strategic vision of the company, for, depending on the TILPs efficiency and efficacy in the supply and distribution of the companys products in a number of countries and continents, the expected international expansion of the outsourcer will or will not occur. Consequently, the inter-seccionist SCM concept will be adopted in this paper. Generally speaking, companies usually point out the following objectives to adopt SCM: reduce costs, inventory investment along the chain, and, according to Delfmann & Albers (2000), Akkermans et al. (1999), enhance customer satisfaction. Nevertheless, whatever the objectives of the company are, there is no doubt whatsoever that inter-organizational aspects, long-term vision and, above all, long-term contracts are intrinsic to SCM. Integration among activities along the supply chain is particularly necessary when there is a larger number of business partners and when the distance between origin and destination is longer. A linear supply chain, linking the supplier, manufacturer or distributor to the customer, is a theoretical simplification (Lambert & Cooper (2000) and Delfmann & Albers (2000)). Actually, those authors emphasize that there is a complex network between the original supplier and the end user which consists of a set of companies and the relationships among them, as seen in Figure 1. Lambert & Cooper argue that the objective of these companies is to optimize their main connections within the network, as shown by the continuous lines in bold. Thus, optimizing the complex system of network connections will depend on the setting where each knot in the network is inserted and on a careful mapping-out of these connections.

Fig. 1 - Types of intercompany business process links (Lambert & Cooper (2000) According to Connolly (2005), SCM should be broad, flexible and responsive; it should also have control and coordination mechanisms to be effective, that is, it should be a selforganized, not isolated, selective system (Table 1). The balance of power and the level of trust among the participants in the chain will also determine the strategic role of SCM and, in order to succeed, global businesses have to exchange information and interact with the main actors, including suppliers, customers and logistics providers (Larson & Halderson, 2004; Youngdahl & Loomba, 2000). To this end, they should be guided, according to Youngdahl, apud Schary and Skyott-Larson, by three forces that guide the development of global supply chains: the supply chain concept, trends within global business, and new orientation of enterprise toward core competencies. The effects of production internationalization can, however, be essentially distinct in nature due to international geographic dispersion and the integration of production activities in companies, as shown in Figure 2. As seen, various production structures naturally require clearly distinct logistics and communication services, according to the stage of production internationalization at which they are.

Fig. 2 - Basic patterns of production units spatial dispersion in global supply chains (Delfmann & Albers (2000)

A poorly-conceived focal company design may result in partners poor performance, even though the partners may not be responsible or have contributed to it. Thus, an optimal flow along the chain results from the correct identification of occasional bottlenecks that block the flow of goods and information. An example of such bottleneck is the improper outsourcing of an TILP, whose accountabilities are listed in the next section of this paper, that does not meet the strategic requirements established by the focal company. 2.3 Third-Party International Logistics Providers In his market segmentation of Third-party Logistics Providers, Berglund (1999) classifies them into two types: (1) Service Providers, which specialize in traditional logistics (e.g. transportation and warehousing) and are limited to offering standardized services, and sometimes complementary ones, using mainly economies of scale, in order to increase their profits; and (2) Solution Providers, which specialize in managerial skills, view the supply chain from a managerial point of view, and customize their services. Solution Providers may contract out since, in this case, it is not essential for logistics providers to do the job themselves. Both types of businesses proposed by Berglund (1999) have a strategic vision focused on distinct business segments, and neither of them specializes in all of the skills. International logistics services outsourcers should, therefore, evaluate carefully the type of company that will suit them best. As Youngdhal (2000) puts it: The content or actual information provided as service output from one supply chain stakeholder to another will depend on the needs of internal and external customer as well as the capabilities of the IT design. The final responsibility for the content of the information flowing through the supply chain depends on managements ability to design effective service processes and IT architecture to generate, integrate, and transmit the information. According to Delfmann and Albers (2000), Logistics Providers and other businesses in an ISCM (International Supply Chain Management) environment should guide themselves by the following principles: adopt a systemic and total-cost perspective; focus on the processes that make products flow, rather than accept the restrictions imposed by organization boundaries; focus on customers and services all along the way, and not only on the end stages of the chain. Thus, whenever possible, it is advisable to consider the relationship between the suppliers of your suppliers.

These principles should be applied so as to ensure global optimization of the supply chain. However, in view of the requirements of an ISCM, it may be assumed that its implementation at global level will depend on the stability links between the participants along the chain and on an efficient information exchange system. These have to be considered together and represented by indicators.

3. INDICATOR CONCEPTS AND METHODS TO DEVELOP INDICATORS This section focuses on concepts concerning indicators and their applications, as well as methods to develop them. 3.1 Defining Indicators Integrating computerized systems that connect companies along SCM processes may prove to be a particularly complex and challenging issue, especially when there is a growing need for information exchange between systems of different companies along the chain. Since it is only possible to evaluate something which is measurable, it is necessary to use performance indicators to understand the systemic unit described in Figure 1, with its links and processes. Indicators are representative, concise parameters which are easy to read and which are used to illustrate the main characteristics of certain items. When combined together, they may define an index (Silva, 2006). They should be able to reflect not only static instances of the service but also the interaction between the components of the chain supply, which, in turn, should be structured in such a way as to enable sellers to pursue their strategy. This will only be possible if an TILP outsourced meets the requirements expressed by the performance indicators that show how the chain works and include the TILP service as its component. Bowersox and Closs (2001) argue that indicators that measure performance are used to monitor resources, which are factors that consummate a strong supply chain with consistent links. In the authors measurement proposal, indicators are associated with segments in the chain such as Costs, Customer Service, Productivity Measures, Assets Measurement, and Quality, among others. Consequently, by establishing an objective and measuring the various stages in the supply chain, it may be possible to achieve the desired consistency. In order to develop indicators, it is essential to have a strategy and to know the limitations of the system. The outlining of the limiting elements and the strategies involves methodical thinking. 3.2 Methods to Develop Indicators A number of methods may be used in developing indicators, such as brainstorming, interviews, scenarios, the Delphi method, and Balanced Scorecard. The peculiarities in each of them will define their applicability and suitability to each case. Brainstorming and interviews are widely used methods, according to Bossel (1996). Scenarios (Silva, 2006) and the delphi method are contemporary ones. Balanced Scorecard is more suitable in defining performance indicators (Kaplan & Norton, 1997). Besides the above-mentioned methods, two other methods may be adopted to develop indicators: the multicriteria technique (Macbeth, Electra, etc) and revealed preference. Both are based on the economic concept of utility (Mas-Collel, Whinston and Green, 1995) and may be used, for instance, to select a firm to do some transportation job for a producer.

To understand how the Balanced Scorecard works, refer to Figure 3, which shows the steps in its construction, with special emphasis on the set of steps in the square in bold type. It is worth noticing that in the original frame, conceived by Kaplan & Norton (1997), there are eight steps, which have been reduced in this paper since the interview phase and the executive work session form a cycle which aims to identify possible flaws in the first round and to design a plan for the key factors to success. 4. METHODOLOGICAL PROPOSAL The methodological proposal encompasses the steps in the Balanced Scorecard, as well as the interactions that take place throughout the decision-making process carried out by the focal company regarding the ILP to be outsourced, which will not make the supply chain less efficient. Figure 3 shows the steps in the Balanced Scorecard, as well as a few adjustments made to connect the sub-systems in the supply chain. It must be noted that the SC to be examined will depend essentially on the pattern of production internationalization adopted, as shown in Figure 2. Basically, the proposal in this paper, in compliance with Lambert & Cooper (2000), is to optimize the main network connections in SC. Thus, the paper is concerned with identifying the TILP pattern Service Providers or Solution Providers - that decision-makers aim to implement, and how they should integrate the systemic structure in the supply chain. This will work as the methodological sequence in the construction of the Balanced Scorecard. The first methodological steps help understand SCM behavior; the last steps help funnel the indicators into the decision-making parameter.

Fig. 3 - Proposed Methodology for selection of TILPc The methodology proposed to define performance indicators and the ultimate decisionmaker is in accordance with Heuermanns view (2002), according to which logistics and, in the present case, SCM have to be submitted to a hierarchy of strategies, of the industry and of the corporation. An additional advantage of this method is that, if the market does not offer an TILP with the desired conditions, or if the price charged is too high, it is possible to choose the second best option available, which will go along with the companys strategy and allow for some bargaining between the outsourcer and the TILP.

5. CONCLUSIONS The proposed methodology indicates that there is not a set of universal performance indicators to evaluate the TILP or any other element in the supply chain, since an integrated vision is essential. What is required is a philosophy of integration between the TILP, the outsourcer, and the other partners in the logistical chain, based on a shared strategy. This acquires great significance since the company counts on international operations adjusted to its supply chain, which implies long-term contracts between partners. The degree of internationalization of the companys production will determine the degree of importance of the TILPs strategic role, and this will demand closer monitoring of the performance indicators, for this will determine whether the outsourcer will expand or not and will represent its competitive advantage. The systemic vision is clearly observed in a company where all activities are carried out by the same executive body. Companies that outsource may have difficulties in keeping within the parameters they set for themselves. Outsourcers cannot help falling prey to TILPs unless they come to an agreement on a contract that not only encompasses the pre-established strategy but also foresees any other development along its effectiveness. If such a condition is not anticipated, the outsourcer will define parameters for the indicators that may be achieved and will expect an improvement along the years, but they will not have room for negotiation or power to pressure for the desired adjustments. The risks involved in outsourcing this or that Third-Party International Logistics Provider have not been taken into consideration in this paper, in particular the human factor, which may be the subject of a new study. The comparison between several TILPs and the prices charged by them for their services will be the subject of another study to analyze the cost-benefit ratio associated to each of them, although this analysis should be made beforehand, in a comparative, rather than in a quantitative, way. Less complex production systems, such as agribusiness, will naturally be able to simplify the necessary steps since the final product generally involves fewer components, if compared to the manufacturing industry. ACKNOWLEDGMENTS We are grateful for ANTT (Agncia Nacional de Transportes Terrestres) who supported this research. BIBLIOGRAPHY Berglund, M., Laarhoven, P. van, Sharman, G. e Wandel, S., 1999. Third-Party Logistics: Is there a Future? The International Journal of Logistics Management, 10, (1), pp. 5970. Bossel, H., 1999. Indicators for sustenable development: theory, method, application. International Institute for Sustainable Development (IISD) Bowersox, Donald J. Closs, David J., 2001. Logstica empresarial: o processo de integrao da cadeia de suprimento. So Paulo: Ed. Atlas.

Connolly, Kate P., Sullivan, Erin., et al., 2005. International SupplyChain Mnagement: A Walk around the Elephant. The Irish Journal of Management. Vol. 26, Issue 1, pp. 141162. Delfmann, Werner; Albers, Sascha, 2000. Supply Chain Management in the Global Context, Working Paper No. 102, Dept. of General Management, Business Planning and Logistics of the University of Cologne, Cologne. Goebel, Dieter, 2006. H oportunidades para empresas brasileiras atuarem como provedores logsticos internacionais? paper presented at Pluris 2006. 2 Congresso Luso Brasileiro para o Planeamento Urbano, Regional, Integrado e Sustentvel, Braga, Portugal. Heuermann, Caroline, 2002. Internationalisierung und Logistikstrategie. Wettbewerbsstrategische Implikationen fr die Gestaltung internationaler Logistiksysteme. Arbeitsbericht Nr. 104. Unversitt zu Kln. Kln. Lambert, Douglas M. and Cooper, Martha C., 2000. Issues in Supply Chain Management. Industrial Marketing Management. Volume 29, Issue 1, pp. 65-83. Larson, Paul D. and Halldorsson, Arni, 2004. Logistics versus Supply Chain Management: An International Survey. International Journal of Logistics: Research and Applications. Vol. 7, No. 1. Lee, Hau L. , Padmanabhan, V., Seungjin, Whang, 1997. The Bullwhip Effect in Supply Chains. Sloan Management Review, pp. 93-102. Kaplan, Robert S., Norton, David P., 1997. Estratgia em ao = Balanced Scorecard. Rio de Janeiro. Ed. Campus Mas-Collel, A., Whinston, M. D., Green, J. R., 1995. Microeconomic theory. Oxford University Press, Inc. Pontrandolfo, P.; et al. Global supply chain management: a reinforcement learning approach. International Journal of Production Research. Vol 40 No. 6 pp. 1299-1317. Porter, Michael, 1991. Towards a dynamic theory of strategy. Strategic Management Journal, Vol. 12, pp. 95-117. Silva, F. G. F., 2006. Metodologia para Identificar as Informaes Necessrias para Definio de Polticas Pblicas do Transporte Rodovirio Interestadual de Passageiros: Caso da Regulao Tarifria. Braslia. Dissertao de Mestrado, Publicao TU.DM-007.A/2006, Departamento de Engenharia Civil e Ambiental, Universidade de Braslia. Youngdahl, William E. and Loomba, Arvinder, P.S., 2000. Service-driven global supply chains International Journal of Service Industry Management Vol. 11 No. 4, pp. 329-347. CORRESPONDENCIA Dieter Goebel Agncia Nacional de Transportes Terrestres ANTT Sector Bancario Norte, Quadra 2, Bloco C 70040-020 Brasilia Brasil Tfno: +55 61 22 03 E-mail: dieter.goebel@antt.gov.br