European Journal of Purchasing & Supply Management 8 (2002) 314

Procurement of logistics servicesFa minutes work or a multi-year project?

Department of Management and Economics, Logistics Management, Linkopings Universitet, SE-581 83 Linkoping, Sweden . . b Department of Industrial Management and Logistics, Lund University, P.O. Box 118, SE-221 00 Lund, Sweden

Abstract The purpose of the article is to describe and compare the purchasing process for advanced versus basic logistics services. Further some specic observations are presented from the procurement of advanced third-party logistics services, with respect to service denitions, providers evaluations and contracts. The purchasing process of logistics services will in the future need to be more differentiated due to current business trends. Hence companies must analyse how these new procurement situations will impact on their purchasing processes in order to understand what new resources, routines and competence they need to have in order to purchase logistics services in an effective way. r 2002 Published by Elsevier Science Ltd.
Keywords: Purchasing process; Services; Third-party logistics

1. Introduction A changing context and new demands on logistics are driving an ongoing transformation and differentiation of the buying process for logistics services. Logistics services purchased some years ago were usually quite easy to dene and the purchase decision was mainly based on the price of the service. Those basic logistics services constitute still the big volume offered and bought, but they are increasingly bought in bundles (van Laarhoven et al., 2000; Andersson, 1997; Sink and Langley, 1997; Berglund, 2000). At the same time, different value adding services and IT services are increasingly included in the bundles of services, which are handled in so-called third-party logistics relationships (Andersson, 1997; van Laarhoven et al., 2000). This development increases the complexity of the purchasing process of logistics. The increasingly more advanced tasks companies are trying to outsource today (e.g. logistics management) are much harder to specify and the companies are also not used to doing this. Van Hoek (2000) argues that there is a need for further

*Tel.: +46-13-28-1521; fax: +46-13-28-2513. E-mail addresses: danan@eki.liu.se (D. Andersson), andreas.norrman@tlog.lth.se (A. Norrman). 0969-7012/02/$ - see front matter r 2002 Published by Elsevier Science Ltd. PII: S 0 9 6 9 - 7 0 1 2 ( 0 1 ) 0 0 0 1 8 - 1

research and understanding of purchasing initiatives supporting the establishment of supplementary logistics services. We will in this article discuss the kind of procurement included in the procurement of advanced logistics services. But we will in the discussion also include routine purchases of basic services e.g. by the use of an Internet freight exchange. While the rst type of process may take several years to nalise the latter may be only a minutes work. The purpose of the article is to describe and compare the purchasing process for logistics services for companies following either the trend towards outsourcing of more advanced logistics services, which will be emphasised here, or the trend towards leveraging the internet as a tool in their buying of basic services. Further lessons learned from especially the procurement of advanced third-party logistics will be shared. The article is conceptual in its nature, but based on empirical material that has been collected over several years of contacts with shippers, both in research projects and variants of action research. The article takes its starting point in the characteristics of service procurement and the business trends inuencing logistics. Thereafter two emerging market areas are illustrated and, based on this, a comparison of different types of purchasing processes is made. This results in the identication of three important phases in the purchasing process, which are discussed in greater detail.

D. Andersson, A. Norrman / European Journal of Purchasing & Supply Management 8 (2002) 314

2. Logistics services and business trends 2.1. LogisticsFa matter of services Most of the differences between the procurement of services and the procurement of goods apply to the purchase of logistics services, (see for example Axelsson and Wynstra, 2002). Services differ from goods since they are (Zeithaml et al., 1985): intangible, heterogeneous (not standardised), inseparable (meaning difcult to separate production of the service from the consumption), and perishable (not possible to stock). Logistics services also have these characteristics, however, they also differ from a large part of the services described in the service literature. For instance, logistics services mainly involve business-to-business relationships, where not only the buyer is the critical stakeholder, but also his customer who can be directly hurt by bad service. Furthermore, there is in many cases a need for close interaction with both the clients and his customers processes. The nature of the total logistics service bought, and the corresponding purchasing process, can be more or less complex. We will in this article use the term advanced logistics services for the more complex ones, and the term basic logistics services for the ones on the other end of the continuum (see Fig. 1). What drives the degree of complexity are factors such as the number of services included (single or multiple bundled services); the tangibility of the service denition; whether focus is on handling or value adding; whether focus is on execution of activities or management; and whether the service is pre-dened and stable or if development and re-engineering is part of the scope.

2.2. Business trends impacting on logistics procurement By using Kraljics (1983) purchasing product portfolio to position traditional logistics services (e.g. transportation or warehousing), those services would for most producing companies be at the border between leverage and non-critical items. The position on the Financial impact-axis is based on the fact that, although logistics is a big cost element in many companies and an important service element, it is normally not the major competitive advantage or cost element. When analysing the Supply risk this is often quite low as the buyer has a strong negotiating position and there are a large number of providers. Logistics services such as transportation or warehousing have often been bought separately or only bundled with a few other services. This has made the services quite simple and many providers are often available and willing to offer low prices to secure high utilisation of their capacity. Hence, purchasing strategies, that are often used, are or should be to standardise the services bought, use competitive bidding and global sourcing, and consolidate the services bought to a few providers both to achieve economies of scale and to reduce transaction costs. All of this is leading to a further strengthening of the buyers position versus the providersFbut also to reduce some of the internal costs in the procurement process. Some examples (compare e.g. Peters and Jockel, 1998) of the changing context driving more differentiated logistics procurement strategies and processes are: increasing globalisation of supply and demand markets, focus on agility and core competence, leading to outsourcing, consolidation of the supply markets, and the development of Information Technology and especially e-commerce (see Fig. 2).

Basic logistics service Single services Tangible service definitions Handling focus Execution of activities Stable service definition

Advanced logistics service Multiple and bundled services Intangible outcome requirements Value adding focus Management Development and reengineering of solution

Degree of complexity of service

D. Andersson, A. Norrman / European Journal of Purchasing & Supply Management 8 (2002) 314

High

Leverage items

Strategic items Focus on agility and core competence

Financial impact

Current position

Consolidation among providers Globalisation, new supply markets and customer Bottleneck items

Low

Freight exchanges Non-Critical items

idea with the more advanced logistics purchases is similar to the system supplier concept for physical products, but the special characteristics of services (as mentioned above), make any relationship even more complicated to handle and structure in contracts. This leads to a situation where the growth of some logistics services, i.e. third-party logistics inuence the positioning of logistics in the direction of more strategic in the Kraljic matrix (see Fig. 2). 2.2.3. Consolidation of the logistics markets The globalisation and its consequences have forced the logistics industry to consolidate, resulting in many mergers and alliances in recent years. A completely changed landscape with new pan-European or even world-wide networks, so-called Mega-Carriers, able to offer shippers a whole set of services has arisen (see e.g. Klaus, 1999). For instance, the former two largest transport and logistics companies in the Nordic countries (BTL and ASG) were bought and incorporated in large networks (by Schenker, May 1999, respectively, by Danzas, April 1999). This trend has made the logistics service providers more powerful as the number of competitors declines, and in the Kraljic matrix the position of logistics services is hence moving more to the right-hand side as supply risk increases for the buyer. 2.2.4. Development of information technology and e-commerce Besides more system integration between shippers and service providers, essential for establishing third-party logistics relationships, web-based freight exchanges have emerged. Those drive the position of transportation services towards a more non-critical item easy to dene and with a working market place. 2.2.5. Future purchasing situations To conclude, our view is that especially two types of purchasing situations and processes will be increasingly more common in the future, illustrated in Fig. 3, where deep strategic alliances are sought with few providers of advanced logistics services or where purchases of basic services are very transactional and fast. Although those two will not be the only situations for all companiesF some companies will rely on one or both of them more heavily than today.

Low

Supply risk

High

Fig. 2. Trends impacting the positioning of logistics services in the Kraljic matrix.

2.2.1. Increasing globalisation markets Globalisation is leading to sales, production and purchasing of products in new areas and hence a need of global logistics. This may have a big impact on the logistics cost, but here we will point at other issues such as the resulting new requirements on all actors in a supply chain (for example Bagchi and Virum, 1998; Shef, 1990). And so far no truly global service provider for third-party logistics services has emerged. In many countries, e.g. developing countries or former stateregulated ones, the logistics infrastructure is bad, customs and regulations unclear and inefcient, the logistics supply market undeveloped and the risk for crime is high (for example Nollet et al., 1994; Speece and Kawahara, 1995; Fawcett et al., 1995; Ta et al., 2000). All this makes the supply risk high, as the number of trustworthy or capable partners is low and the few existing ones enjoy a better negotiating position. Hence a logistics service will be more positioned as a bottleneck product in the Kraljic portfolio matrix in this context than normal. 2.2.2. Focus on agility and core competence Focusing on agility and core competence leads to outsourcing of more advanced services to systems/ solutions providers. Companies intention to focus on core competence is one of the major driving forces for using third-party logistics (Andersson, 1997). Outsourcing is a viable strategy as it enables management to leverage its resources, spread its risks and concentrate on issues critical to survival and future growth (Sink and Langley, 1997). Sink and Langley (1997) argue that many companies may not have core competencies in the operational logistics area but prot from their ability to manage relationships with rms that do excel in logistics. Another issue, which is important from our perspective, is the ability to establish the relationship, which starts during the purchasing process. The basic

3. Illustrations of the two emerging market areas As a foundation for the following discussions about differences in the purchasing process of logistics services some very short descriptions of the two studied phenomenon are presented here. Both are developments of the traditional procurement of basic

D. Andersson, A. Norrman / European Journal of Purchasing & Supply Management 8 (2002) 314

Todays service market

Multiple Market Sources

Qualified Suppliers
Bottleneck & Leverage items

Key Alliances

Leverage & Non-critical items

Strategic items

Trend
Future Market Characteristics
Multiple, one-off transactional relationships Deep Strategic Alliances With Few Partners

Leverage & Non-critical items Example: Basic services

Bottleneck & Leverage items

Strategic items

Advanced logistics

Fig. 3. Possible development of the logistics market.

services in medium or long-term frame agreement see Fig. 4). The more advanced outsourcing of increasingly complex services is done within strategic alliances. The second phenomena shows when basic services are purchased within short-term transactional relations further accelerated by the growth and development of Internet based tools such as freight exchanges. The emerging logistics alliances (see Fig. 3) are illustrated with three different examples in Table 1. All of them are purchasing of bundled and advanced logistics services but they are representing different industries, contexts and scope. The industries represented are automotive and high-tech which both put high demands on their logistics systems. The Alpha case is, compared to the other two, the least advanced and integrated relationship even if there are a number of rather complex services included, however, these are mainly limited to execution of activities. On the other hand the Gamma case may be labelled as the most advanced of the three. The multiple one-off transactional relationships in Fig. 3 are illustrated by two freight exchanges CargoNow and NTE, presented in Table 2. These are just two from a long list of web-based freight exchanges that have been launched in recent years, and which serve both buyers and service providers of different transportation modes.

Long term Lengt of relationship Traditional logistics services

Example:
Advanced Outsourcing

Example:
Freight exchanges Basic

Not discussed:

Short term

Advanced Complexity of service

Fig. 4. The two phenomena studied compared to purchase of traditional logistics services.

4. The purchasing process of logistics services 4.1. Procurement of logistics services In traditional purchasing of logistics services the relationships are typically conducted at arms length. Industrial transport and warehousing buyers have, however, stepwise-introduced concepts such as: supply base reduction, partnership, contracting, and vendor

D. Andersson, A. Norrman / European Journal of Purchasing & Supply Management 8 (2002) 314 Table 1 Three shippers buying third-party logistics services Company Industry, scope and context Alpha Beta Automotive/inbound greeneld site Service focus on core Responsibility for: Receiving, inbound trp, delivery to line (sequencing) outbound trp of returnable containers and spareparts Mgmt of 2nd tier providers Gamma High tech/distribution fully reengineered system Service focus on core

Automotive/inbound existing system with product changes Driving force for buying advanced Service and cost capacity provider 3PL reduction Procured logistics service Execution of: Receiving inbound trp cross docking picking sequencing outbound trp of returnable containers

Responsibility for physical distribution and its development: International trp cross docking/ merge local transportation shipping administration

Table 2 Two examples of freight exchanges Company Size Service/value offering Fee/prot model Cargo now (previous LSXS) 4400 members 3 600 000 tons of cargo handled founded 1997 Helping clients to communicate, give up to date rates and service information Free for buyers Fees for providers: Annual fee 170 Euro+280 Euro per received request (max 173 Euro/ month) Global National transport exchange (NTE) 1175 members 6.5 millions site-hits in March 2001 founded 1994 Mediating empty freight and quoting and bidding services Initial member fee, prot from the different between what is paid to carrier and charged to client US

Geographic scope

certication, from other disciplines e.g. from purchasing, quality control and manufacturing (Gibson et al., 1993). In general, a purchasing process contains steps such as: dene specication; select supplier; contract agreement; ordering; expediting and evaluation (van Weele, 1994). A number of logistics authors have dened similar processes for selecting carriers (e.g. Lambert and Stock, 1993) or third-party logistics providers (for . example (Skjott-Larsen, 1995; Sink and Langley, 1997; Bagchi and Virum, 1998; Menon et al., 1998). In principle the same basic phases were identied by the other group of authors for selecting providers for more advanced services: preparation and identication of requirements; provider selection and negotiation; monitoring provider performance. However, different authors do emphasise different phases. Sink and Langley (1997) and Menon et al. (1998) stress the rst phases of the buying process. Other authors focus more on the latter parts: Bagchi and Virum (1998) on the evaluation of the logistics alliance, . ongoing measuring and goal renements, and SkjottLarsen adds a contract phase, an implementation phase and an improvement phase. Based on the discussion above, practical experience and traditional purchasing processes a framework, focusing on the early steps until contracting in a purchasing process (see the upper part of Fig. 5) will

be used to discuss differences between purchasing of basic or advanced logistics services. The objective with the framework is rst to describe the characteristics of the different phases for purchases and what is required to carry them out in a situation of procurement of traditional logistics services. Secondly, the two emerging segments: transactional purchases of basic services (illustrated by the use of the supporting tool freight exchanges) and strategic alliances, for advanced services, (illustrated with third-party logistics) the framework will be used to compared both to each other as well to the more traditional situation and identify differences. Finally this comparison should also identify the phases were there is a need for further development in order to facilitate an efcient purchasing process. 4.1.1. Dene or specify the service Logistics services are performed in the interface between shippers and customers, meaning that many sites are involved. The services have often been developed locally over time and not constructed or dened, making them less standardised and containing requirements limiting efcient solutions. However, traditional logistics services are not that difcult to specify, but it takes time. One issue is, for instance, what level, e.g. mode of transportation, should be specied by the purchasing company (Gibson et al., 1993; Lambert and Stock, 1993) or by the provider (Coyle et al., 1992).

D. Andersson, A. Norrman / European Journal of Purchasing & Supply Management 8 (2002) 314
Understand currently bought (vol & delimits)

Define/ specify the service

Simplify/ standardise

Market survey

RfI

Contracting RfP Negotiations

Advanced outsourcing

Difficult as service often new for both shipper and provider + it is complex Simple service from A to B

New service not bought before and changed context Not necessaray as spot buy

Standard operating procedures and IT interfaces to be developed Exchanges bidding format is standard

Few providers available must find potential to develop or new entrants Exchange is the market

Difficult to communicate the scope and nature the of service

Complex to answer and analyse. Not directly compareble answers

Long time due to new type of negotiations and requirements and complex service Short and directly on the web

Detailed due to uncertainties and complexity

Freight exchanges

Not applicable

Direct order on the exchange

Direct buy Exchange market maker and handles deal

Fig. 5. Differences in the purchasing processes for basic and advanced logistics services.

The service purchased from freight exchanges, is often quite simple such as a one-time buy of transportation from A to B. As the purchase is based on a real demand, it is relatively easy to dene. For the purchase of advanced logistics services, in the form of third-party logistics, the denition is much more difcult than in the traditional case. This relates to the fact that the service in mind is new for both shipper and provider and that it is rather complex (involving several different activities and a certain amount of design and development). It could for example be a service like develop and deliver best-in-class service to our customers by using a costcompetitive solution. 4.1.2. Understand the volume bought As services are intangible and consumed at the same time as produced there is often a lack of knowledge of what has really been bought both in terms of type of service (specication) and volume in different categories (e.g. lane and weight/volume for transportation). This internal knowledge is important for the evaluating the tendersFbut also to give providers a fair opportunity to develop proposals. When buying basic services by the use of a freight exchange, the need to understand the volume bought is of minor (if any) importance as we are looking at a spot buy. For the more advanced logistics service, the challenge still is not having bought the service before, and that the context of the purchase has shifted (from basic service to a bundle or a solution). In most cases the overall logistics structure is also being changed (number and location of nodes, roles and responsibilities etc). 4.1.3. Simplify and standardise In many traditional cases there is still room for internal standardisation and simplication, which is especially important for purchasing strategies such as leveraging size, reducing supplier base or buying a more standardised service. For purchasing of transport services by the use of freight exchange, the bidding format is already standar-

dised and neither the shipper nor the provider has to make any efforts. Regarding more advanced logistics services, the logic is the opposite from the normal purchase of transport. Instead of getting involved in standardisation of the operations to be carried out by the provider, the buyer wants to buy a function, which the provider has to develop, and optimise. However, standard operating procedures should initially be developed. 4.1.4. Market survey To develop a bigger supplier base, especially if the strategy is to nd best price, is normal. However, when transport markets were deregulated, the differentiation between carriers was small (Sink and Langely, 1997). When using a freight exchange, the exchange as such is the market place and have a long list of providers so in most cases no more survey must be made. If there should be a survey, it is probably better to survey the different freight exchanges available, than service providers. When buying third-party logistics, there are just a few or sometimes no provider available with the required experience or capability. Third-party logistics, as an industry, is still in a formative stage or at the beginning of the growth stage. So far the development has been achieved by trial and error, where most providers have no previous or very little experience of the services they offer. Therefore, most development of concepts and services has been carried out by shippers, who may also have been forced to teach the providers how to manage the operations. Hence the issue will be to make a market survey to determine if there are any of potential providers, and in which areas they are to be found, or if there are present providers or new entrants who later could be developed to the service provider asked for. 4.1.5. Request for information Next step is to screen potential suppliers and reduce the number to continue with. Often a Request for Information (RfI) can be posted to potential suppliers

D. Andersson, A. Norrman / European Journal of Purchasing & Supply Management 8 (2002) 314

to get the necessary information. While RfI is not applicable for the freight exchange (a direct order is put on the web), it is a challenge for the advanced service. This is due to the difculty to communicate a vaguely dened service but also to develop screening criteria. 4.1.6. Request for proposal A Request for Proposal (RfP) is sent out to providers qualied from the screening process. The RfP should specify the services and the forecast volumes on each specied lane between departure and arrival points. For warehousing activities the RfP should dene e.g. the uctuations of the goods volumes and the handling characteristics. The response format is then often designed so that suppliers have to ll in data in a standardised way that makes it easy to analyse and compare the proposal and create a solid platform for negotiations. On the freight exchange an order is submitted that corresponds to the RfPFand the evaluation process is easy and based almost only on price. For the more advanced purchase, the RfP-step is more cumbersome than in a traditional purchase situation. After a limited number of providers have been identied they should be provided, with information necessary to develop a process, plan, and cost structure. Some companies chose to select a provider, develop a blue print for the relationship and thereafter negotiate the costs in the negotiation phase. As a more solution-oriented RfP is send out, it is more complex to answer and analyse. One reason for this is that responds are not directly comparable since they can suggest quite different solutions. 4.1.7. Negotiations When offers are evaluated service providers are called for negotiations. According to McGinnis (in Menon et al., 1998) a carrier choice selection is often a constrained optimisation decision whereby freight rates are minimised subject to a dynamic array of reliability, transit time, damage shipper market conditions, carrier considerations, and product characteristic constraints. In the freight exchange example the negotiations are very short and efcient being transacted directly on the web. When there is outsourcing of complex services the negotiations may take long time due to the new type of services bought but also due to problems understanding how to calculate prices. 4.1.8. Contracting Finally a contract should be developed, usually part of the negotiation process. In traditional purchases of transports there is in many cases no formal contract for the services. For the freight exchange there is no written contract since it is a direct buy in the market.

When purchasing more advanced logistics services the contracts will be detailed due to uncertainties and complexity.

5. Three important areas in the purchasing process of advanced logistics services When comparing the purchasing process for different kinds of logistics services, it has been observed that the purchases of advanced logistics services has some distinct needs in the following phases: the service denition, the RFP, and the contracting phase, and this calls for a further elaboration which will done below. 5.1. Service denition The increasingly more bundled and complex services some companies try to outsource lead to an increased need for specication of the service, something which the companies are not used to. It is more a question of buying functions and/or competence, not single services. Axelsson and Wynstra (2002) point out the importance, when buying services, to dene what the service is, what demand it should full and what problem it should solve. For the purchasing process of third-party logistics this step, to dene a logistics solution and the services needed, is often the most difcult (Sink and Langley, 1997). But it is also one of the most important, as it is linked to the most important group of success factors for third-party logistics: well-dened requirements, procedures and systems (Andersson, 1997; Bagchi and Virum, 1998; van Laarhoven and Sharman, 1994). The major challenges are due both to the complexity of the task and due to the fact that many rms have never purchased this type of service. Hence there is often a need of converting generalised images of the nal solution into workable plans that can be implemented (Sink and Langley, 1997). One example of such an image could be the following quote from one shipper: the Contractor [i.e. the service provider] through its global resources and competence shall actively contribute to the development of future world-class distribution processes. This quote also points at another important problem related to the denition of the services, the fact that they should not be over specied. If they are, the provider will not be motivated or able to actively contribute to the development of new processes and it may also hamper his abilities to optimise own processes, which may lead, to higher costs and/or lower service for the client. Those two problems, what to dene (how detailed) and who to dene are implicitly guiding the four principles of service denition of Axelsson and Wynstra (2000, 2002):

10

D. Andersson, A. Norrman / European Journal of Purchasing & Supply Management 8 (2002) 314

1. Function describing denition: the function performed by the services bought is dened. 2. Activity describing denition: which implies that the client must know exactly how the services are produced. 3. Performance or service level denition: service level agreement, in addition to the function the performance and the cost (changes) are also dened. 4. Competence denition: the client does not know exactly what he is going to buy but he believes that the service provider will be able to help him. According to Axelsson and Wynstra one way of describing What to dene is, like Bryntse (2000), to divide input and resources, the process and the output. To illustrate and discuss some issues in service denition, we have used these denitions, the dimension of Who denes? (client, provider or jointly) but also added a dimension showing the nature of the factor to be dened (tangible, semi or intangible). Starting with the tangible factors; resources could be exemplied by equipment such as, type and number of trucks or warehouses and their design, and processes could be dened, in terms of e.g. working instructions of how to load a truck or pack a crate (see Fig. 6). An example of logistics output that is often measured, is lead-time. For traditional procurement of logistics, the key to get low prices can be to have a very welldened service so that different proposals are easy to compare. If we instead focus on the intangible factors, resources difcult to dene are knowledge, competence and creativity. However, those kinds of capabilities are becoming more important as the clients are asking for a long-term relationship where the provider proactively

Lead time

Customer service

Concepts

Standard Operations Procedures Work instructions Loading/ Unloading Human assets

Design Process definition

Equipment

Knowledge

J ider Prov

Fig. 6. Three dimensions impacting the logistics service denition.

per Ship y ointl

ho de f

Tangible

Semitangible

Intangible

Nature of the factors

should develop a solution that is best in class. One way of making it more tangible and dening the human assets, is to ask for people with certain proles. If loading a truck is quite an easy process to dene the task to design or dene a process is more intangible. Design or re-design could involve decision making regarding channel structure, i.e. which/how many intermediaries to use, and network structure, i.e. the number and location of supplying and producing units, warehouses and terminals. It also comprises decision making about processes within the logistics system, i.e. warehouse design and operations, transportation management. Sales and operation planning, a process that to some degree have been started to be outsourced, has both more routine aspects easy to dene (such as inventory replenishment on certain re-ordering point) as well as more semi-tangible activities (such as how to dene inventory management principles for different parts of the assortment). Finally, intangible output could be future concepts of how to be best in class. In this case neither the client nor the provider knows exactly best in what only that it is part of the mission. A service denition on the concept level may be about stating the use of overarching principles inuencing the output of the system, e.g. direct distribution system without any inventory, i.e. a Merge-in Transit concept. A somewhat more tangible output could be customer service, that can be made more tangible by further operationalised into e.g. availability, reliability, leadtime. Looking at the trends of the nature of logistics services bought, we see both a direction towards more tangible service denitions (e.g. when buying on freight exchange or when trying to leverage size and best price) and more intangible (e.g. when trying to leverage the core competence and pro-activeness of providers). Focusing on the third dimension, who denes, we could nd some examples of client, joint or even provider denition for many of the services. Currently however, the logistics design responsibilities most often reside in the shipper organisation and the service is dened in detail by the shipper, i.e. it is an activity describing purchasing process. An hypothesis is that the service providers in the future will be more involved in the denition of resources, processes and to some extent also intangible output (see Fig. 7). This development of the purchasing process indicates a shift into more of a function or performance describing denition of the service, which is in line with the increasing ambitions to focus on core business. If a function is bought the provider will be responsible to dene its sub-systems, i.e. the tangible and semi-tangible resources and processes. As the providers become more proactively involved in the design phase of logistics system they will also be involved in the denitions of the output in the form of concepts used.

What to define
in es

Resources

Processes

Output

D. Andersson, A. Norrman / European Journal of Purchasing & Supply Management 8 (2002) 314

11

Current ways to define the service

Potential future way to define the service

Lead time

Customer service

Concepts

Lead time

Customer service

Concepts

What to define

Standard Operations Work Procedures instructions Loading/ Unloading Human assets

What to define

Processes

Design Process definition

Standard Operations Work Procedures instructions Loading/ Unloading Human assets

Processes

Design Process definition

Resources

Equipment

Knowledge

Resources

Equipment

Knowledge

Tangible

Semitangible

Intangible

Tangible

Semitangible

Intangible

Nature of the factors

Nature of the factors

Fig. 7. Potential future changes of who denes what in the service.

5.2. Request for proposal In RfP-processes for logistic services there are typically around six to fteen service providers approached (often selected as a result of an earlier RfI). A rst round of data collection and analysis will usually result in twothree companies being investigated indepth. But instead of developing an RfP structured around prices, an RfP for third-party logistics will in addition to various performance factors include further provider characteristics in the selection process. Examples of other criteria that become more important in third-party logistics RfP processes are: cultural compatibility, nancial strength, the quality of the management, exibility in meeting new, unforeseen requirements, information system capabilities (Sink . and Langley, 1997; Schary and Skjott-Larsen, 1995). Examples of the content of RfP for third-party logistics for the three companies described earlier (See Table 1) are shown in Table 3 below. It should be noted that there is a difference in complexity in outsourced services between the three companies, which also is reected in the differences in the RfP content. Company Alpha may be categorised as a purchaser of activity dened services while company Beta and Gamma have purchased more of a function. Company Alpha which wanted to outsource the execution of the inbound logistics system focused on operational factors as capacity, equipment and cost. In the case of Beta and Gamma, which are more complex and involve transferral of responsibilities, the emphasis was put on IT, management and cultural aspects. The high tech company (Gamma) outsourcing a re-engineered distri-

bution system intended to appoint one service provider capable of handling all distribution activities from the order receipt to the delivery to the nal customer. It was believed that the management of these activities would require a high degree of sophistication from both management and IT. The factors considered by the companies in the table above highlight some of the important evaluation criteria for complex logistics services. And this gives indirectly an idea of the differences between these kinds of purchases and the traditional ones. Cost evaluation, which traditionally is a very important factor, was not included as a rate comparison instead the evaluation focused on the costing principles. Due to the fact that the system to be outsource in the case of Beta and Gamma, was not implemented and was rather complex, it was not possible to dene e.g. exact volumes, destinations/origins, which makes a direct cost analysis impossible. The complexity of the systems made it likely that these difculties would prevail even after the implementation and thus the costing principles were even more important. Another traditional evaluation factor, capacity, was not an issue in case Gamma since the provider was supposed to buy operational services from second tier providers. However, this implies that a new important factor has to be introduced, the management and development of second tier providers. Since the shipper and the provider have to exchange a large amount of information, very good IT interfaces are essential and the ability to set these up and also to provide IT systems for supporting the operations must be assessed. Due to the nature of the services bought and the intended close and long-term relationship the

12

D. Andersson, A. Norrman / European Journal of Purchasing & Supply Management 8 (2002) 314

Table 3 Examples of the content in an RfP for third-party logistics Company Areas focused the RfP process Alpha Basic skills Beta Gamma

Capacity

Equipment

Cost

Management: attitude toward continuos Management and It capability improvement, understanding of partnership concept, mgmt of people Service: service assurance, performance Management and development of 2nd tier standards, capacity availability, exibility, providers innovation Service and local market presence Operation Technologies trp systems, People/cultural t communication, simulation tools, in-house R&D Finance Contract structure and costs

management skills and cultural t was also important. Related to this is also a factor of a hard quantitative nature: the nancial stability of the provider, if there is a risk that it will get into nancial problems this is not the right base on which to build a long-term and close relationship. A test of both the provider skills and how well the companies could interact is offered in a possible second stage of the RfP process. After a small number of potential providers have been identied more in-depth discussions were initiated. The purpose was to nd the best providers but also develop the concept, processes and plans further. Important issues that needed further development were for instance how to operationalise the general concept and how to design effective costing principles. Another important issue was the plan for the implementation of the new concept, both with regards to feasibility and speed aspects.

5.3. Contracts The importance of contracts in deep partnerships has been debated and it could be argued that there are two basic and fundamentally opposing views on contracts: lack of contract is seen as a strength of the relationship or contracts are essential for the success. Van Hoek (2000) has, according to a transaction cost theory perspective, veried the expected positive correlation between the offering of supplementary logistics services and the use of detailed contracts. According to one survey more than half of the contracts used in thirdparty logistics relationships in Europe have detailed specications and specic performance targets are also part of the contracts (Van Laarhoven et al., 2000). According to the same study 40% of the contracts contain penalty clauses if the providers do not achieve the agreed performance targets. As the providers take increasingly larger responsibilities for the logistics system the issue of penalties will become a vital issue

in future contract negotiations. If a service provider takes over a large part or the entire system the shippers anticipate that he also will take all the risks involved, e.g. for lost or damaged products and claims from the end users, if the goods are delayed etc. These responsibilities do in some cases involve very large sums of money. The providers are however not at all of the same opinion and the tradition/praxis in the industry is far from the shippers stand point, if something goes wrong the shipper might be indemnied by a reduction of the service cost. The issue is not only related to actually protect against losses but also to ensure the best possible service. In the latter case, the penalty clauses are the stick and incentive ones the carrot. In addition some contracts also have clauses stating that if the provided services do not meet the agreed standard the provider should make some kind of root cause analysis and present a plan of how to solve the problem. It could be argued that the contract could have an important role with respect to safeguarding and operations support. Contracts could be used in order to protect ones own interest and minimise risks, being ready for use if some problem occur, but they could also be used as a support to the operation and development of the logistics system i.e. include denitions of processes, activities, roles and responsibilities, incentives/penalties. The contracts for purchasing of more complex logistics system do contain more details due to the scope of services but they also contain a number of issues dealing with unknown future issues and how to handle them and how to ensure that the relationship will develop and improve the performance.

6. The length of the purchasing process The title of this article implies that the purchasing process could be a multi-year project. To illustrate this

D. Andersson, A. Norrman / European Journal of Purchasing & Supply Management 8 (2002) 314

13

End

Company Beta, 25 months 7 months 3 months 1 month

14 months Start

Define/ specify the service

Understand currently Simplify/ bought (vol & standardise delimits)

Market survey

RfI

Contracting RfP Negotiations End

Start

7 months

1 month

4 months

2 months

18 months Implementation/service definition/operations

Company Gamma, 32 months

two examples, company Beta and Gamma, will be used to show the length of the previously dened subprocesses (see Fig. 8). The work to be carried out in the RfP process suggests that it may take some time to perform, however, it is the work before and after that consumes most of the time. To go through all of the steps in the purchasing process took the two companies 32 and 25 months respectively; however, the process was not executed in a linear way. In both cases the service denition was made or remade jointly after the provider was selected. In case Beta, which was a logistics system for a greeneld plant, the joint development work could take place before the operations started. In the Gamma case, on the other hand, there was a need to instantly handle the operations in the re-engineered logistics system in parallel with the development and specication of the system.

7. Conclusions In the future the purchasing process of logistics services will be more differentiated due to current business trends. While most previous logistics services could be characterised as leverage or non-critical items, we will in the future get a more even distribution of the services over Kraljics portfolio matrix. While many deals will be made as today, maybe in new markets or with changed power relations, some services will be purchased on web-based spot markets. If a company increases the use of freight exchanges, this will lead to a faster, but more repetitive, purchasing process. Further this demands a simplication of the service bought, as standardised and well-dened services are what most easily can be exchanged on an electronic market place. When looking at the opposite type of

procurement situation, the purchase of third-party logistics services, the challenges are big. It requires more efforts and there will be a need for purchasers to develop new skills in order to handle these deals effectively. Today these purchasing processes may take years for shippers and providers to jointly develop and contract, so there is great potential for reducing the length of the processes when companies get more used to this kind of procurement. One major challenge is the service denition, which causes problems in several steps of the purchasing process. First, the logistics service as such is often very unclear for both partners; it might just be a vision in the buyers mind. Both scope and type of service must hence be denedFbut not to the degree that it delimits the providers degree of freedom to nd pioneering solutions. Another issue is that there might only be very few, or even none, providers available to deliver the service requested. It might instead be an issue of developing providers based on some capability they have. This points further to the problem of dening a RfP that is understandable but not too restricting, and also useful for evaluation. Finally, the negotiation process will be long due to all the uncertainty, a lot of service construction that must jointly be completed, developing a contract that could act as an incentive for further development and sharing risks and rewards. All in all, this type of purchasing process will be a long project with new demands on both buyers and providers. It has also been shown that the purchasing process for advanced logistics services may not always be characterised as linear with distinctive steps. Hence companies must analyse how the new procurement situations will impact their purchasing processes and understand where they have to obtain new resources, routines and competence.

14

D. Andersson, A. Norrman / European Journal of Purchasing & Supply Management 8 (2002) 314 Menon, M.K., McGinnis, M.A., Ackerman, K.B., 1998. Selection criteria for providers of third-party logistics services: an exploratory study. Journal of Business Logistics 19 (1), 121137. Nollet, J., Leenders, M.R., Diorio, M.O., 1994. Supply challenges in Africa. International Journal of Purchasing and Material Management 30 (1), 5256. Peters, M., Jockel, O., 1998. The day of the mega-carrier; the megacarriers predicted at the beginning of the 1990s are nally making their presence felt, but will they deliver, Logistics Europe, June 1998, pp. 1625. . Schary, P.B., Skjott-Larsen, Y., 1995. Managing the Global Supply Chain. Handelshojskolens Forlag, Copenhagen. Shef, Y., 1990. Third party logistics: present and future prospects. Journal of Business Logistics 11 (2), 2739. Sink, H.L., Langley Jr., C.J., 1997. A managerial framework for the acquisition of third-party logistics services. Journal of Business Logistics 18 (2), 163187. . Skjott-Larsen, T., 1995. Tredjeparts-logistikFI teori og praksis. Paper presented at NOFOMA, June 8-9, School of Economics, BI, Oslo. Speece, M.W., Kawahara, Y., 1995. Transportation in China in the 1990s. International Journal of Physical Distribution and Logistics Management 25 (8), 5371. Ta, H.-P., Chong, H.-L., Sum, C.-C., 2000. Transportation concerns of foreign rms in China. International Journal of Physical Distribution and Logistics Management 30 (1), 3554. van Hoek, R., I., 2000. The purchasing and control of supplementary third-party logistics services. The Journal of Supply Chain Management, Fall, 1426. van Weele, A.J., 1994. Purchasing Management. Chapman & Hall, London. van Laarhoven, P., Sharman, G., 1994. Logistics alliances: the European experience. The McKinsey Quarterly 1, 3949. van Laarhoven, P., Berglund, M., Peters, M., 2000. Third-party logistics in Europe-ve years later. International Journal of Physical Distribution and Logistics Management 30 (8), 425444. Zeithaml, V.A., Parasuraman, A., Berry, L.L., 1985. Problems and strategies in service marketing. Journal of Marketing 49, 3346.

References
Andersson, D., 1997. Third Party LogisticsOutsourcing Logistics in Partnerships. Dissertation No. 34, Department of Management . and Economics, Linkopings Universitet, Sweden. Axelsson, B., Wynstra, F., 2000. Companies buy services, dont they? Proceedings Ninth International IPSERA Conference, 2427 May, London/Ontario-Canada, pp. 4253. Axelsson, B., Wynstra, F., 2002. Buying Business Services. Wiley, Chichester. Bagchi, P.K., Virum, H., 1998. Logistical alliances: trends and prospects in integrated Europe. Journal of Business Logistics 19 (1), 191213. Berglund, M., 2000. Strategic Positioning of the Emerging Third-Party Logistics Providers. Dissertation from the IMIE, No. 43, Thesis, . Linkoping Studies in Science and Technology, Thesis No.45, . Linkopings Universitet, Sweden. Bryntse, K., 2000, Kontraktsstyrning i teori och praktik (Contract management in theory and practice), Dissertation, Department of Business Administration, Lund University, Sweden. Coyle, J.J., Bardi, E.J., Langley, C.J., 1992. The Management of Business Logistics, West Publishing Company, St. Paul, MN. Fawcett, S.E., Taylor, J.C., Smith, S.R., 1995. The realities of operating in Mexico: an exploration of manufacturing and logistics issues. International Journal of Physical Distribution and Logistics Management 25 (3), 4967. Gibson, B., Mundy, R.A., Rutner, S.M., Sink, H.L., 1993. Transportation Purchasing Strategy: A survey of U.S. Industrial Shippers, CLM Proceedings, October, 36, pp. 211228. Klaus, P., 1999. Logik der Fusionen? Zu den Treibern der ReFormation der europ. ischen Logistik-Dienstleistungswirtschaft a und deren Folgen. Logistik Management 1 (2), 111123. Kraljic, P. 1983. Purchasing must become supply management. Harvard Business Review, September/October, pp. 109117. Lambert, D.M., Stock, J.R., 1993, Strategic Logistics Management, Irwin, Homewood, IL.