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

European Journal of Purchasing & Supply Management 8 (2002) 3–14

Procurement of logistics servicesFa minutes work or a multi-yearproject?

Dan Anderssona,*, Andreas Norrmanb

aDepartment of Management and Economics, Logistics Management, Link .opings Universitet, SE-581 83 Link .oping, SwedenbDepartment 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 specific observations are presented from the procurement of advanced third-party logistics services, with respect to service

definitions, 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 aredriving an ongoing transformation and differentiationof the buying process for logistics services. Logisticsservices purchased some years ago were usually quiteeasy to define and the purchase decision was mainlybased on the price of the service. Those basic logisticsservices constitute still the big volume offered andbought, but they are increasingly bought in bundles (vanLaarhoven et al., 2000; Andersson, 1997; Sink andLangley, 1997; Berglund, 2000). At the same time,different value adding services and IT services areincreasingly included in the bundles of services, whichare handled in so-called third-party logistics relation-ships (Andersson, 1997; van Laarhoven et al., 2000).This development increases the complexity of thepurchasing process of logistics. The increasingly moreadvanced tasks companies are trying to outsource today(e.g. logistics management) are much harder to specifyand the companies are also not used to doing this. VanHoek (2000) argues that there is a need for further

research and understanding of purchasing initiativessupporting the establishment of supplementary logisticsservices. We will in this article discuss the kind ofprocurement included in the procurement of advancedlogistics services. But we will in the discussion alsoinclude routine purchases of basic services e.g. by the useof an Internet freight exchange. While the first type ofprocess may take several years to finalise the latter maybe only a minutes work. The purpose of the article is todescribe and compare the purchasing process forlogistics services for companies following either thetrend towards outsourcing of more advanced logisticsservices, which will be emphasised here, or the trendtowards leveraging the internet as a tool in their buyingof basic services. Further lessons learned from especiallythe procurement of advanced third-party logistics will beshared. The article is conceptual in its nature, but basedon empirical material that has been collected overseveral years of contacts with shippers, both in researchprojects and variants of action research. The articletakes its starting point in the characteristics of serviceprocurement and the business trends influencing logis-tics. Thereafter two emerging market areas are illu-strated and, based on this, a comparison of differenttypes of purchasing processes is made. This results in theidentification of three important phases in the purchas-ing process, which are discussed in greater detail.

*Tel.: +46-13-28-1521; fax: +46-13-28-2513.

E-mail addresses: [email protected] (D. Andersson), andreas.norr-

[email protected] (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

2. Logistics services and business trends

2.1. LogisticsFa matter of services

Most of the differences between the procurement ofservices and the procurement of goods apply to thepurchase of logistics services, (see for example Axelssonand Wynstra, 2002). Services differ from goods sincethey are (Zeithaml et al., 1985): intangible, heteroge-neous (not standardised), inseparable (meaning difficultto separate production of the service from the con-sumption), and perishable (not possible to stock).Logistics services also have these characteristics, how-ever, they also differ from a large part of the servicesdescribed in the service literature. For instance, logisticsservices mainly involve business-to-business relation-ships, where not only the buyer is the critical stake-holder, but also his customer who can be directly hurtby bad service. Furthermore, there is in many cases aneed for close interaction with both the client’s and hiscustomer’s processes.

The nature of the total logistics service bought, andthe corresponding purchasing process, can be more orless complex. We will in this article use the term‘‘advanced logistics services’’ for the more complexones, and the term ‘‘basic logistics services’’ for the oneson the other end of the continuum (see Fig. 1).

What drives the degree of complexity are factors suchas the number of services included (single or multiplebundled services); the tangibility of the service defini-tion; whether focus is on handling or value adding;whether focus is on execution of activities or manage-ment; and whether the service is pre-defined and stableor if development and re-engineering is part of thescope.

2.2. Business trends impacting on logistics procurement

By using Kraljic’s (1983) purchasing product portfolioto position traditional logistics services (e.g. transporta-tion or warehousing), those services would for mostproducing companies be at the border between leverageand non-critical items. The position on the ‘‘Financialimpact’’-axis is based on the fact that, although logisticsis a big cost element in many companies and animportant service element, it is normally not the majorcompetitive advantage or cost element. When analysingthe ‘‘Supply risk’’ this is often quite low as the buyer hasa strong negotiating position and there are a largenumber of providers. Logistics services such as trans-portation or warehousing have often been boughtseparately or only bundled with a few other services.This has made the services quite simple and manyproviders are often available and willing to offer lowprices to secure high utilisation of their capacity. Hence,purchasing strategies, that are often used, are or shouldbe to standardise the services bought, use competitivebidding and global sourcing, and ‘‘consolidate’’ theservices bought to a few providers both to achieveeconomies of scale and to reduce transaction costs. All ofthis is leading to a further strengthening of the buyers’position versus the providersFbut also to reduce someof the internal costs in the procurement process.

Some examples (compare e.g. Peters and Jockel, 1998)of the changing context driving more differentiatedlogistics procurement strategies and processes are:increasing globalisation of supply and demand markets,focus on agility and core competence, leading tooutsourcing, consolidation of the supply markets, andthe development of Information Technology andespecially e-commerce (see Fig. 2).

Basic logisticsservice

Advanced logisticsservice

Single services Multiple and bundled services

Tangible service definitions Intangible outcome requirements

Handling focus Value adding focus

Execution of activities Management

Stable service definition Development and re-engineering of solution

Degree of complexity of service

Fig. 1. Advanced versus basic logistics services.

D. Andersson, A. Norrman / European Journal of Purchasing & Supply Management 8 (2002) 3–144

2.2.1. Increasing globalisation markets

Globalisation is leading to sales, production andpurchasing of products in new areas and hence a need ofglobal logistics. This may have a big impact on thelogistics cost, but here we will point at other issues suchas the resulting new requirements on all actors in asupply chain (for example Bagchi and Virum, 1998;Sheffi, 1990). And so far no truly global service providerfor third-party logistics services has emerged. In manycountries, e.g. developing countries or former state-regulated ones, the logistics infrastructure is bad,customs and regulations unclear and inefficient, thelogistics supply market undeveloped and the risk forcrime is high (for example Nollet et al., 1994; Speece andKawahara, 1995; Fawcett et al., 1995; Ta et al., 2000).All this makes the supply risk high, as the number oftrustworthy or capable partners is low and the fewexisting ones enjoy a better negotiating position. Hencea logistics service will be more positioned as a ‘‘bottle-neck product’’ in the Kraljic portfolio matrix in thiscontext than normal.

2.2.2. Focus on agility and core competence

Focusing on agility and core competence leads tooutsourcing of more advanced services to ‘‘systems/solutions providers’’. Companies intention to focus oncore competence is one of the major driving forces forusing third-party logistics (Andersson, 1997). Outsour-cing is a viable strategy as it enables management toleverage its resources, spread its risks and concentrateon issues critical to survival and future growth (Sink andLangley, 1997). Sink and Langley (1997) argue thatmany companies may not have core competencies in theoperational logistics area but profit from their ability tomanage relationships with firms that do excel inlogistics. Another issue, which is important from ourperspective, is the ability to establish the relationship,which starts during the purchasing process. The basic

idea with the more advanced logistics purchases issimilar to the system supplier concept for physicalproducts, but the special characteristics of services (asmentioned above), make any relationship even morecomplicated to handle and structure in contracts. Thisleads to a situation where the growth of some logisticsservices, i.e. third-party logistics influence the position-ing of logistics in the direction of more ‘‘strategic’’ in theKraljic matrix (see Fig. 2).

2.2.3. Consolidation of the logistics markets

The globalisation and its consequences have forcedthe logistics industry to consolidate, resulting in manymergers and alliances in recent years. A completelychanged landscape with new pan-European or evenworld-wide networks, so-called ‘‘Mega-Carriers’’, ableto offer shippers a whole set of services has arisen (seee.g. Klaus, 1999). For instance, the former two largesttransport and logistics companies in the Nordiccountries (BTL and ASG) were bought and incorpo-rated in large networks (by Schenker, May 1999,respectively, by Danzas, April 1999). This trend hasmade the logistics service providers more powerful asthe number of competitors declines, and in the Kraljicmatrix the position of logistics services is hence movingmore to the right-hand side as supply risk increases forthe buyer.

2.2.4. Development of information technology and

e-commerce

Besides more system integration between shippers andservice providers, essential for establishing third-partylogistics relationships, web-based freight exchanges haveemerged. Those drive the position of transportationservices towards a more ‘‘non-critical item’’ easy todefine and with a working market place.

2.2.5. Future purchasing situations

To conclude, our view is that especially two types ofpurchasing situations and processes will be increasinglymore common in the future, illustrated in Fig. 3, wheredeep strategic alliances are sought with few providers ofadvanced logistics services or where purchases of basicservices are very transactional and fast. Although thosetwo will not be the only situations for all companiesFsome companies will rely on one or both of them moreheavily than today.

3. Illustrations of the two emerging market areas

As a foundation for the following discussionsabout differences in the purchasing process oflogistics services some very short descriptions of thetwo studied phenomenon are presented here. Both aredevelopments of the traditional procurement of basic

Low High

High

Low

Fin

anci

alim

pac

t

Freightexchanges

Currentposition

Focus on agility andcore competence

Globalisation, newsupply marketsand customer

Supply risk

Leverageitems

Non-Criticalitems

Strategicitems

Bottleneckitems

Consolidation amongproviders

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

Kraljic matrix.

D. Andersson, A. Norrman / European Journal of Purchasing & Supply Management 8 (2002) 3–14 5

services in medium or long-term frame agreementsee Fig. 4). The more advanced outsourcing ofincreasingly complex services is done within strategicalliances. The second phenomena shows when basicservices are purchased within short-term transactionalrelations further accelerated by the growth and devel-opment of Internet based tools such as freightexchanges.

The emerging logistics alliances (see Fig. 3) areillustrated with three different examples in Table 1. Allof them are purchasing of bundled and advancedlogistics services but they are representing differentindustries, contexts and scope. The industries repre-sented are automotive and high-tech which both puthigh demands on their logistics systems. The Alpha caseis, compared to the other two, the least advanced andintegrated relationship even if there are a number ofrather complex services included, however, these aremainly limited to execution of activities. On the otherhand the Gamma case may be labelled as the mostadvanced of the three.

The multiple one-off transactional relationships inFig. 3 are illustrated by two freight exchanges Cargo-Now and NTE, presented in Table 2. These are just twofrom a long list of web-based freight exchanges thathave been launched in recent years, and which serveboth buyers and service providers of different transpor-tation modes.

4. The purchasing process of logistics services

4.1. Procurement of logistics services

In traditional purchasing of logistics services therelationships are typically conducted at arms length.Industrial transport and warehousing buyers have,however, stepwise-introduced concepts such as: supplybase reduction, partnership, contracting, and vendor

Future Market Characteristics

Deep Strategic Alliances With Few Partners

Today’s service market

Multiple Market Sources Key AlliancesQualifiedSuppliers

”Strategic items””Bottleneck & Leverage items””Leverage & Non-critical items”

Multiple, “one-off” transactional relationships

Trend

”Strategic items””Leverage & Non-critical items”

”Bottleneck & Leverage items”

Example: Basic services Advanced logistics

Future Market Characteristics

Deep Strategic Alliances With Few Partners

Today’s service market

Multiple Market Sources Key AlliancesQualifiedSuppliers

”Strategic items””Bottleneck & Leverage items””Leverage & Non-critical items”

Multiple, “one-off” transactional relationships

Trend

”Strategic items””Leverage & Non-critical items”

”Bottleneck & Leverage items”

Example: Basic services Advanced logistics

Fig. 3. Possible development of the logistics market.

Traditionallogisticsservices

Example:

Freightexchanges

Example:

AdvancedOutsourcing

Long term

Short term

Basic Advanced

Len

gt

of

rela

tio

nsh

ip

Complexity of service

Not discussed:

Fig. 4. The two phenomena studied compared to purchase of

traditional logistics services.


certification, from other disciplines e.g. from purchas-ing, quality control and manufacturing (Gibson et al.,1993).

In general, a purchasing process contains steps suchas: define specification; select supplier; contract agree-ment; ordering; expediting and evaluation (van Weele,1994). A number of logistics authors have definedsimilar processes for selecting carriers (e.g. Lambert andStock, 1993) or third-party logistics providers (forexample (Skj .ott-Larsen, 1995; Sink and Langley, 1997;Bagchi and Virum, 1998; Menon et al., 1998). Inprinciple the same basic phases were identified by theother group of authors for selecting providers for moreadvanced services: preparation and identification ofrequirements; provider selection and negotiation; mon-itoring provider performance.

However, different authors do emphasise differentphases. Sink and Langley (1997) and Menon et al.(1998) stress the first phases of the buying process. Otherauthors focus more on the latter parts: Bagchi andVirum (1998) on the evaluation of the logistics alliance,ongoing measuring and goal refinements, and Skj .ott-Larsen adds a contract phase, an implementation phaseand an improvement phase.

Based on the discussion above, practical experienceand traditional purchasing processes a framework,focusing on the early steps until contracting in apurchasing process (see the upper part of Fig. 5) will

be used to discuss differences between purchasing ofbasic or advanced logistics services. The objective withthe framework is first to describe the characteristics ofthe different phases for purchases and what is requiredto carry them out in a situation of procurement oftraditional logistics services. Secondly, the two emergingsegments: transactional purchases of basic services(illustrated by the use of the supporting tool freightexchanges) and strategic alliances, for advanced services,(illustrated with third-party logistics) the framework willbe used to compared both to each other as well to themore traditional situation and identify differences.Finally this comparison should also identify the phaseswere there is a need for further development in order tofacilitate an efficient purchasing process.

4.1.1. Define or specify the service

Logistics services are performed in the interfacebetween shippers and customers, meaning that manysites are involved. The services have often beendeveloped locally over time and not ‘‘constructed’’ ordefined, making them less standardised and containingrequirements limiting efficient solutions. However,traditional logistics services are not that difficult tospecify, but it takes time. One issue is, for instance, whatlevel, e.g. mode of transportation, should be specified bythe purchasing company (Gibson et al., 1993; Lambertand Stock, 1993) or by the provider (Coyle et al., 1992).

Table 1

Three shippers buying third-party logistics services

Company Alpha Beta Gamma

Industry, scope and context Automotive/inbound existing

system with product changes

Automotive/inbound greenfield

site

High tech/distribution fully

reengineered system

Driving force for buying advanced

3PL

Service and cost capacity provider

reduction

Service focus on core Service focus on core

Procured logistics service Execution of: Receiving inbound

trp cross docking picking

sequencing outbound trp of

returnable containers

Responsibility for: Receiving,

inbound trp, delivery to line

(sequencing) outbound trp of

returnable containers and

spareparts Mgmt of 2nd tier

providers

Responsibility for physical

distribution and its development:

International trp cross docking/

merge local transportation shipping

administration

Table 2

Two examples of freight exchanges

Company Cargo now (previous LSXS) National transport exchange (NTE)

Size 4400 members 1175 members

3 600 000 tons of cargo handled founded 1997 6.5 millions site-hits in March 2001 founded 1994

Service/value offering Helping clients to communicate, give up to date rates

and service information

Mediating empty freight and quoting and bidding services

Fee/profit model Free for buyers Fees for providers: Annual fee 170

Euro+280 Euro per received request (max 173 Euro/

month)

Initial member fee, profit from the different between what

is paid to carrier and charged to client

Geographic scope Global US


The service purchased from freight exchanges, is oftenquite simple such as a one-time buy of transportationfrom A to B. As the purchase is based on a real demand,it is relatively easy to define. For the purchase ofadvanced logistics services, in the form of third-partylogistics, the definition is much more difficult than in thetraditional case. This relates to the fact that the servicein mind is new for both shipper and provider and that itis rather complex (involving several different activitiesand a certain amount of design and development). Itcould for example be a service like ‘‘develop and deliverbest-in-class service to our customers by using a cost-competitive solution’’.

4.1.2. Understand the volume bought

As services are intangible and ‘‘consumed at the sametime as produced’’ there is often a lack of knowledge ofwhat has really been bought both in terms of type ofservice (specification) and volume in different categories(e.g. lane and weight/volume for transportation). Thisinternal knowledge is important for the evaluating thetendersFbut also to give providers a fair opportunity todevelop proposals.

When buying basic services by the use of a freightexchange, the need to understand the volume bought isof minor (if any) importance as we are looking at a spotbuy. For the more advanced logistics service, thechallenge still is not having bought the service before,and that the ‘‘context’’ of the purchase has shifted (frombasic service to a bundle or a solution). In most cases theoverall logistics structure is also being changed (numberand location of nodes, roles and responsibilities etc).

4.1.3. Simplify and standardise

In many traditional cases there is still room forinternal standardisation and simplification, which isespecially important for purchasing strategies such asleveraging size, reducing supplier base or buying a morestandardised service.

For purchasing of transport services by the use offreight exchange, the bidding format is already standar-

dised and neither the shipper nor the provider has tomake any efforts. Regarding more advanced logisticsservices, the logic is the opposite from the normalpurchase of transport. Instead of getting involved instandardisation of the operations to be carried out bythe provider, the buyer wants to buy a function, whichthe provider has to develop, and optimise. However,standard operating procedures should initially be devel-oped.

4.1.4. Market survey

To develop a bigger supplier base, especially if thestrategy is to find ‘‘best price’’, is normal. However,when transport markets were deregulated, the differ-entiation between carriers was small (Sink and Langely,1997). When using a freight exchange, the exchange assuch is the market place and have a long list of providersso in most cases no more survey must be made. If thereshould be a survey, it is probably better to survey thedifferent freight exchanges available, than serviceproviders. When buying third-party logistics, there arejust a few or sometimes no provider available with therequired experience or capability. Third-party logistics,as an industry, is still in a formative stage or at thebeginning of the growth stage. So far the developmenthas been achieved by trial and error, where mostproviders have no previous or very little experience ofthe services they offer. Therefore, most development ofconcepts and services has been carried out by shippers,who may also have been forced to teach the providershow to manage the operations. Hence the issue will be tomake a market survey to determine if there are any ofpotential providers, and in which areas they are to befound, or if there are present providers or new entrantswho later could be developed to the service providerasked for.

4.1.5. Request for information

Next step is to screen potential suppliers and reducethe number to continue with. Often a ‘‘Request forInformation’’ (RfI) can be posted to potential suppliers

Define/ specify the

serviceA

dvan

ced

outs

ourc

ing

Fre

ight

ex

chan

ges

Difficult as service often new for both shipper and provider + it is complex

New service not bought before and changed context

Few providers available – must find ”potential” to develop or new entrants

Difficult to communicate the scope and naturethe of service

Complex to answerand analyse. Not directly compareble answers

Long time due to new type of negotiations and requirements and complex service

Detailed due to uncertainties and complexity

Simple service –from A to B

Not necessaray as spot buy

Exchanges bidding format is standard

Exchange is the market

Not applicable ”Direct order” on the exchange

Short and directlyon the web

Direct buy -Exchange ”market maker” and handles deal

Understand currently

bought (vol & delimits)

Simplify/ standardise

Market survey

RfI RfPNegotiations

Contracting

Standard operating procedures and IT interfaces to be developed

Define/ specify the

serviceA

dvan

ced

outs

ourc

ing

Fre

ight

ex

chan

ges

Difficult as service often new for both shipper and provider + it is complex

New service not bought before and changed context

Few providers available – must find ”potential” to develop or new entrants

Difficult to communicate the scope and naturethe of service

Complex to answerand analyse. Not directly compareble answers

Long time due to new type of negotiations and requirements and complex service

Detailed due to uncertainties and complexity

Simple service –from A to B

Not necessaray as spot buy

Exchanges bidding format is standard

Exchange is the market

Not applicable ”Direct order” on the exchange

Short and directlyon the web

Direct buy -Exchange ”market maker” and handles deal




Market survey

RfI RfPNegotiations

Contracting

Standard operating procedures and IT interfaces to be developed

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


to get the necessary information. While RfI is notapplicable for the ‘‘freight exchange’’ (a direct order isput on the web), it is a challenge for the advancedservice. This is due to the difficulty to communicate avaguely defined service but also to develop screeningcriteria.

4.1.6. Request for proposal

A ‘‘Request for Proposal’’ (RfP) is sent out toproviders qualified from the screening process. TheRfP should specify the services and the forecast volumeson each specified lane between departure and arrivalpoints. For warehousing activities the RfP should definee.g. the fluctuations of the goods volumes and thehandling characteristics. The response format is thenoften designed so that suppliers have to fill in data in astandardised way that makes it easy to analyse andcompare the proposal and create a solid platform fornegotiations.

On the freight exchange an order is submitted thatcorresponds to the RfPFand the evaluation process iseasy and based almost only on price. For the moreadvanced purchase, the RfP-step is more cumbersomethan in a traditional purchase situation. After a limitednumber of providers have been identified they should beprovided, with information necessary to develop aprocess, plan, and cost structure. Some companies choseto select a provider, develop a blue print for therelationship and thereafter negotiate the costs in thenegotiation phase. As a more solution-oriented RfP issend out, it is more complex to answer and analyse. Onereason for this is that responds are not directlycomparable since they can suggest quite differentsolutions.

4.1.7. Negotiations

When offers are evaluated service providers are calledfor negotiations. According to McGinnis (in Menonet al., 1998) a carrier choice selection is often aconstrained optimisation decision whereby freight ratesare minimised subject to a dynamic array of reliability,transit time, damage shipper market conditions, carrierconsiderations, and product characteristic constraints.In the freight exchange example the negotiations arevery short and efficient being transacted directly on theweb. When there is outsourcing of complex services thenegotiations may take long time due to the new type ofservices bought but also due to problems understandinghow to calculate prices.

4.1.8. Contracting

Finally a contract should be developed, usually partof the negotiation process. In traditional purchases oftransports there is in many cases no formal contractfor the services. For the freight exchange there is nowritten contract since it is a direct buy in the market.

When purchasing more advanced logistics services thecontracts will be detailed due to uncertainties andcomplexity.

5. Three important areas in the purchasing process of

advanced logistics services

When comparing the purchasing process for differentkinds of logistics services, it has been observed that thepurchases of advanced logistics services has somedistinct needs in the following phases: the servicedefinition, the RFP, and the contracting phase, and thiscalls for a further elaboration which will done below.

5.1. Service definition

The increasingly more bundled and complex servicessome companies try to outsource lead to an increasedneed for specification of the service, something whichthe companies are not used to. It is more a question ofbuying functions and/or competence, not single services.Axelsson and Wynstra (2002) point out the importance,when buying services, to define what the service is, whatdemand it should fulfil and what problem it shouldsolve. For the purchasing process of third-party logisticsthis step, to define a logistics solution and the servicesneeded, is often the most difficult (Sink and Langley,1997). But it is also one of the most important, as it islinked to the most important group of success factorsfor third-party logistics: well-defined requirements,procedures and systems (Andersson, 1997; Bagchi andVirum, 1998; van Laarhoven and Sharman, 1994). Themajor challenges are due both to the complexity of thetask and due to the fact that many firms have neverpurchased this type of service. Hence there is often aneed of converting generalised images of the finalsolution into workable plans that can be implemented(Sink and Langley, 1997). One example of such an imagecould be the following quote from one shipper: ‘‘theContractor [i.e. the service provider] through its globalresources and competence shall actively contribute tothe development of future world-class distributionprocesses’’.

This quote also points at another important problemrelated to the definition of the services, the fact that theyshould not be over specified. If they are, the providerwill not be motivated or able to actively contribute tothe development of new processes and it may alsohamper his abilities to optimise own processes, whichmay lead, to higher costs and/or lower service for theclient. Those two problems, what to define (howdetailed) and who to define are implicitly guiding thefour principles of service definition of Axelsson andWynstra (2000, 2002):


1. Function describing definition: the function per-formed by the services bought is defined.

2. Activity describing definition: which implies that theclient must know exactly how the services areproduced.

3. Performance or service level definition: service levelagreement, in addition to the function the perfor-mance and the cost (changes) are also defined.

4. Competence definition: the client does not knowexactly what he is going to buy but he believes thatthe service provider will be able to help him.

According to Axelsson and Wynstra one way ofdescribing ‘‘What to define’’ is, like Bryntse (2000), todivide input and resources, the process and the output.To illustrate and discuss some issues in service defini-tion, we have used these definitions, the dimension of‘‘Who defines?’’ (client, provider or jointly) but alsoadded a dimension showing the nature of the factor tobe defined (tangible, semi or intangible).

Starting with the tangible factors; resources could beexemplified by equipment such as, type and number oftrucks or warehouses and their design, and processes

could be defined, in terms of e.g. working instructions ofhow to load a truck or pack a crate (see Fig. 6). Anexample of logistics output that is often measured, islead-time. For traditional procurement of logistics,the key to get low prices can be to have a very well-defined service so that different proposals are easy tocompare.

If we instead focus on the intangible factors, resourcesdifficult to define are knowledge, competence andcreativity. However, those kinds of capabilities arebecoming more important as the clients are asking fora long-term relationship where the provider proactively

should develop a solution that is best in class. One wayof making it more tangible and defining the human

assets, is to ask for people with certain profiles. Ifloading a truck is quite an easy process to define the taskto ‘‘design’’ or ‘‘define’’ a process is more intangible.Design or re-design could involve decision makingregarding channel structure, i.e. which/how manyintermediaries to use, and network structure, i.e. thenumber and location of supplying and producing units,warehouses and terminals. It also comprises decisionmaking about processes within the logistics system, i.e.warehouse design and operations, transportation man-agement. Sales and operation planning, a process that tosome degree have been started to be outsourced, hasboth more routine aspects easy to define (such asinventory replenishment on certain re-ordering point) aswell as more semi-tangible activities (such as how todefine inventory management principles for differentparts of the assortment). Finally, intangible outputcould be future concepts of how to be best in class. In thiscase neither the client nor the provider knows exactly‘‘best in what’’ only that it is part of the mission. Aservice definition on the concept level may be aboutstating the use of overarching principles influencing theoutput of the system, e.g. direct distribution systemwithout 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 furtheroperationalised into e.g. availability, reliability, lead-time.

Looking at the trends of the nature of logisticsservices bought, we see both a direction towards more‘‘tangible’’ service definitions (e.g. when buying onfreight exchange or when trying to leverage size andbest price) and more ‘‘intangible’’ (e.g. when trying toleverage the core competence and pro-activeness ofproviders). Focusing on the third dimension, who

defines, we could find some examples of client, joint oreven provider definition for many of the services.Currently however, the logistics design responsibilitiesmost often reside in the shipper organisation and theservice is defined in detail by the shipper, i.e. it is anactivity describing purchasing process. An hypothesis isthat the service providers in the future will be moreinvolved in the definition of resources, processes and tosome extent also intangible output (see Fig. 7).

This development of the purchasing process indicatesa shift into more of a function or performancedescribing definition of the service, which is in line withthe increasing ambitions to focus on core business. If afunction is bought the provider will be responsible todefine its sub-systems, i.e. the tangible and semi-tangibleresources and processes. As the providers become moreproactively involved in the design phase of logisticssystem they will also be involved in the definitions of theoutput in the form of concepts used.

Wha

t to

def

ine

Shipper

Provider

Res

ourc

esP

roce

sses

O

utpu

t

TangibleSemi-

tangibleIntangible

Concepts

Design

Processdefinition

HumanassetsEquipment

Lead time Customerservice

Standard OperationsProcedures

Knowledge

Loading/Unloading

Who

def

ines

Nature of the factors

Workinstructions

Jointly

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


5.2. Request for proposal

In RfP-processes for logistic services there aretypically around six to fifteen service providers ap-proached (often selected as a result of an earlier RfI). Afirst round of data collection and analysis will usuallyresult in two–three companies being investigated in-depth. But instead of developing an RfP structuredaround prices, an RfP for third-party logistics willin addition to various performance factors includefurther provider characteristics in the selection process.Examples of other criteria that become more importantin third-party logistics RfP processes are: culturalcompatibility, financial strength, the quality of themanagement, flexibility in meeting new, unforeseenrequirements, information system capabilities (Sinkand Langley, 1997; Schary and Skj .ott-Larsen, 1995).

Examples of the content of RfP for third-partylogistics for the three companies described earlier (SeeTable 1) are shown in Table 3 below. It should be notedthat there is a difference in complexity in outsourcedservices between the three companies, which also isreflected in the differences in the RfP content. CompanyAlpha may be categorised as a purchaser of activitydefined services while company Beta and Gamma havepurchased more of a function. Company Alpha whichwanted to outsource the execution of the inboundlogistics system focused on operational factors ascapacity, equipment and cost. In the case of Beta andGamma, which are more complex and involve transfer-ral of responsibilities, the emphasis was put on IT,management and cultural aspects. The high techcompany (Gamma) outsourcing a re-engineered distri-

bution system intended to appoint one service providercapable of handling all distribution activities from theorder receipt to the delivery to the final customer. It wasbelieved that the management of these activities wouldrequire a high degree of sophistication from bothmanagement and IT.

The factors considered by the companies in the tableabove highlight some of the important evaluationcriteria for complex logistics services. And this givesindirectly an idea of the differences between these kindsof purchases and the traditional ones. Cost evaluation,which traditionally is a very important factor, was notincluded as a rate comparison instead the evaluationfocused on the costing principles. Due to the fact thatthe system to be outsource in the case of Beta andGamma, was not implemented and was rather complex,it was not possible to define e.g. exact volumes,destinations/origins, which makes a direct cost analysisimpossible. The complexity of the systems made it likelythat these difficulties would prevail even after theimplementation and thus the costing principles wereeven more important. Another traditional evaluationfactor, capacity, was not an issue in case Gamma sincethe provider was supposed to buy operational servicesfrom second tier providers. However, this implies that anew important factor has to be introduced, the manage-ment and development of second tier providers. Sincethe shipper and the provider have to exchange a largeamount of information, very good IT interfaces areessential and the ability to set these up and also toprovide IT systems for supporting the operations mustbe assessed. Due to the nature of the services bought andthe intended close and long-term relationship the

Wha

t to

def

ine

Res

ourc

esP

roce

sses

O

utpu

t

TangibleSemi-

tangibleIntangible

Concepts

Design

Processdefinition




Knowledge

Loading/Unloading


Workinstructions

Defined jointly or by provider

Defined by shipper

Current ways to define theservice

Wha

t to

def

ine

Res

ourc

esPr

oces

ses

Out

put

TangibleSemi-

tangibleIntangible

Concepts

Design

Processdefinition




Knowledge

Loading/Unloading


Workinstructions

Defined by provider

Defined by shipper

Potential future way to definethe service

Defined jointly

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


management skills and cultural fit was also important.Related to this is also a factor of a hard quantitativenature: the financial stability of the provider, if there is arisk that it will get into financial problems this is not theright base on which to build a long-term and closerelationship.

A test of both the provider skills and how well thecompanies could interact is offered in a possible secondstage of the RfP process. After a small number ofpotential providers have been identified more in-depthdiscussions were initiated. The purpose was to find thebest providers but also develop the concept, processesand plans further. Important issues that needed furtherdevelopment were for instance how to operationalise thegeneral concept and how to design effective costingprinciples. Another important issue was the plan for theimplementation of the new concept, both with regardsto feasibility and speed aspects.

5.3. Contracts

The importance of contracts in deep partnerships hasbeen debated and it could be argued that there are twobasic and fundamentally opposing views on contracts:lack of contract is seen as a strength of the relationshipor contracts are essential for the success. Van Hoek(2000) has, according to a transaction cost theoryperspective, verified the expected positive correlationbetween the offering of supplementary logistics servicesand the use of detailed contracts. According to onesurvey more than half of the contracts used in third-party logistics relationships in Europe have detailedspecifications and specific performance targets are alsopart of the contracts (Van Laarhoven et al., 2000).According to the same study 40% of the contractscontain penalty clauses if the providers do not achievethe agreed performance targets. As the providers takeincreasingly larger responsibilities for the logisticssystem the issue of penalties will become a vital issue

in future contract negotiations. If a service providertakes over a large part or the entire system the shippersanticipate that he also will take all the risks involved,e.g. for lost or damaged products and claims from theend users, if the goods are delayed etc. These respon-sibilities do in some cases involve very large sums ofmoney. The providers are however not at all of the sameopinion and the tradition/praxis in the industry is farfrom the shippers stand point, if something goeswrong the shipper might be indemnified by a reductionof the service cost. The issue is not only related toactually protect against losses but also to ensure thebest possible service. In the latter case, the penaltyclauses are the stick and incentive ones the carrot. Inaddition some contracts also have clauses stating that ifthe provided services do not meet the agreed standardthe provider should make some kind of rootcause analysis and present a plan of how to solve theproblem.

It could be argued that the contract could have animportant role with respect to safeguarding and opera-tions support. Contracts could be used in order toprotect ones own interest and minimise risks, beingready for use if some problem occur, but they could alsobe used as a support to the operation and developmentof the logistics system i.e. include definitions ofprocesses, activities, roles and responsibilities, incen-tives/penalties. The contracts for purchasing of morecomplex logistics system do contain more details due tothe scope of services but they also contain a number ofissues dealing with unknown future issues and how tohandle them and how to ensure that the relationship willdevelop and improve the performance.

6. The length of the purchasing process

The title of this article implies that the purchasingprocess could be a multi-year project. To illustrate this

Table 3

Examples of the content in an RfP for third-party logistics

Company Alpha Beta Gamma

Areas focused the RfP process Basic skills Management: attitude toward continuos

improvement, understanding of partnership

concept, mgmt of people

Management and It capability

Capacity Service: service assurance, performance

standards, capacity availability, flexibility,

innovation

Management and development of 2nd tier

providers

Service and local market presence

Equipment Operation Technologies trp systems,

communication, simulation tools, in-house

R&D

People/cultural fit

Cost Finance Contract structure and costs


two examples, company Beta and Gamma, will be usedto show the length of the previously defined sub-processes (see Fig. 8). The work to be carried out inthe RfP process suggests that it may take some time toperform, however, it is the work before and after thatconsumes most of the time. To go through all of thesteps in the purchasing process took the two companies32 and 25 months respectively; however, the process wasnot executed in a linear way.

In both cases the service definition was made or re-made jointly after the provider was selected. In caseBeta, which was a logistics system for a greenfield plant,the joint development work could take place before theoperations started. In the Gamma case, on the otherhand, there was a need to instantly handle theoperations in the re-engineered logistics system inparallel with the development and specification of thesystem.

7. Conclusions

In the future the purchasing process of logisticsservices will be more differentiated due to currentbusiness trends. While most previous logistics servicescould be characterised as ‘‘leverage’’ or ‘‘non-critical’’items, we will in the future get a more even distributionof the services over Kraljic’s portfolio matrix. Whilemany deals will be made as today, maybe in newmarkets or with changed power relations, some serviceswill be purchased on web-based spot markets. If acompany increases the use of freight exchanges, this willlead to a faster, but more repetitive, purchasing process.Further this demands a simplification of the servicebought, as standardised and well-defined services arewhat most easily can be exchanged on an electronicmarket place. When looking at the opposite type of

procurement situation, the purchase of third-partylogistics services, the challenges are big. It requires moreefforts and there will be a need for purchasers to developnew skills in order to handle these deals effectively.Today these purchasing processes may take years forshippers and providers to jointly develop and contract,so there is great potential for reducing the length of theprocesses when companies get more used to this kind ofprocurement.

One major challenge is the service definition, whichcauses problems in several steps of the purchasingprocess. First, the logistics service as such is often veryunclear for both partners; it might just be a vision in thebuyers mind. Both scope and type of service must hencebe definedFbut not to the degree that it delimits theproviders degree of freedom to find pioneering solu-tions. Another issue is that there might only be veryfew, or even none, providers available to deliver theservice requested. It might instead be an issue ofdeveloping providers based on some capability theyhave. This points further to the problem of defining aRfP that is understandable but not too restricting, andalso useful for evaluation. Finally, the negotiationprocess will be long due to all the uncertainty, a lot ofservice construction that must jointly be completed,developing a contract that could act as an incentivefor further development and sharing risks and rewards.All in all, this type of purchasing process will be a longproject with new demands on both buyers andproviders. It has also been shown that the purchas-ing process for advanced logistics services may notalways be characterised as linear with distinctivesteps.

Hence companies must analyse how the new procure-ment situations will impact their purchasing processesand understand where they have to obtain newresources, routines and competence.

Define/ specify the

service




Market survey

RfI RfP Negotiations

Contracting

7 months 1 month3 monthsS

tart

End

14 monthsCompany Beta, 25 months

7 months 4 months1 month 2 months

18 months

Implementation/service definition/operations

Company Gamma, 32 months

Sta

rt En d

Define/ specify the

service




Market survey

RfI RfP Negotiations

Contracting

7 months 1 month3 monthsS

tart

End

14 monthsCompany Beta, 25 months

7 months 4 months1 month 2 months

18 months

Implementation/service definition/operations

Sta

rt En d

Fig. 8. The length of two purchasing processes.


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