Supply Chain Management: An International Journal

Benchmarking the operational efficiency of third party logistics providers using data envelopment analysis
Hokey Min, Seong Jong Joo,
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 Research paper

Benchmarking the operational efficiency of

third party logistics providers using data
envelopment analysis
Hokey Min and Seong Jong Joo
UPS Center for World Wide Supply Chain Management, University of Louisville, Louisville, Kentucky, USA

Abstract
Purpose – In an era of downsizing and financial cutbacks, the operational efficiency of third party logistics providers (3PLs) dictates their
Downloaded by Indian Institute of Technology Kharagpur At 22:11 12 June 2018 (PT)

competitiveness and/or survival. In an effort to help 3PLs enhance productivity and price leverage in the increasingly competitive third party logistics
market, this paper aims to develop a meaningful set of financial benchmarks that will dictate best practices. In particular, the paper proposes a data
envelopment analysis (DEA) that is proven to be useful for measuring the operational efficiency of various profit or non-profit organizations.
Design/methodology/approach – Using the examples of major 3PLs in the USA, this paper is the first to illustrate the usefulness of DEA for
measuring the competitiveness of third party logistics services. The proposed DEA model also helps 3PLs identify potential sources of inefficiency and
provide useful hindsight for the continuous improvement of operational efficiency. Furthermore, the proposed DEA model not only helps 3PLs establish
detailed policy guidelines in prioritizing the use of financial resources, but also helps them evaluate the effects of financial investment on the
profitability of 3PLs.
Findings – DEA study finds that the strength of 3PL service performances and the breadth of diverse 3PL services is somewhat correlated to the long-
term financial strength of 3PLs.
Originality/value – The main contribution of this paper includes the novel application of DEA to the performance measurement of 3PLS. The proposed
DEA model not only helps 3PLS establish detailed policy guidelines in prioritizing the use of financial resources, but also helps them evaluate the effects
of financial investment on the profitability of 3PLS.

Keywords Benchmarking, Data analysis, Resource management, United States of America

Paper type Research paper

Introduction services. Those 3PLs, which cannot handle steep cost

increases outpacing revenue growth, may not survive in the
As a growing number of firms look for ways to focus on their end. In particular, 3PLs which failed to sustain their
core competency and streamline their supply chains, the economies of scale, and the subsequent price leverage, may
popularity of third-party logistics (3PL) services has fall victim to ongoing merger and acquisition activities.
continued to rise for the last few years. For example, the Indeed, the CEOs of the 20 largest US-based 3PLs predicted
average annual revenue of the 20 largest US-based 3PLs that only half of the top twenty 3PLs would survive as
jumped from $545 million in 1997 to $1.18 billion in 2000 independent companies within the next few years (Lieb and
(Lieb and Kendrick, 2001). However, the CEOs of the 20 Kendrick, 2001).
largest U.S.-based 3PLs projected that the recent economic One way of improving the operational efficiency of 3PLs
downturn would slow the revenue growth of the 3PL industry and to act as a means of providing a survival strategy is to
for the next several years (Lieb and Kendrick, 2003). With emulate best practice firms that can be identified by setting a
tight profit margins and increasing competition, a key to reliable financial performance standard. Examples of such a
3PL’s survival is its ability to keep 3PL operations “lean”. standard are a financial audit, an industry norm, and a
Sustaining lean operations, however, is not easy given benchmark. Since a 3PL needs to measure its financial
performance relative to its competitors to constantly
mounting cost pressures emanating from rising customer
strengthen its market position and then gain a position of
expectations, fuel costs, insurance premiums, and expanded
“the best of breeds”, benchmarking seems to be the most
effective way of setting a reliable financial standard and then
The current issue and full text archive of this journal is available at measuring the operational efficiency of the 3PL.
www.emeraldinsight.com/1359-8546.htm In general, benchmarking is a continuous quality
improvement process by which an organization can assess
its internal strengths and weaknesses, evaluate comparative
Supply Chain Management: An International Journal advantages of leading competitors, identify the best practices
11/3 (2006) 259– 265
q Emerald Group Publishing Limited [ISSN 1359-8546]
of industry functional leaders, and incorporate these findings
[DOI 10.1108/13598540610662167] into a strategic action plan geared towards gaining a position

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 Operational efficiency of third party logistics providers Supply Chain Management: An International Journal
Hokey Min and Seong Jong Joo Volume 11 · Number 3 · 2006 · 259 –265

of superiority (Min and Galle, 1996). The main goals of performance measures, and provides valuable insights as to
benchmarking are to: how operational efficiency can be improved.
Identify key performance measures for each function of a business operation;
Measure one’s own internal performance levels as well as those of the leading
competitors; Compare performance levels and identify areas of comparative The model input and output measures
advantages and disadvantages; Implement programs to close a performance
gap between internal operations and the leading competitors (Furey, 1987, The assessment of operational efficiency using DEA begins
p. 30). with the selection of appropriate input and output measures
that can be aggregated into a composite index of overall
In setting the benchmark, this paper will measure the performance standards. Although any resources used by
operational efficiency of 3PLs relative to prior periods and DMU should be included as input, we selected four different
their competitors. The operational efficiency measured by metrics as inputs. These are: account receivables, salaries and
input/output ratios can reflect the true overall productivity of wages (including fringe benefits) of employees, operating
3PLs better than traditional financial ratios, such as, return expenses other than salaries and wages, and property and
on investments and assets that tend to focus on myopic equipment (e.g. warehouses, terminals, trucks, airplanes,
aspects of financial performances. As a way of comparatively trailers, containers). Since 3PLs often sell their services on
assessing the productivity of 3PLs with multiple inputs and credit rather than cash, account receivables can be a key
outputs, this paper proposes a data envelopment analysis resource for increasing sales and the subsequent revenue.
(DEA) which was successfully explored in measuring the Thus, account receivables reflect an efficiency of short-term
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operational efficiency of banks (e.g. Thanassoulis, 1999), asset management and should be chosen as one of the inputs.
hospitals (Valdmanis, 1992), nursing homes (Kleinsorge and Due to the labor-intensive nature of the logistics industry,
Karney, 1992), purchasing departments (Murphy et al., typical 3PLs hire a large personnel consisting of managers,
1996), cellular manufacturing (Talluri et al., 1997), travel dispatchers, drivers, order pickers, and cargo handlers, among
demand (Nozick et al., 1998), information technology others, on either a part-time or full-time basis and their
investments (Shafer and Byrd, 2000), customer service payroll represents one of the major costs of doing business.
performances of less-than-truckload (LTL) motor carriers For instance, Ryder Systems, Inc. had a total of 16,674
(Poli and Scheraga, 2000) and international ports (Tongzon, employees in 2000 (Armstrong, 2001a, b). Since salaries and
2001). For further details on other DEA applications, wages (including fringe benefits) reflect the efficiency of direct
interested readers should refer to Seiford (1990). In general, investment in human resources, they were regarded as input.
DEA is referred to as a linear programming (non-parametric) Operating expenses (excluding personnel cost) include many
technique that converts multiple incommensurable inputs and elements of variable costs, such as fuel, oil, lubricants, vehicle
outputs of each decision-making unit (DMU) into a scalar parts, tires, tubes, license fees (including software), utilities,
measure of operational efficiency, relative to its competing taxes and insurance premiums that comprise another key
DMUs. Herein, DMUs refer to the collection of private firms, resource for maintaining equipment and keeping a fleet and
non-profit organizations, departments, administrative units, warehouses operational. Thus, operating expenses were
and groups with the same (or similar) goals, functions, included as input. Equipment is viewed as a resource for
standards and market segments. DEA is designed to identify 3PLs (especially asset-based 3PLs), because the utilization of
the best practice DMU without a priori knowledge of which a carrier’s capacity and information technology (IT)
inputs and outputs are most important in determining an infrastructure can increase the efficiency of 3PLs in filling
efficiency measure (i.e. score) and assess the extent of the needs of their customers. Properties such as buildings and
inefficiency for all other DMUs that are not regarded as the lands (estimated in book values) are considered to be
best practice DMUs (e.g. Charnes et al., 1978). Since DEA resources given that they can add value to warehousing and
provides a relative measure, it will only differentiate the least freight services by increasing the opportunity to consolidate
efficient DMU from the set of all DMUs. Thus, the best freight, manage critical inventory, and offer value-added
practice (most efficient) DMU is rated as an efficiency score services.
of one, whereas all other less efficient DMUs are scored On the output side, the overall performance of 3PLs can be
somewhere between zero and one. To summarize, DEA measured by operating income that best reflects the
determines the following (Sherman and Ladino, 1995): operational efficiency of 3PLs. Other well-known financial
.
The best practice DMU that uses the least resources to ratios such as profit margin and return-on investment were
provide its products or services at or above the quality not considered relevant, because a less profitable firm may be
standard of other DMUs. more efficient in utilizing its personnel and equipment than
.
The less efficient DMUs compared to the best practice the more profitable firm. For example, a favorable change in
DMU. fuel price and tax rate can increase profitability, but not
.
The amount of excess resources used by each of the less necessarily the operational efficiency (e.g. equipment
efficient DMUs. utilization or labor productivity) of 3PLs. In fact, Sherman
.
The amount of excess capacity or ability to increase (1984) observed that profit measure was not a good indicator
outputs for less efficient DMUs without requiring added of how efficiently resources were used to provide customer
resources. services. We obtained the aforementioned input and output
data from the annual scoreboard reports of the recent Business
In measuring the operational efficiency of trucking firms, we Week magazines (2001, 2003) and a series of annual reports in
chose DEA over other alternative techniques, such as Cobb the form of 10-K, which was required by the Securities
Douglas functions and analytic hierarchy process (AHP), Exchange Act of 1934 (Edgar Online, 2003). These reports
because DEA reflects the multiple aspects of organizational listed four years of data for major 3PLs including C.H.
performances, does not require a priori weights of Robinson Worldwide (hereafter C.H. Robinson), FedEx

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 Operational efficiency of third party logistics providers Supply Chain Management: An International Journal
Hokey Min and Seong Jong Joo Volume 11 · Number 3 · 2006 · 259 –265

Supply Chain Services (hereafter FedEx), Hub Group, J.B. Table II Efficiency scores for operating income
Hunt Dedicated Contract Services (hereafter J.B. Hunt),
Ryder, and UPS Supply Chain Solutions (hereafter UPS). To Year
keep the homogeneity of these firms for equitable Company 1999 (%) 2000 (%) 2001 (%) 2002 (%)
comparisons, we only included the top-notch US-based C.H. Robinson 93.07 86.21 90.51 100
3PLs that offer more diverse but integrated value-added FedEx 49.05 46.68 41.77 43.53
services (e.g. customs brokerage, merge-in-transit, specialty Hub Group 47.53 21.19 17.44 19.24
packaging, reverse logistics, repair, kitting and light assembly) J.B. Hunt 35.18 28.95 32.05 43.50
and are considerably larger in scale (annual gross revenue of Ryder 84.39 95.76 65.95 60.18
approximately $500 million to $3 billion). With the exception
UPS 100.00 100.00 85.50 89.05
of J.B. Hunt, all 3PLs selected for DEA evaluation were listed
Average 68.20 63.13 55.54 59.25
among the top ten 3PLs according to the reader survey
conducted by Inbound Logistics magazine (2001). All of them
(including J.B. Hunt) were once ranked in one of top ten
n ¼ the number of DMUs,
3PLs in 1999 (Inbound Logistics, 1999). All selected 3PLs
t ¼ the number of outputs,
(including J.B. Hunt) were listed among the 25 largest 3PLs
m ¼ the number of inputs,
in North America in terms of annual gross revenue
1 ¼ a small positive number.
(Armstrong, 2001a, b). Among these selected 3PLs, UPS,
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FedEx, Ryder, and J.B. Hunt are asset-based, whereas both By solving the above equations (1), (2), and (3), the efficiency
C.H. Robinson and Hub Group are considered to be non- of DMU ( jp) is maximized subject to the efficiencies of all
asset based. Although other major 3PLs such as Menlo DMUs in the set with an upper bound of 1. The above model
Logistics, Schneider Logistics, and Exel Americas deserved is solved n times to evaluate the relative efficiency of each
consideration for comparative benchmarking studies, a lack of DMU. Notice that the weights ur and ni are treated as
financial data for those 3PLs precluded their inclusion for unknown variables whose values will be optimally determined
DEA analysis. by maximizing the efficiency of the targeted DMU jp. An
efficiency score ( jp) of 1 indicates that the DMU under
consideration is efficient relative to other DMUs, while an
Data envleopment analysis model design and efficiency score of less than 1 indicates the DMU under
testing consideration is inefficient. In a broader sense, an efficiency
The DEA model, with the inputs and output summarized in score represents a 3PL’s ability to transform a set of inputs
Tables I and II, was adopted for this study. The DEA model is (given resources) into a set of outputs. The above model also
mathematically expressed as: identifies a peer group (efficient DMU with the same weights)
for the inefficient DMU (Boussofiane et al., 1991).
X
t A complete DEA analysis was conducted by applying a
ur yrjp non-linear fractional program formulated in equations (1)-(3)
r¼1
Maximize efficiency score ðjpÞ ¼ Xm ð1Þ to actual data containing a sample of six major 3PLs with four
ni xijp consecutive years of performance measures. The results
i¼1 obtained from the use of Frontier Analyst software (1998)
show that UPS consistently recorded an efficiency score of 1
X
t
ur yrj (100 per cent) in 1999 and 2000. However, UPS lost its
r¼1 efficiency in both 2001 and 2002 (see Table II). C.H.
Subject to Xm # 1; j ¼ 1; . . . ; n; ð2Þ Robinson achieved an efficiency score of 1 (100 per cent) in
ni xij 2002. On a year-to-year basis, at least one of the 3PLs is
i¼1 considered efficient, with the exception of 2001. In 2001 the
nr ; vi $ 1; ;r and i; ð3Þ relative efficiency scores ranged from 17.44 per cent to 90.51
per cent, suggesting that there is room for substantial
where improvement in operating income (see Tables II and III).
yrj ¼ amount of output r produced by DMU j, Surprisingly, FedEx, Hub Group, and J.B. Hunt., which still
xij ¼ amount of input i used by DMU j, ranked in the top 25 revenue generators among 3PLs in 2000,
ur ¼ the weight given to output r, never rated as efficient (below the group average) throughout
ni ¼ the weight given to input i, the investigation. In particular, Hub Group recorded an

Table I Descriptive statistics for input and output measures

Number of Minimum Maximum Mean Standard Deviation
annual reports (in thousand dollars) (in thousand dollars) (in thousand dollars) (in thousand dollars) Type
Operating income 24 10,548 4,512,000 917,149 1,493,798 Output
Accounts receivables 24 140,451 4,140,000 1,175,960 1,352,147 Input
Salaries and wages 24 84,082 17,944,000 4,320,703 6,192,384 Input
Operating expenses 24 48,199 9,232,000 3,462,887 3,474,022 Input
Property and equipment 24 24,244 13,612,000 3,795,383 4,609,712 Input

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Hokey Min and Seong Jong Joo Volume 11 · Number 3 · 2006 · 259 –265

Table III Potential improvements in operating income Table IV Resource (input) utilization rates in percentage
Year Year
Company 1999 (%) 2000 (%) 2001 (%) 2002 (%) 1999 2000 2001 2002
Resource Company (%) (%) (%) (%)
C.H. Robinson 7.45 16.00 10.48 0.00
FedEx 103.89 114.23 139.42 129.74 Accounts receivables C.H. Robinson 2 16.65 24.35 0.00 0.00
Hub Group 110.38 371.83 473.31 419.77 FedEx 0.00 0.00 0.00 0.00
J.B. Hunt 184.26 245.41 212.04 129.91 Hub Group 2 26.82 2 18.64 0.00 0.00
Ryder 18.49 4.43 51.62 66.17 J.B. Hunt 0.00 0.00 0.00 0.00
UPS 0.00 0.00 16.96 12.29 Ryder 0.00 0.00 0.00 0.00
UPS 0.00 0.00 0.00 0.00
Salaries and wages C.H. Robinson 0.00 0.00 0.00 0.00
efficiency score of only 17.44 per cent in 2001 leaving ample FedEx 0.00 0.00 2 7.41 0.00
room for improvement. In 2001 it could have improved its Hub Group 0.00 0.00 0.00 0.00
efficiency in operating income by as much as five times (see J.B. Hunt 0.00 0.00 0.00 0.00
Table III). A decline in operating income may have stemmed Ryder 0.00 0.00 0.00 0.00
from substantial interest expenses ($10.3 million) and the UPS 0.00 0.00 0.00 0.00
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$3.4 million impairment charge due to the Hub Group’s exit Operating expenses C.H. Robinson 2 29.02 2 19.40 211.27 0.00
from its initiatives surrounding the home delivery of large box FedEx 2 54.24 2 55.59 254.69 2 48.17
items purchased over the internet. It may also explain why Hub Group 2 33.29 2 36.65 249.47 2 36.34
Hub Group’s annual gross margin ($179 million) represented J.B. Hunt 2 71.49 2 70.67 267.70 2 68.80
barely 13.6 per cent of its annual gross revenue ($1.319 Ryder 2 83.47 2 83.61 283.14 2 80.96
billion) in 2001 (Edgar Online, 2003). Despite the fact that UPS 0.00 0.00 2 1.52 22.24
Hub Group is a non-asset-based 3PL with a limited number Property and C.H. Robinson 2 38.46 2 21.95 215.19 0.00
of tractors (a total of 300) and no warehousing facilities of its equipment FedEx 2 21.45 2 22.27 0.00 2 19.49
own, its equipment and other properties (e.g. software, office Hub Group 2 61.19 2 75.45 262.85 2 50.57
equipment and furniture) were poorly utilized, compared to J.B. Hunt 2 35.81 2 33.94 231.13 2 29.53
other competing 3PLs throughout the period (see Table IV). Ryder 2 81.39 2 75.94 274.11 2 73.59
Part of such underutilization may be due to a huge start-up UPS 0.00 0.00 2 2.94 20.22
investment in proprietary software as a way of becoming a
leader in knowledge-based transportation solutions and Note: Negative values show underutilization of resources and zero values
decreased demand in steamship line services (e.g., the indicate full utilization
bankruptcy of a Korean steamship line customer) in 2001.
To make matters worse, its operating expenses were
significantly underutilized in 2001. Overall, 2001 was the worst year for FedEx, Hub Group,
Although the extent of decline in efficiency scores was not Ryder and UPS in terms of efficiency scores for operating
as dramatic as Hub Group, FedEx shows similar patterns. income, reflecting the negative impact of 9/11 and economic
downturn. Table II displays the decline in efficiency scores for
While its utilization rate of buildings and other properties has
all but J.B. Hunt and C.H. Robinson in 2001. Both J.B. Hunt
steadily improved over the last two years (2001-2002), its
and C.H. Robinson continued to improve their efficiency
operating expenses were half-utilized for the last four years
scores in the last two years (2001-2002) thanks to their
(1999-2002). Indeed, FedEx’s operating expenses jumped
improvement in utilizing operating expenses, property and
from $6,883,092 in 1999 to $8,385,174,000 in 2001 due, in
equipment. For example, J.B. Hunt’s operating income rose
part, to substantial increases in fuel costs and jet fuel hedging
from $63.4 million in 2000 to $101 million in 2002 due to its
expenses (Edgar Online, 2003). Also, among the six 3PLs high customer retention rate (Edgar Online, 2003). J.B. Hunt
evaluated in this study, FedEx is the only one that shows the has been once honored as the first-ever “Truckload Carrier of
underutilization of salaries and wages in 2001 (see Table IV). the Year” award winner by its main customer, Wal-Mart. In
The underutilization of salaries and wages may have stemmed 2001, J.B. Hunt also renewed its 3PL contract with a
from FedEx’s 3.4 per cent annual pay raise and enhanced packaging industry leader, Georgia Pacific, solidifying its major
retirement benefits for its employees (esp. pilots) and customer bases. J.B. Hunt’s emphasis on customer relationship
restructuring of its logistics divisions (FedEx Supply Chain management may have contributed to its sales and profit
Services), which may have in turn triggered a shuffling of increases in 2003. As a matter of fact, J.B. Hunt’s sales reached
employees and the subsequent decline in labor productivity in $1.171 billion in the first six months of 2003 representing a 10
2001. Unless FedEx makes conscious efforts of controlling per cent increase from the previous year and its profit soared 79
payroll and operating expenses, it may continue to lose per cent in 2003 over the previous year (Business Week, 2003).
ground to its archrival, UPS, who has a significant price Leveraging its experience in managing 3PL services for
advantage due to its efficiency in controlling costs. In an effort time-sensitive commodities (e.g. food, beverages, groceries),
to control such expenses, FedEx recently sought to trim C.H. Robinson has emerged as one of the most efficient 3PLs.
salaried employees by offering early retirement and severance In particular, C.H. Robinson has been known for its nimble
packages. This move is expected to save $100 to $130 million responses to customer requests and effective just-in-time
in 2004 and thereafter $150 to $190 million annually (JIT) delivery services through real-time, and interactive
thereafter (Wlazlowski, 2003). online freight payment and order management systems

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Hokey Min and Seong Jong Joo Volume 11 · Number 3 · 2006 · 259 –265

(Armstrong, 2001a, b). Thanks to its operational efficiency, of $2.1 million in its net income. Although Ryder recently
C.H. Robinson has the highest net profitability ratio among formed a joint venture relationship with its long-term
the 3PLs (see Table V). For example, their gross profit customer, Toyota, to provide reliable value added services to
reached $483.8 million in 2002 which represented an increase automobile manufacturers, its equipment leasing business
of 15.4 per cent over $419.3 million in 2000. Their highest may have stalled and, subsequently, contributed to the
gross profit margin came from the sales of information underutilization of its equipment. Similarly, UPS, which was
services (Edgar Online, 2003). considered to be another benchmarking firm, has experienced
declining efficiency for the last two years of the investigation
Conclusions and managerial implications period, due to rising purchased transportation costs, capital
expenditures, compensation and benefits, and other operating
After two decades of evolution, the 3PL industry has finally expenses (e.g. fuel costs, taxes and insurances). For instance,
reached the mature stage of its life cycle. As the 3PL industry UPS’s operating expenses rose by 5.6 per cent from the
matures, both newcomers and old guards, that cannot deal previous year due to expanded service offerings in 2001.
with mounting pressures to reduce costs, integrate supply Likewise, its capital expenditures increased by 10.5 per cent
chain services, and improve operational efficiencies, are over the previous year during 2001. As a result, its operating
unlikely to survive in the increasingly demanding margin (operating profit as a percentage of revenue) declined
marketplace. Over the last two decades, the crowed market 12.9 per cent in 2001 (Edgar Online, 2003). In addition,
segment resulted in intense competition and low profit UPS’s recent acquisition of Fritz, Comlasa, Rollins, Finon
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margins for 3PLs that struggled to meet industry financial Sofecome, Livingston, and a piece of Burnham froze its cash
standards. In an effort to help these 3PLs formulate survival flows and did not give sufficient time to translate such an
strategies, this paper proposed a data envelopment analysis investment into substantial growth in operating income in
that was designed to analyze the operational efficiency of 2001 and 2002. Furthermore, uncertainty involved in
3PLs, identify potential sources of inefficiency, and provide contract negotiation with the Teamsters union and major
useful information (hindsight) for the continuous organizational restructuring may have hurt its earning growth
improvement of operational efficiency. This paper also in 2002. However, UPS bounced back by streamlining its IT
summarizes several major findings of this benchmarking services (e.g. online shipment tracking systems), enhancing
study and develops practical guidelines for improving the fuel efficiencies for its delivery vehicles (e.g. using hydrogen-
operational efficiency of 3PLs. powered fuel cells) and reducing workforce (e.g. elimination
First, while the 3PL market continued to show promise, of 800 jobs during the restructuring process). In fact, UPS’s
four out of six investigated 3PLs experienced a declining operating profit in non-package segments (e.g. 3PL services)
operational efficiency in 2001 (see Table II). This declining doubled in the first quarter of 2003 (Transport Topics, 2003).
efficiency within 3PLs coincides with a decline (3.4 per cent A second finding is that the strength of 3PL service
decrease from the previous year) in the average annual growth performances and the breadth of diverse 3PL services is
of the manufacturing industry, which is commonly regarded somewhat (but not directly) correlated to the operational
as one of the key users for 3PL services. In particular, Ryder, efficiency of 3PLs. For example, as shown in Table VI, C.H.
which was considered relatively efficient during early portions Robinson had the highest performance index (an average of
of the investigation period (1999-2000), registered a steep 4.50) among the six 3PLs that we considered in this study and
decline in its efficiency score in 2001 and 2002. Such a scored relatively high in operational efficiency throughout the
decline in efficiency may have stemmed from its high investigation period. On the other hand, J.B. Hunt had an
underutilization of fixed assets and declining revenue from equally high performance index, but did not score well in
its key customers in the automotive industry (e.g. operational efficiency during the investigation period due to
DaimlerChrysler, General Motors, Saturn) during the last its limited service offering (i.e. a primary focus on private fleet
few years. In the first quarter of 2002, Ryder registered a loss management and dedicated carriages). Given that a growing
number of 3PL users desire one-stop shopping with more
Table V The net profitability of major 3PLs diversified service offerings, a niche-oriented 3PL should
identify the lucrative or newly emerging market segment (e.g.
3PL Net profitability (in percentage) Rank reverse logistics) to stay profitable.
C.H. Robinson 19 1 Finally, in contrast to Armstrong’s (2001a, b) observation
Expeditors International 15 2 that an asset-based 3PL tended to maintain a higher
UPS 10 3 profitability ratio than a non-asset based 3PL, we discovered
Kuehne and Nagel 9 4 that both the top performer (i.e. C.H. Robinson) and the
Deutsche Post 5 5 (tie) lowest achiever (i.e. Hub Group) are non-asset based 3PLs.
This finding is somewhat contradictory to the fact that
TNT Post Group 5 5 (tie)
margins (net income before taxes) on an asset-based 3PL
Penske 5 5 (tie)
represented 6-8 per cent of its revenue, whereas margins on
DHL 4 8
an non-asset based 3PL accounted for 3-4 per cent of its
FedEx 3 9
revenue (Armstrong, 1998). However, we found that two
Exel 2 10 underachievers (Hub Group and J.B. Hunt) seldom or never
Nippon Express 22 11 (tie) played roles as lead logistics providers (LLP) or fourth party
Ryder 22 11 (tie) logistics providers (4PLs) for their key customers, whereas all
APL 23 12 three best performers (C.H. Robinson, UPS, and Ryder)
Source: Armstrong (2002) often served as lead logistics providers. FedEx is the only 3PL
which has played a role as a lead logistics provider for at least

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Hokey Min and Seong Jong Joo Volume 11 · Number 3 · 2006 · 259 –265

Table VI The competitive performance index of 3PLs

Transportation
Private fleet management/ LTL Bulk Information
3PL management contract carriage consolidation Warehousing distribution Fulfillment technology Average
C.H. Robinson N/A 5.0 4.5 4.5 4.5 4.5 4.0 4.50
UPS 4.0 4.0 4.0 4.0 4.0 5.0 5.0 4.29
Ryder 4.5 4.5 4.5 4.0 4.0 4.0 4.5 4.29
FedEx N/A 4.0 4.0 4.0 4.0 4.5 4.0 4.08
J.B. Hunt 4.5 N/A N/A N/A N/A N/A N/A 4.50
Hub Group N/A N/A N/A N/A N/A N/A N/A N/A
Notes: 5:0 ¼ Top-notch, 4:5 ¼ Very Good, 4:0 ¼ Good, 3:0 ¼ Fair, N=A ¼ Not available
Source: Armstrong (2001a)

several of its customers (e.g. Dade Behring, John Deere, To conclude, this paper differentiates between surviving and
Owens-Illinois) and never scored an above-average struggling groups of 3PLs on the basis of DEA efficiency
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operational efficiency during the investigation period. Also, scores. The DEA efficiency score gives management a
we discovered that a poor performing peer group (Hub warning signal that the lower the DEA score is, the greater
Group, J.B. Hunt, and FedEx) did not offer e-fulfillment likelihood a 3PL has for failure. Thus, DEA is very useful for
capabilities for its customers, while its good performing identifying the least efficient 3PLs which require the closest
counterparts (C.H. Robinson, UPS, and Ryder) offered attention. Furthermore, given that a growing number of 3PL
e-fulfillment services. These findings implied that 3PLs, users have begun to perceive 3PLs as their “resource
which could quickly adapt to the changing needs (LLP and providers,” 3PLs should prove to its potential customers
e-fulfillment services) of 3PL users, had a greater chance of that their resource utilization in terms of DEA scores is
selling their equipment and service offerings, and, therefore, comparatively higher than their competitors; thus, DEA
better utilizing their resources than 3PLs which became becomes an important tool for selecting the right 3PL. In fact,
followers in the quickly evolving industry. Although such a majority (77 per cent) of the 3PL users, that Langley et al.
findings may not be generalized, revenue growth opportunity (2002) recently surveyed, viewed their 3PLs as resource
can influence the operational efficiency of 3PLs. On the other providers. However, the proposed DEA model can be
hand, the sheer volume of revenue or the size of 3PLs does extended to include multiple outputs (including non-
not seem to have any bearing on their operational efficiency. financial measures) and a greater number of 3PLs in
Based on the above observations, we suggest the following homogeneous business sectors and organizational settings.
To summarize, the main contribution of this paper includes
survival strategies:
.
Take initiatives in the emerging market segments with high the novel application of DEA to the performance
measurement of 3PLs. The proposed DEA model not only
profitability potentials. Examples of this segment include
helps 3PLs establish detailed policy guidelines in prioritizing
returns management, repair/re-assembly services for high
the use of financial resources, but also helps them evaluate the
tech equipment (e.g. computers and communications
effects of financial investment on the profitability of 3PLs.
equipment), international air-express services to Asian
Since the proposed DEA model provides the detailed
territories, importing/exporting/customs clearance
performance benchmarks for 3PLs, it would allow 3PLs to
services, real-estate portfolio services, web-enabled
continue to improve their operations and enhance their
communications, and 4PL services with consulting competitiveness.
capabilities.
.
Target mid-sized firms (mid-market players) by enhancing
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“Evaluating of travel demand measures and programs: louisville.edu

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