Logistics plays a crucial role in chemical supply chains. Its function is entirely different from manufacturing and other activities as it directly impacts customer satisfaction (Razzaque and Chang, 1998; Anderson and Norrman, 2002). In recent years, chemical companies are increasingly outsourcing a variety of their logistics services to third-party logistics (3PL) firms. However, outsourcing of services differs from the outsourcing of manufacturing, since the services are (Zeithaml et al., 1985): intangible, heterogeneous, inseparable (meaning difficult to separate production of the service from consumption), and perishable. There has been a steady increase in the use of third-party logistics services in the chemical sector. The reason for outsourcing logistics services is to reduce the costs associated with the logistics and to allow one to focus better on the core competency of chemical manufacturing. Bhatnagar et al. (1999) in their study showed that 60.3% of 126 registered Singaporean firms had engaged third-party logistics services.

In the logistics literature, research has focused mainly on general 3PL provider selection with emphasis on carrier, mode, and freight selection problems. Tay et al. (2005) has divided the services provided by the 3PL firms to chemical companies into three broad categories: Tank Storage, Land Logistics and Integrated Logistics. They have solved the problem of selecting contracts and allocating tanks to contracts in a storage terminal to maximize profit. However, the problem of selecting contracts for Land and Integrated Logistics still remains unsolved.

To reduce the cost and improve the service, many chemical companies prefer long term contracts with their logistics provider. A logistics service contract is an agreement between a company and a 3PL for a fixed duration which comprises certain terms and conditions. Contracts come with different features such as carrier, mode of transportation, equipment, reputation, speed, freight, pricing, flexibility, service, reliability, quality, lead time, terms, conditions, durations, etc. In such a scenario, selecting logistics contracts and 3PLs is a non-trivial problem that has received little attention in the literature. According to our knowledge, there is no paper related to the selection of contracts and/or 3PLs for logistics needs of companies. Therefore, it is very important to develop a method that considers cost and customer service objectives to critically evaluate and select contracts for 3PLs.

The objective of this paper is to model the logistics contract selection problem for 3PLs considering different aspects of contracts. In this paper, we reduce this to the problem of contract selection, as we consider each 3PL as offering a set of contracts. The contracts are divided into two classes:

1. Capacity–based Contracts: In these contracts, 3PLs commit to meet certain volumes and service levels specified by the company, but they can use their service/equipment/facilities for other customers. In this class of contracts, 3PLs may have multiple customers at the same time. 3PLs may quote lower prices for these types of contracts, but their reliability also decreases as they have to serve multiple companies. 2. Asset-based contracts: In the asset-based contracts, the equipment or facilities service only one customer. This class of contracts may be expensive, but definitely more reliable than the capacity-based contracts.

There will be some contracts which can provide only one service. On the other hand, there may be contracts that can provide bundles of services. In this case, 3PLs will offer additional discounts known as consolidation discounts. We also wish to model consolidation discount in our model. Selection of logistics contracts is a essentially a multi-criteria selection problem. Quantitative measures will be developed to objectively assess the candidate 3PL performance in each criterion and these measures will be the parameters in our mathematical programming model. The advantages of the proposed model will be highlighted through a case study.

Key words: Logistics; 3PLs; contracts; supply chain optimization

References:

Andersson, Dan, and Norrman, Andreas (2002), “Procurement of logistics services – a minutes work or a multi-year project?”, European Journal of Purchasing and Supply Management, 8(1), pp 3-14.

Bhatnagar, R., Sohail, A.S., Millen, R. (1999), “Third Party Logistics Services: A Singapore Perspective”, International Journal of Physical Distribution & Logistics Management, 29, pp 569-587.

Razzaque, M.A., and Chang, C.S. (1998), “Outsourcing of logistics functions: a literature survey”, International Journal of Physical Distribution & Logistics Management, 28(2), pp 89-107.

Tay, H.L., Karimi, I.A., Peck, C.K, Peh, X.L. (2005), “Contract Selection and Tank Allocation in a Terminaling and Storage Facility”, Industrial Engineering of Chemistry Research, 44, 7435-7450.

Zeithaml, V.A., Parasuraman, A., Berry, L.L., 1985. Problems and strategies in service marketing. Journal of Marketing 49, 33-46.