A Method of Third-party Logistics Providers Selection and Transportation Assignments with FAHP and GP

Dongai Wang
Mechanical Engineering School Tianjin University Tianjin, P. R. China wangda@tjcu.edu.cn

Wei Guo
Tianjin Key Laboratory of AMT&E Tianjin University Tianjin, P. R. China wguo@tju.edu.cn

Ke Chen
Mechanical Engineering School Tianjin University Tianjin, P. R. China chenke@tju.edu.cn

AbstractThird-party Logistics (TPL) has now become a common practice. So it is very important to firms to select appropriate TPL providers. This paper gives a method of TPL provider selection and transportation assignments with Fuzzy Analytic Hierarchy Process (FAHP) and Goal Programming (GP). We give a process of selection TPL providers and establish a criteria hierarchy structure which has two levels including 4 criteria and 16 sub-criteria. At last, it has proved the validity and the practicability by an example. Keywords- third-party logistics(TPL); supply chain; Fuzzy AHP

I. INTRODUCTION The tendency of the global economic development makes the competition of the supply chains be the main and essential one between two individual enterprises. Only when its whole supply chain keeps high competitive could an enterprise survive for a long time. So more and more enterprises only concentrate on their own core competencies but procure some products or services, such as the parts and logistics from outside suppliers or manufacturers. So Third-party Logistics (TPL) has now become a common practice. The commonly known drivers for outsourcing are needs of the organizations to concentrate on core competencies, cost reduction, development of supply chain partnerships, restructuring of the company, success of the firms using contract logistics, globalization, improvement of services and efficient operations, etc [14]. One of the most important reasons for outsourcing is the capabilities of the providers to support their clients with the expertise and experience that otherwise would be difficult to acquire or costly to have in-house [1]. So it is very important to firms how to select appropriate TPL providers. Thus, it is very meaningful to do some researches on TPL provider selection. Empirically based insights into the problem of selecting the right logistics service provider have been provided in the studies by McGinnis et al. [5] and Menon et al. [6], which investigated criteria for TPL selection and how the firms competitive responsiveness strategy and external environment affect them. Studies in this area have also relied on conceptualtype research to provide decision-making models and frameworks for the selection process of TPL service providers. Meade and Sarkis [7] offered a decision-making model based

on the analytical network process (ANP) to assist the management in the selection of providers for the reverse logistics process. More recently, Vaidyanathan [8] proposed a conceptual framework for the selection of TPL providers built around IT and Bottani and Rizzi [9] presented a multi-attribute approach based on the TOPSIS (Technique for Order Preference by Similarity to Ideal Solution) technique and the fuzzy set theory. With these methods best provider was selected. But firms generally need several providers. The cause maybe: (1) One providers transportation capability is not enough. (2) Several providers may compete with each other. (3)Transportation risk is reduced selecting several providers. So transportation assignment problem must be solved by decision makers. The literatures didnt mention the problem. In this paper, we would like to propose a method of TPL provider selection and transportation assignments with Fuzzy Analytic Hierarchy Process (FAHP) and Goal Programming (GP). The method will have high practical value for the decision maker to select the best TPL providers and to assign the transportation quantity. II. THE PROPOSED METHOD

The proposed method allows for the evaluation of the TPL providers and the assignments of transportation quantity. Fig.1 gives the process of the method. The various steps of this framework are described in brief as follows. Step1. Customer demand analysis Firms transport their product to customer through TPL provider. They must know the demand of customer such as transportation way, distance, volume and so on. Step2. Define logistics objective According to customers demand and firms own circumstance, firm define the expected objective of logistics such as cost, time. Step3. Develop a team of expert To develop a team of expert is necessary in selection TPL provider. The team should have members from all functional

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areas within the organization such as sales, marketing, manufacturing, finance, and logistics. Step4, Step5 and Step6 are the process of FAHP method, which is discussed in the next section of the paper. Step7. Transportation assignments Firm selected several right TPL providers and discussed detailed services with them. Then Transportation assignment is done with GP model. Step8. Build contract As any long-term business relationship, a formal contract is essential. Such a contract must address scope of work, damages, responsibilities, risks and rewards, remedies, extra services, termination, agreement modification, liabilities, limitations, compensation, etc.

structure, and then put the evaluation criteria on the second layer of the hierarchical structure. The candidate alternatives lay in the bottom layer. Step2. Constructing the fuzzy judgment matrix A and weight vector W for the hierarchical structure. In this study, the fuzzy judgment matrix A is the matrix of the combination of each candidate alternative and evaluation criteria, and the weight vector W is constructed by the evaluation criteria. The elements of the fuzzy judgment matrix A and weight vector W are represented by triangular fuzzy numbers, shown in table . The detailed definitions of the relative importance of fuzzy numbers are shown in Table .
TABLE I. Fuzzy number
~

DEFINITIONS OF THE RELATIVE IMPORTANCE FOR FUZZY

NUMBERS

Membership function (1,1,3) (1,3,5) (3,5,7) (5,7,9) (7,9,9)

Relative importance Equal importance Weak importance Strong importance Demonstrated importance Absolute importance

1
~

3
~

5
~

7
~

Step3. Ranking candidates and determining the optimum alternative. The result of calculating the FAHP is that the final fuzzy scores of candidate alternatives are represented in terms of fuzzy numbers. In order to ascertain the selection is the optimum, the fuzzy numbers ultimately need to be interpreted. Therefore, a defuzzification process needs to be adopted, which arranges the fuzzy numbers for ranking. The defuzzification process can be described as follows. Firstly set the weight vector W made up of evaluation criteria as
wj
~ 1 n

Figure 1. the process of TPL providers selection and transportation assignments

III. FUZZY AHP Analytic hierarchy process (AHP) is considered as one of the most useful approaches as it has the advantage of incorporating tangible as well as intangible criteria especially where the subjective evaluations of different individuals constitute an important part of the decision process. The concept of AHP was developed by Thomas Saaty in 1971. With the AHP not being able to overcome the deficiency of the fuzziness during decision-making, Laarhoven and Pedrycz have evolved Saatys AHP into the FAHP, bringing the triangular fuzzy number of the fuzzy set theory directly into the pairwise comparison matrix of the AHP. The purpose is to solve vague problems, which occur during the analysis of criteria and the judgment process[10-12]. The FAHP approach in this study extends the AHP by combining it with the fuzzy set theory, and its procedure is described as follows. Step1. Constructing hierarchical structure Put the goal of the desired problem (in this case the optimum spatial allocation) on the top layer of the hierarchical

, The fuzzy judgment matrix A is made up of

aij
~ mn

alternatives, and the evaluation criteria is given as we obtain the fuzzy sequencing vector S.
a11 A = a ij
~ ~ ~

. Then

a12 a 22 a m2
~ ~

a1m a 2n a ij
~ ~

= a 21
mn

a m1

W = wj
1 n

= w1

w2

wn

a11 S = A W T = a 21 a m1
~ ~

a12 a 22 am2
~ ~

a1m
~

w1
~

s1
~

a 2n w2 = s 2 a ij
~

wn

sn

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Figure 2. the the criterion system of TPL evaluation based on FAHP

Where criterion,

wj
~

is the relative importance of the jth evaluation

a ij

is the relative importance of the ith alternative Ai

si
~

W companys product is diesel engine. Its customers are heavy truck manufacturer, passage car manufacturer ship manufacturer, etc. They hope their diesel suppliers give less price and supply products on time. Quantity and quality are perfect. Step2. Define logistics objective W company needs to compress the total cost through outsourcing of logistics. Certainly customers satisfaction about products and service is the important target. Step3. Develop a team of expert To select good providers, W company develop a team include 4 experts who have rich knowledge and experience in logistics activities. Step4. Build the criterion system based on FAHP Referring several literatures and experiences in practice, we established a criteria hierarchy structure which has two levels include criteria and sub-criteria based on FAHP. The criteria system is in fig. 2. The first tier has four criteria, base information, technology and equipment, financial performance, service quality. Every first tier criteria has four sub-criteria. Step5. Evaluate the 6 TPL provider based on FAHP Based on the collected opinions of the experts and the proposed model, the performance results of the suppliers can be generated. The weighs are in table . The result of 6 TPL providers of score is in table .

corresponding to the jth evaluation criterion and Fuzzy score of alternative Ai.

is the final

Secondly through defuzzification of the final fuzzy scores and ranking of the fuzzy numbers, the optimum candidate alternative is determined. IV. CASE IMPLEMENTATION

W Company is one of the largest diesel engine manufacturers in China. The products it produced include bus diesel engines, truck diesel engines, generating diesel engines, marine diesel engines, engineering diesel engines and agricultural diesel engines. During its more than 60 years development process, W Company gradually organized a diesel engine supply chain system, and became its core firm. With the market competition more and more fiercely, W Company needs to compress the total cost of the whole supply chain urgently, thus, they want their logistics to TPL. Take this case for example, W Company needs to evaluate 6 TPL providers named S1 to S6, and selects 3 providers as cooperators and assigns the transportation volume to them. The application of proposed method in section II has been illustrated in the following. Step1. Customer demand analysis

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Step6. Select the logistics service providers According to table

TABLE II. Criteria Base Information (BI) Technology and Equipment (TE) Financial Performance (FP)

0 x1 6000 0 x2 14000 0 x3 12000

Weighs 0.25 0.25 0.20 0.30 0.26 0.25 0.23 0.26 0.20 0.22 0.35 0.21 0.26 0.25 0.23 0.26

we select the S1 S2 and S3 .

THE WEIGHS OF CRITERIA Weighs 0.20 Sub criteria BI 1 BI 2 BI 3 BI 4 TE 1 0.30 TE 2 TE 3 TE 4 FP 1 0.25 FP 2 FP 3 FP 4 SQ 1

di-

di+ 0
+

i=1 2 3. x2=14000
+

The result is: x1=3500

x3=2500
-

And d1 =0, d1 =20, d2 =25, d2 =0, d3 =d3+=0 It means provider S1s assignment is 3500 per month. S2s is 14000 per month. And S3s is 2500 per month. Such assignment is the approving result which has the least deviation from expected target. V. CONCLUSION

Service Quality (SQ)

0.25

SQ 2 SQ 3 SQ 4

This paper proposed a method of TPL provider selection and transportation assignments with FAHP and GP. We give a process of selection TPL providers and establish a criteria hierarchy structure which has two levels including 4 criteria and 16 sub-criteria. And then, the method has been used to assist W Company to solve its TPL provider selection and transportation assignment. At last, the result has been recognized by the company. REFERENCES
S6 0.525
[1] M. A. Razzaque and C. C. Sheng, Outsourcing of logistics functions: a literature survey, International Journal of Physical Distribution and Logistics Management, vol. 28, No. 2, pp. 89107, 1998. [2] S Hertz and M Alfredsson, Strategic development of third party logistics providers, Industrial Marketing Management, vol. 32, No. 2, pp. 139149, 2003. [3] R. Bhatnagar, A. S. Sohal and R Millen, Third party logistics services: a Singapore perspective, International Journal of Physical Distribution and Logistics Management vol. 29, No.9, pp. 569587, 1999. [4] T. Skjoett-Larsen, Third party logistics-from an inter organizational point of view, International Journal of Physical Distribution and Logistics Management, vol.30, No.2, pp. 112127, 2000. [5] M. A. McGinnis, C. M. Kochunny and K. B. Ackerman, Third-party logistics choice, The International Journal of Logistics Management, vol. 6, No. 2, pp. 93102, 1995. [6] M. K. Menon, M. A. McGinnis and K. B. Ackerman, Selection criteria for providers of third-party logistics services: An explanatory study, Journal of Business Logistics, vol. 19, No.1, pp. 121137, 1998. [7] L. Meade, and J. Sarkis, A conceptual model for selecting and evaluating third-party reverse logistics providers, Supply Chain Management: An International Journal, vol. 7, No.5, pp. 283295, 2002. [8]G. Vaidyanathan, A framework for evaluating third-party logistics, Communications of the ACM, vol. 48, No.1, pp. 8994, 2005. [9]E. Bottani and A. Rizzi, A fuzzy TOPSIS methodology to support outsourcing of logistics services, Supply Chain Management: An International Journal, vol. 11, No.4, pp. 294308, 2006. [10]P. J. M. Laarhoven, and W. Pedrycz, A Fuzzy Extension of Saaty's Priority Theory, Fuzzy Sets and Systems, 1983, No.11, pp.229-241. [11] T. L. Saaty, The Analytic Hierarchy Process, McGraw-Hill, NewYork, 1980. [12] J. J. Buckley, Fuzzy Hierarchical Analysis, Fuzzy Sets and Systems, 1985, No.17, pp.233-247.

TABLE III.

TPL PROVIDERS SCORE OF S

Providers Score

S1 0.706

S2 0.567

S3 0.762

S4 0.324

S5 0.229

After three providers were selected through FAHP we may assign the transportation of 20000 engines to every provider to reach the goal of firm through GP model. W company expected to attain such service goal: the rate of damaged less than 0.03, the rate of arriving on time more than 0.965 and logistics service expense less than 690000 Yuan.
TABLE IV. Logistics service provider S1 S2 S3 Damaged ratio 0.05 0.03 0.01 INFORMATION OF TPL PROVIDERS arriving on time ratio 0.92 0.97 0.99 Transportation Price of capability transport an engine 30 6000 35 14000 38 12000

Now assign the total transportation task to the three selected logistics service provider , s1-x1 s2-x2 s3- x3. So we have the GP model: min z= P1 d1++P2 d2-+P3d3+ s.t 0.05 x1+0.03 x2+0.01 x3+ d1--d1+

600

0.92 x1+0.97 x2+0.99 x3+ d2--d2+ 19300 30 x1+35 x2+38 x3+ d3--d3+ 690000 x1+x2+x3 =20000

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