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Procedia - Social and Behavioral Sciences 235 (2016) 226 234

12th International Strategic Management Conference, ISMC 2016, 28-30 October 2016, Antalya,
Turkey

Third Party Logistics (3PL) Provider Selection with AHP

Application
mer Faruk Grcana*, brahim Yazcb , mer Faruk Beycac, idem Yavuz Arsland,
Fahrettin Eldemire
a, b, c
Istanbul Technical University, Istanbul, 34367, Turkey
e
Yldz Technical University, Istanbul, 34343, Turkey
d
Logistics Company, Istanbul, Turkey

Abstract

Contemporarily, globalization causes increase in competitions and this fact leads the companies having to focus on their
specialties in order to gain competitive advantage. In todays market conditions, the decision making process has become more
complicated due to improvements in options, targets and environmental conditions parallel to technology. Particularly in the
information technologies sector, options are increased to a great extent. The dependency of the companies to a single firm is no
longer the case and the selection of the most suitable firm has become more complicated. In this study, logistics service provider
selection for a company in stanbul is selected as a decision making problem. The third party logistic (3PL) provider selection
problem was modeled by one of the most frequently used multi criteria decision making method, AHP, which takes into account
both tangible and intangible criteria. As a result of AHP, best alternative for 3PL provider is determined.

2016
2016TheTheAuthors.
Authors.Published
Publishedby by
Elsevier Ltd.Ltd.
Elsevier This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of the organizing committee of ISMC 2016.
Peer-review under responsibility of the organizing committee of ISMC 2016.
Keywords: 3PL provider; AHP; Multi criteria decision making

* Corresponding author. Tel.: +90 212 293 13 00; fax: +90 212 240 72 60.
E-mail address: ofgurcan@itu.edu.tr

1877-0428 2016 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of the organizing committee of ISMC 2016.
doi:10.1016/j.sbspro.2016.11.018
 mer Faruk Grcan et al. / Procedia - Social and Behavioral Sciences 235 (2016) 226 234 227

1. Introduction

Owing to the globalization of sources, manufacturing and production, distribution companies in recent years have
been adopting the logistics management view to guide their business operations (Aktas & Ulengin, 2005).
Logistics, the central part of the supply chain, has a great importance on the efficiency and the cost of the entire
supply chain (Li et al., 2012).
Strategic alliances are an important form of inter-organizational co-operation. By forming strategic alliances, the
partners can pool their resources and strengths together in order to achieve their respective goals, share risks, gain
knowledge, and obtain access to new markets. Three most important types of logistics value chain-related strategic
alliances have attracted interest among the researchers: third-party logistics (3PL), retailer-supplier partnerships, and
distributor integration (Wu et al., 2009; Buyukozkan et al., 2008).
This study focuses on the 3PL. The adoption of logistics concepts has increasingly forced such companies to
focus on their core business and, at the same time, to outsource their transport and logistics activities this has
resulted in an increasing demand for logistics services that has generated, in past decades, the creation of a
worldwide growing market in which specialized service providers, which are called 3PL providers. Outsourcing
provides a certain power that is not available within an organizations internal departments. This power can have
many dimensions: economies of scale, process expertise, access to capital, access to expensive technology etc. By
outsourcing logistics activities, firms can save on capital investment and thus reduce financial risks (Aghazadeh,
2003; Aktas & Ulengin, 2005).
Many 3PL companies provide a professional logistics service. In the global supply chain systems, industries try
to outsource the logistics. 3PL providers are one of the choices. Choosing the 3PL providers providing the best
selection problems is an interesting and important subject of companies with face when trying to select a suitable
and long-term 3PL company (Chiang & Tzen, 2009).
Aguezzoul (2014) presented a literature review on 3PL selection decision in terms of criteria and methods. Based
on the analysis of 67 articles published within 19942013 period, this study identified 11 key criteria in terms of
3PL selection. Cost is the most widely adopted criterion, followed by relationship, services, quality, information &
equipment system, flexibility, delivery, professionalism, financial position, location and reputation In terms of
methods for 3PL evaluation, 5 groups were identified namely: MCDM techniques, statistical approaches, artificial
intelligence, mathematical programming, and hybrid methods.
Many decision makers or experts select suppliers based on their experience and intuition. These approaches are
obviously subjective. Alternatively, multiple criteria decision-making or multiple attributes decision making
(MCDM/MADM) is the approach dealing with the ranking and selection of one or more suppliers from a pool of
providers. The MCDM provides an effective framework for supplier comparison based on the evaluation of multiple
conflict criteria (Shyur & Shih, 2006). One of the techniques for solving MCDM problems is analytic hierarchy
process (AHP). AHP is a subjective tool with which to analyze, based on a crisp 9-point scale, the qualitative criteria
needed to generate alternative priorities and preferences. AHP enables decision makers to construct complex
problems in a simple hierarchical form, and to evaluate a large number of quantitative and qualitative factors in a
systematic manner despite the presence of multiple conflicting criteria (Lee et al., 2008).
This paper models 3PL service provider selection problem using AHP. The AHP model is developed on the basis
of literature review and a series of informal discussions with a few industry personnel and academicians for the
selected problem.

2. Literature review

Early 3PLs that came into play during the late 1980s and it is referred as suppliers of logistics outsourcing. 3PLs,
as a new business form, has been developing since the 1990s. At present, in the US, about 42% of the companies
have implemented logistics outsourcing (Li et al., 2012).
The 3PL sector continuously improves due to the increased demand as a result of the advanced logistics services.
Globalization, shorten delivery periods, customer focusing and outsourcing cause more importance to be given to
logistics and third party logistics to develop. 3PL covers all of the services regarding effective planning, storage and
controlling of each kind of product, service and information flow from the start to the end of the supply chain.
228 mer Faruk Grcan et al. / Procedia - Social and Behavioral Sciences 235 (2016) 226 234

Today, many firms find it more beneficial and economical to turn to third party logistics companies for the total or a
part of their logistics activities (Daugherty, 1996). The selection of an effective logistics strategy depends on a
number of creative processes based on the development of a common strategy. A logistics strategy has 3 main
objectives; cost reduction, reducing of the capital and service improvement (Ballou, 1999). 3PLs' importance
is growing in the world due to integration of countries by globalization. Turkey is one of the countries which 3PL
sector has been gaining importance due to its geographical and economic situation.
Supplier selection belongs to the class of multi-criteria decision making (MCDM) problem in which the firms
need to identify the top priorities of selecting the best supplier based on its working style and the industry type. The
researchers used various approaches to solve the complex and uncertain MCDM problems of supplier evaluation
and selection. Most of them mainly include DEA, mathematical models, AHP, linear programming, ANP, SMART,
etc. (Agarwal et al., 2011). Ho et al. (2010) reviewed the literature of the multi-criteria decision making approaches
for supplier evaluation and selection. It was noted that the most popular individual approach is DEA, followed by
mathematical programming, AHP, CBR, ANP, fuzzy set theory, SMART, and GA. integrated AHP approaches are
more prevalent. The wide applicability of AHP was attributed to its simplicity, ease of use, and great flexibility.
Gol & Catay (2007) used AHP to select a suitable 3PL with respect to general company considerations,
capabilities, quality, client relationship, and labor relations for a Turkish automotive company. Buyukozkan et al.
(2008) presented a decision support system using fuzzy AHP and TOPSIS to make a careful evaluation of e-logistics
partner for a well-known Turkish logistics firm. Ho et al. (2012) combined quality function deployment (QFD),
fuzzy set theory, and AHP approach to select the optimal 3PLs for a Hong Kong based enterprise that supplies hard
disk components. Jayant et al. (2014) used TOPSIS-AHP based approach for selection of reverse logistics service
provider for the mobile phone manufacturing industry.

3. Case Study

In this paper, we aimed to select the best 3PL service provider for a firm operating in stanbul by using AHP
method. There are three 3PL alternatives for the firm. The names of the firms will be given differently due to
confidentiality reasons. A Logistics is a pioneer logistics service firm that serves its clients with the strength of its
experience and large service network and has more than 1000 offices in 70 countries. This company has provided
service to its clients for more than 44 years with 46000 employees and storage areas that reach up to 10 million m2
and it reaches every point in the world by means of sea, road or airline transport. It is a firm that has a powerful
infrastructure of information technologies. RFID chips, which are the most advanced automatic defining and data
collecting technologies, are used in tags that are the size of small paper pieces. The use of RFID tags in the supply
chain activities brings important improvements. On the other hand, A Logistics is not sufficient in terms of
customer relationships. The fact that the products are not preserved in suitable conditions and their numbers are not
known occasionally causes problems with its customers.
B Logistics transfers its 27 years of experience in the 3PL sector as integrated Logistics Service Provider to
its customers. It conducts its work processes parallel to the technological advances. It uses CRM software in order to
store the data of its clients and to reach the updated information as quickly as possible. CRM brings along 2 items;
human, process and technology. CRM projects are the identifying of the business strategies and parallel to these
strategies configuring the compatible human, process and technology. It continues its trials to obtain ISO9001 (for
managerial perfection) certification.
C logistics provides service in the sector for 14 years. With the flexibility that the software that the company
information technology teams developed, it can respond to client needs quickly and provides them the most quality
service making use of its experience in working with clients in the different sectors. In addition, C Logistics
minimizes the error rates by means of the automation technologies that it uses in the stocks and provides its clients
with real time information flow with portal applications. Furthermore, it earned the right to hold the ISO 10002
certification (Operational Perfection).
In the literature there are lots of selection criteria for 3PL providers based on companies requirements. The
literature on logistics outsourcing accords a very high level of importance to compatibility, long-term relationship,
 mer Faruk Grcan et al. / Procedia - Social and Behavioral Sciences 235 (2016) 226 234 229

financial performance, and reputation in the selection of a provider. By means of expert reviews who are from
supply chain department of the company and academicians interested in supply chain management, the company
determined the same criteria for the selection problem; compatibility, financial performance, reputation of 3PL
provider and long term relationship. Compatibility criteria refers to the ability of the user and the provider and their
support systems to work together in close coordination to achieve some common objectives. It may be classified in
terms of the attributes of business process, cultural fit, technology capability, characteristics of other service
providers of the user, etc. (Andersson & Norman, 2002; Lynch, 2004; Thompson, 1996; Boyson et al., 1999;
Mohanty & Deshmukh, 1993). Long-term relationships criteria, which include shared risks and rewards, ensure
cooperation between the user and the provider. It also helps in controlling the opportunistic behavior of providers
(Lynch, 2004; Thompson, 1996; Boyson et al., 1999). A sound financial performance of the provider ensures
continuity of service and regular upgrading of the equipments and services, which are used in logistics operations
(Andersson & Norman, 2002; Boyson et al., 1999; Gattorna & Walters, 1996). The reputation of a provider refers to
the opinion of the people about how good they are in satisfying the needs of the customer. The reputation of a
provider plays a major role in its selection. This is more relevant in the initial screening of the providers (Lynch,
2004; Thompson, 1996; Boyson et al., 1999).

4. Methodology

Our aim in this study is to determine the best 3PL provider for a firm. We used one of the most popular multi
criteria decision making methods, Analytic Hierarchy Process (AHP) Method, for determining the best alternative.
The method takes into consideration of intangible criteria besides tangible ones. This characteristic which has great
importance in the decision making process, provides flexibility to the experts.
We used the steps of the method in accordance with Singh & Nachtnebel (2016) study. In the method, general
steps are as follows:
x Constructing pair wise comparison matrices for criteria, and alternatives with respect to each criteria,
x Normalizing the pair wise comparison matrix elements,
x Computing priority weights,
x Checking consistency of all pair wise comparison matrices. If consistency is not achieved, relevant pair wise
comparison(s) must be revised,
x Constructing integrated table including criteria weights (priority weights) and alternatives weights (priority
weights) with respect to each criteria.
x Scale of pair wise comparisons and random index (RI) tables in the study of Singh & Nachtnebel (2016)
were presented in Tables 1 and 2.

Table 1. Scale of pairwise comparisons.

Intensity of
importance Definition Explanation
1 Equal importance Two activities contribute equally to the objective.
2 Weak
3 Moderate importance Experience and judgment slightly favor one activity over another
4 Moderate plus
5 Strong importance Experience and judgment strongly favor one activity over another
6 Strong plus
7 Very strong An activity is favored very strongly over another
8 Very very strong
9 Extreme importance The evidence favoring one activity over another is of the highest possible order of
affirmation.
230 mer Faruk Grcan et al. / Procedia - Social and Behavioral Sciences 235 (2016) 226 234

Table 2. Random index (RI) table.

Matrix
Order 1 2 3 4 5 6 7 8 9 10
RI 0 0 0.58 0.9 1.12 1.24 1.32 1.41 1.45 1.49

Four criteria, compatibility, long term relationship, financial performance, reputation, are denoted as C1, C2, C3,
C4, respectively and alternatives are denoted as A1, A2 and A3. Relevant equations of general steps are as follows
for criteria:
Constructing the pair-wise table; as an example of a pair wise comparison, if C1 is moderately important than C2,
then C1-C2 cell will have the value 3 and C2-C1 cell will have reciprocal of the value 3,i.e.1/3.
Normalization process; will be done on the basis of column totals. For that, all columns total will be obtained,
then each row element in this column will be divided to the column total. Let i be the rows number and j be the
columns numbers in criteria pair wise comparison matrix. (i=j=4). Let Nc ij,cij and TCj denote normalized value of
of ith criteria with respect to jth criteria, pair wise comparison value of ith criteria with respect to jth criteria, and
the jth column total, respectively. Then, normalization of the matrices elements are carried by using equation 1 and
2.
    (1)

   

Priority weights of criteria are computed by averaging each row values. These averages are the priority weights
of criteria. Let Wi denote the priority weight of ith criteria. Then, priority weights, W i, are computed by equation 3:

 

Consistency check for criteria pair wise comparisons are performed as in the study of Singh & Nachtnebel
(2016); Eigenvalue method is suggested to perform the consistency check. Let C denotes pair wise comparison
matrix and priority weight matrix. First of all, Cw vector is found in the performing the consistency check. Then all
Eigenvalues of criteria matrix are found and max is computed by taking average of Eigenvalues i and max are
computed using equation 4 and 5. Finally, consistency index and consistency ratio are computed according to
equation 6 and 7 (Random Consistency Index (RI) is presented in Table 2). If Consistency Ratio (CR) of relevant
comparisons (alternatives or criteria) is less than 0.1, the comparisons consistency is validated and other steps can
be performed. If not, comparisons must be revised.

  

 

 

 

The detailed steps and equations were for only criteria pair wise comparisons. By changing Nc ij and cij with Naij
and aij for alternatives, we can perform normalization, finding priority weights and consistency check steps for
 mer Faruk Grcan et al. / Procedia - Social and Behavioral Sciences 235 (2016) 226 234 231

alternatives with respect to each criteria. (Note: In this stage, it must be used i=j=3 instead of i=j=4, since we are
interested in alternatives. Number of alternatives is 3).
Priority weights of criteria and alternatives with respect to each criteria are combined. Each alternatives
weighted scores are computed by using equation 8 and scores are presented in Table 3.

Table 3. An example of combined table.

C1 C2 C3 C4
W1 W2 W3 W4
A1 a11 a12 a13 a14
A2 a21 a22 a23 a24
A3 a31 a32 a33 a34

Score Ai =  , i=1, 2, 3. (8)

The alternative that has the highest score is the best alternative. Pair wise comparison of criteria and alternatives
with respect to each other are represented in Tables 4, 5, 6, 7, 8.

Table 4. Criteria pair wise comparisons.

C1 C2 C3 C4
C1 1 4 2 3
C2 1/4 1 1/2 1/2
C3 1/2 2 1 2
C4 1/3 2 1/2 1

Table 5. Alternatives pair wise comparisons wrt compatibility criteria.

Compatibility
(C1) A1 A2 A3
A1 1.00 0.17 0.50
A2 6.00 1.00 4.00
A3 2.00 0.25 1.00

Table 6. Alternatives pair wise comparisons wrt long term relationship criteria.
Long Term
Rel.(C2) A1 A2 A3
A1 1.00 0.33 1.00
A2 3.00 1.00 3.00
A3 1.00 0.33 1.00

Table 7. Alternatives pair wise comparisons wrt financial performance criteria.

Financial Perf.
(C3) A1 A2 A3
A1 1.00 5.00 0.33
A2 0.20 1.00 0.11
232 mer Faruk Grcan et al. / Procedia - Social and Behavioral Sciences 235 (2016) 226 234

A3 3.00 9.00 1.00

Table 8. Alternatives pair wise comparisons wrt reputation criteria.

Reputation
(C4) A1 A2 A3
A1 1.00 4.00 6.00
A2 0.25 1.00 2.00
A3 0.17 0.50 1.00

We obtain normalized values and priority weights of criteria showed in Table 9 by plugging the values presented
in Table 4 into equations 1 and 2.

Table 9. Priority weights for criteria.

C1 C2 C3 C4 W
C1 0.48 0.444 0.500 0.462 0.472
C2 0.12 0.111 0.125 0.077 0.108
C3 0.20 0.222 0.250 0.308 0.255
C4 0.16 0.222 0.125 0.154 0.165

After that, i and max are computed for criteria pair wise comparisons by utilizing equation 4 and 5. Obtained
values are depicted in Table 10:

Table 10. Consistency check values for criteria pair wise comparisons.
Cw i = Cw/wi
1.91 4.047
0.436 4.037
1.038 4.071
0.666 4.036
max 4.048

By using equation 6 and 7, we obtain CR and CI values as 0.016 and 0.018, respectively. Since CI is less than
0,1, we conclude that the criteria pair wise comparison is consistent (RI value for 4 item is 0.9. See Table 2).
In the same manner, we obtain alternatives weights with respect to criteria, and the pair wise comparisons
consistencies are presented in Table 11:

Table 11. Weights for alternatives with respect to each criteria and consistency indexes.
C1 C2 C3 C4
A1 0.107 0.2 0.267 0.700
A2 0.700 0.6 0.064 0.194
A3 0.194 0.2 0.669 0.700
CI 0.0089 0 0.0281 0.0089
 mer Faruk Grcan et al. / Procedia - Social and Behavioral Sciences 235 (2016) 226 234 233

As seen from Table 11, all pair wise comparisons are consistent and there is no need for revising the
comparisons. Finally, obtained weights for criteria and scores of alternatives for each criteria are shown in Table 12.

Table 12. Integrated table of weights.

C1 C2 C3 C4
0.472 0.108 0.255 0.165
A1 0.107 0.2 0.267 0.700
A2 0.700 0.6 0.064 0.194
A3 0.194 0.2 0.669 0.107

Using Equation 8, scores for alternatives respectively are 0.256, 0.444 and 0.3. According to results, second
alternative is the best choice for the company (best 3PL provider for the firm).

5. Conclusions

According to the results obtained by AHP method, second alternative (B company) is favored over other
alternatives (A and C) with highest score 0.444. This superiority of the second company with respect to first and
third companies can be explained by the experience of the company in 3PL sector, financial performance and the
fact that it has a strong infrastructure of information technologies. The most important factor in firm selection was
found to be Compatibility with a (47.15%) weight. It is followed by Financial Performance (25.49%), Reputation
(16.52%) and Long-term Relationship (10.82%) respectively. The decision maker must not be misled by the fact
that Long-term Relationship criterion has a relatively low importance. In fact, the provision of a firm with quality
logistics service at the minimum cost is one of the prerequisites for achieving the compatibility between the
company and the 3PL service provider. This indicates that long-term relationship criterion must not be overlooked.
Since criteria and its importance were determined by the company requirements, another study of a different
company may obtain different selection criteria and their importance. For further studies, fuzzy extensions of AHP,
TOPSIS and VIKOR can be applied to the problem and compared with obtained results in this study.

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