Benchmarking the operational efficiency of third party logistics providers using data envelopment analysis

TLDR

In an era of downsizing and financial cutbacks, the operational efficiency of third‑party logistics providers (3PLs) dictates their competitiveness and/or survival. This paper develops financial benchmarks to help 3PLs enhance productivity and price leverage in a competitive market, proposing data envelopment analysis (DEA) as a tool for measuring operational efficiency. The study applies DEA to major U.S. 3PLs, demonstrating its use for measuring competitiveness, identifying inefficiencies, guiding resource allocation, and evaluating investment impacts on profitability.

Abstract

Purpose In an era of downsizing and financial cutbacks, the operational efficiency of third party logistics providers (3PLs) dictates their 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.