Optimizing 3PL service delivery using a cost-to-serve and action research framework

Abstract

Full spectrum visibility and real-time management of increasingly complex, high-velocity operations will be the landmark practices of supply chain management in the twenty-first century. Integrating various business processes across functions is at the heart of supply chain management. As we survey the landscape, we can identify two sets of converging forces and newly emerging capabilities that will shape the way supply chains will develop in the near future. The first issue deals with the rapid rise of global third party logistics (3PL) companies that manage entire supply chains. The second issue has to do with how supply chain organizations plan and budget for a process of change, while simultaneously maintaining focus on full supply chain costs using a method known as the cost-to-serve (CSM) method. It is precisely these two issues that we address in this paper. Our first objective is to document the research conducted by the authors in the offshore oil and gas exploration and production industry. Our second objective is to use the CSM method to identify relevant cost drivers of 3PL services by nesting within an action research approach that pinpoints relevant operational constraints. The third objective is to use the action research framework and CSM to model various cost elements that could be incorporated into the objective function of a mathematical programming model. We compared the current design to the optimal design that we obtained from the model, and performed cost-benefit analysis to show the superiority of our procedure.