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Performance improvement of third-party logistics providers - An integrated

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Article  in  International Journal of Technology Management · May 2008

DOI: 10.1504/IJTM.2008.018105

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226 Int. J. Technology Management, Vol. 42, No. 3, 2008

Performance improvement of third-party logistics

providers – an integrated approach with a logistics
information system

John J. Liu
Department of Logistics
The Hong Kong Polytechnic University
Hunghom, Hong Kong
E-mail: lgtjliu@inet.polyu.edu.hk

Stuart C.K. So*

Department of Logistics
The Hong Kong Polytechnic University
Hunghom, Hong Kong
Fax: (852) 23341765
E-mail: lgtsckso@inet.polyu.edu.hk
*Corresponding author

K.L. Choy, Henry Lau and S.K. Kwok

Department of Industrial and Systems Engineering
The Hong Kong Polytechnic University
Hunghom, Hong Kong
E-mail: mfklchoy@inet.polyu.edu.hk
E-mail: mfhenry@inet.polyu.edu.hk
E-mail: mfskkwok@inet.polyu.edu.hk

Abstract: Many third-party logistics (3PL) providers in the Pearl River Delta
(PRD) region are small to medium companies, which play an important
role in outbound logistics, managing logistics activities in the manufacturing
supply chain in the Greater China. It is necessary for these companies to
improve information transparency to their supply chain partners to maintain
competitiveness. In this paper, a logistics information management platform
known as Integrated Logistics Information Management System (ILIMS) is
presented to suit this need. ILIMS aims to provide 3PL companies a uniform
way of doing business with other trading partners and managing operation
performance online. Besides, it enables 3PL companies to communicate with
different trading partners on the internet without geographical restriction. A
case study is presented with the application of ILIMS to a medium-sized 3PL
company. With this generic system, the overall outbound logistics performance
of the supply chain was significantly improved.

Keywords: third-party logistics provider; Logistics Information System; LIS;

performance measurement.

Copyright © 2008 Inderscience Enterprises Ltd.

Performance improvement of third-party logistics providers 227

Reference to this paper should be made as follows: Liu, J.J., So, S.C.K.,
Choy, K.L., Lau, H. and Kwok, S.K. (2008) ‘Performance improvement
of third-party logistics providers – an integrated approach with a logistics
information system’, Int. J. Technology Management, Vol. 42, No. 3,
pp.226–249.

Biographical notes: Professor John J. Liu is the Head and Chair Professor of
Maritime Studies in the Department of Logistics at The Hong Kong
Polytechnic University. He received his MS in Control Theory in China in
1981, his MS in Engineering Economic Systems from Stanford University in
1983 and his PhD in Industrial Engineering from Penn State University
in 1986. He was formerly the Professor of Innovative Manufacturing
and Supply Chain Management and the Director of the Consortium for
Innovative Manufacturing and Operations Management at the University of
Wisconsin–Milwaukee. His current research areas include impulse supply order
fulfilment systems, make-to-order incentive problems, maritime rescue
simulator and maritime logistics.

Stuart C.K. So is the Computer Systems and Laboratory Officer in the

Department of Logistics at The Hong Kong Polytechnic University. He is
involved in research and technology management. He received his Master of
IT Management in 1999 and his Master of Business Administration in 2003,
both from Macquarie University, and his Master of Electronic Commerce in
2002. Mr. So’s current research areas concern the application of information
technology in logistics and supply chain management, electronic business and
information security. He has published a number of international journal papers
in the areas of RFID applications, logistics and information security.

Dr. K.L. Choy is an Assistant Professor in the Department of Industrial and

Systems Engineering at The Hong Kong Polytechnic University. He gained his
MSc degrees in Manufacturing Systems Engineering and in Management
Science and his MPhil degree in Engineering from the University of Warwick
in the 1990s, and his PhD degree in 2003. Dr. Choy’s current research areas
concern the application of artificial intelligent technologies in enhancing the
effectiveness of customer and supplier relationship management, as well as
covering logistics information systems under the outsource manufacturing
environment. He has published a number of international journal papers in the
areas of logistics information, data systems, supply chain management,
technology management and applying expert systems in industry.

Dr. Henry Lau is currently an Associate Professor in the Department of

Industrial and Systems Engineering at The Hong Kong Polytechnic University.
He is involved in research and teaching activities. He received his Master’s
degree from Aston University in Birmingham in 1981 and his Doctorate
from the University of Adelaide in 1995. His current research areas cover
manufacturing information systems and artificial intelligence applications,
and he has authored and coauthored over 100 international research papers
covering multi-agent modelling, object technology, global manufacturing and
computational intelligence applications.

Dr. S.K. Kwok is a Project Fellow of the Department of Industrial and Systems
Engineering at the Hong Kong Polytechnic University. He is also in charge of
the Mobile Commerce Demonstration Unit of the Microsoft Enterprise Systems
Centre (MESC). His research areas are in artificial intelligence, industrial and
systems engineering, Information and Communication Technologies (ICT) and
mobile commerce.
228 J.J. Liu, S.C.K. So, K.L. Choy, H. Lau and S.K. Kwok

1 Introduction

Supply chain management reflects the realisation for a business of a product pipeline
extending from supplier to customer. Tremendous technological advances in the past
decades have not only helped in accelerating the changes, but have also created a more
competitive marketplace. Logistics management as part of the supply chain process
(Council of Logistics Management, 2003) has to be fulfilled more efficiently and
effectively. Firms would rather concentrate on core competency and outsource noncore
processes such as business logistics to outside expertise. Therefore, third-party logistics
(3PL) providers fit into this market niche by providing logistics management on inbound
and outbound logistics activities in the customers’ value chain.
A 3PL provider is an external logistics service provider who manages, coordinates
and delivers logistics activities on behalf of a shipper (Hertz and Alfredsson, 2003).
According to the Hong Kong Logistics Association (2004), many 3PL providers in Hong
Kong and the Pearl River Delta (PRD) are small or medium companies. They provide
logistics services to their customers by subcontracting part of the operations to other
supply chain parties. Currently, the main communication channels for these 3PL
providers are through fax, phone and e-mail, which result in delays, human errors and
high running costs. Moreover, 3PL providers are unable to obtain an up-to-date status
from their trading partners in the fulfilment process in real time for making timely
decisions. It is noted that the current ways of communication are inefficient. Thus,
local small and medium 3PL companies need to adopt new methods to improve the
operation processes.
The Integrated Logistics Information Management System (ILIMS) is designed for
local small and medium 3PL providers, with advanced information technology to suit
such needs. The system replaces traditional business communication methods and
facilitates the operational process flow, resulting in a reduction in operating costs and, at
the same time, enhancing communication efficiency. A web-based common platform for
different parties in the supply chain is provided in order to provide faster and more
accurate logistics information sharing and communication between the trading partners in
the supply chain. Moreover, multidimensional performance analysis in various business
areas is implemented in order to facilitate continuous improvement on both the business
process and service levels.
This paper presents the supporting literature and establishes a generic model of a
responsive logistics information system that integrates processes and utilises advanced
IT applications to optimise the information flow in the supply chain. A case study is then
presented to illustrate how ILIMS is used in improving the business performance of a
3PL company.

2 Outbound logistics and order fulfilment process

The concept of outbound logistics and its association with other major activities of a
value chain was introduced by Michael Porter in 1985. Outbound logistics are essentially
part of the primary activities of a firm’s value chain that are associated with collecting,
storing and physically distributing the product to buyers. These activities include finished
 Performance improvement of third-party logistics providers 229

goods warehousing, material handling, delivery vehicle operation, order processing and
scheduling (Porter, 1985). Figure 1 shows the activities and the major supporting process
of the outbound logistics of a typical value chain.

Figure 1 Typical outbound logistics process and its major activities

Inbound Outbound Marketing

Operations Service
Logistics Logistics and Sales

Order Fulfilment and Billing

Storage and Physical Order Document

Collection Billing
Inventory Mgt Distribution Processing Transfer

Different companies may have different composition and priorities in their value chain
activities. Outbound logistics form one of the key activities in the order fulfilment
process on the supply chain level. Successfully managing the activity could bring the firm
competitive advantage and create value for its customers (Porter, 1985). It involves
various supply chain parties in the product delivery process, including supplier,
distributor, retailer and customer. The execution of the supply chain process involves
coordination of the flow of information, products/services and finances among these
participants (Simchi-levi et al., 2000). It is therefore important to effectively manage the
product flow among these supply chain parties to satisfy the delivery performance and at
a reasonable cost. Figure 2 shows the points in the order fulfilment process that require
logistics services.
There are several intermediate points in the outbound logistics process requiring
logistics operations. The operations can be partly or fully outsourced to logistics service
providers. 3PL providers can provide value-added services by integrating themselves into
the supply chain. Their logistics information, such as order status and inventory reports,
can be shared with the upstream and downstream supply chain parties to help them to
reduce the inventory and speed up the overall fulfilment process.
230 J.J. Liu, S.C.K. So, K.L. Choy, H. Lau and S.K. Kwok

Figure 2 The points in the order fulfilment process that require logistics services

Customer Retailer Manufacturer

Initiate Order Intermediate points that require logistics

Initiate Order services through 3PL providers such as
Receive Delivery warehousing, transportation or forwarding
Receive Delivery

Payment Billing
Payment Billing Receive order
Receive
and order
initiate
and initiate
processing
processing Complete
Complete
production and
Take Remove product production
store and
Take
Away Remove product
from shelf store
Away from shelf
Authorise
Authorize
shipment
shipment
Place on Initiate
Place on
shelf Initiate
production
shelf production
cycle
cycle
Receive
Receive
shipment and
shipment
store and
store Supplier Purchase
Purchase
materials
materials

3 Logistics outsourcing and information technology

The term ‘logistics outsourcing’ or ‘contract logistics’ is used interchangeably with 3PL
(Knemeyer and Murphy, 2004). Logistics outsourcing involves the use of external
companies to perform logistics functions that have been traditionally performed within
a company (Lieb and Randall, 1996). In the highly competitive marketplace, many
companies have tried to shift their resources such as manpower, cost and technology into
their core processes. The noncore processes, such as logistics, have been subcontracted.
The contracting of processes can reduce costs associated with asset ownership,
monitoring of performance, and the hiring, management and training of company
personnel (Maltz and Ellram, 1997). Therefore, many enterprises outsource different
levels of logistics services to 3PL providers. As a result, there has been a trend for 3PL
providers to participate in their fulfilment process for providing logistics management.
There are few studies on small and medium logistics companies (Gunasekaran and
Ngai, 2003). The role of small and medium 3PL companies, however, has become
increasingly important. Many such companies lack strategic plans, but are taking
advantage of the benefits of implementing IT or a Logistics Information System (LIS)
to facilitate the sharing of information among logistics supply chain partners who are
dispersed around the region or all over the world. Unlike the Enterprise Resource
Planning (ERP) system, which mainly supports interdepartmental data access within a
company and aims to streamline intracompany business processes for large enterprises
 Performance improvement of third-party logistics providers 231

(Cliffee, 1999; Neef, 2001; Tadjer, 1998), LIS focuses on facilitating logistics
management and allowing customers to acquire their desired logistics services and
conduct business transactions via the internet.
LIS has been a major area of study in logistics and operations for more than 25 years
(Rutner et al., 2003). Most of the previous studies examined the status of adoption
or the degree of integration of LIS into organisations (Gustin et al., 1994; 1995; Huan,
1995; Kang and Kwon, 1997; Mason et al., 2003; Rutner et al., 2001; 2003). However, it
is found that the previous works have not examined the design of LIS for enhancing
the competitiveness of small and medium 3PL providers through improving their
communication and performance management with the supply chain. There is also little
evidence of such a kind of LIS in the market.

4 Small and medium 3PL providers and operation problems

A 3PL provider acts as a middleman in the supply chain network who delivers essential
information from the factory all the way up to the right destination for the right party at
the right time. Many small to medium 3PL providers use telephone or e-mail as major
channels of communication with suppliers and other supply chain parties to provide
services like collecting logistics service requests from customers or sending notices of
late goods delivery due to traffic congestion, cargo misconnections, etc. (Hong Kong
Logistics Association, 2004). Owing to the different operating environments for each
party, a 3PL provider needs to call several parties, repeating the same information for the
same case, which is expensive, time consuming and potentially unreliable. Figure 3
shows the generic order fulfilment process of small and medium 3PL providers.
It is noticed that during the order fulfilment process, it is important to provide
responsive customer services while keeping a close relationship with customers and
suppliers. Traditionally, core competencies of 3PL providers include:
• providing booking services for air and sea freight forwarding services
• arranging cross-border trucking
• preparing tailor-made documentation.
Nowadays, 3PL providers seek chances to upgrade themselves as supply chain
coordinators in order to increase their competitiveness. As a result, more value-added
services are demanded by their customers, such as sharing the logistics information in a
timely manner among trading partners for better planning, reducing inventory and
improving the delivery time. These can be achieved by using information technology,
such as integrating LIS with the internet, to provide more responsive services.
In order to maximise profits, the physical operation is outsourced to contractors who
have already established a close business relationship with the 3PL company. However,
there exist operational problems and drawbacks. These issues are summarised in Table 1,
and they reflect the need of an LIS.
232 J.J. Liu, S.C.K. So, K.L. Choy, H. Lau and S.K. Kwok

Figure 3 Generic order fulfilment process flow of small and medium 3PL providers

Customer
Logistics service request
from customer
Telephone E-mail

Third Party
Send logistics service form to Logistics
Communicate if
customer Provider
necessary
Logistics
service form

Receive logistics service form

from customer
Logistics
service form

Prepare quotation and send

back to customer
Quotation
Telephone E-mail

Prepare Job order sheet

Job order FAX

Select logistics service
supplier

Fill in booking form to

Communicate if
logistics service supplier
necessary

Send booking form

to suppliers
Booking Form

Contracted
Suppliers provide logistic
services Logistics Service
Providers

Telephone E-mail

Land transport party Warehouse centre Freight forwarder

Good delivering service Warehouse service Shipping and Air service

 Performance improvement of third-party logistics providers 233

Table 1 Drawbacks of existing methods adopted by small and medium 3PL providers

Logistics activities Problems Drawbacks

Sales-related Not able to view services
offered instantly
Quotations only kept for successful
deals
Sent by fax and confirmed by phone
Service delivery Paper-based and manual operations
Order by fax with status update
by phone
Post-sales Manual-based operations
By fax, by hand delivery or by post
Invoice generated by accounting
software
Controlling No predefined metrics and
formal review
Do not maintain records
Delay in searching for desired
service
Incomplete track record for future
analysis
Human error and delay
Human error and delay
Human error and delay
Human error, delay and poor
info sharing
Human error, delay and poor
info sharing
No single view on customer record
No continuous improvement
No continuous improvement

In this study, a generic operation model and design of LIS are proposed based on the
value chain perspective (Porter, 1985). The study aims to enhance the communication,
information sharing and performance management of local small and medium 3PL
providers. Financial and nonfinancial performance measures are developed in the aspects
of sales, operations and support processes (Hudson et al., 1999; Krause and Mertins,
1999) for achieving continuous improvement. It is then realised by using Online
Analytical Processing (OLAP) application. OLAP is a category of software analytical
tools that provides features of a multidimensional conceptual view and intuitive data
manipulation on data stored in a database (Codd et al., 1993). In practice, OLAP converts
data into useful information by transforming raw data into meaningful and organised
information with its analysis features, so that it reflects the real dimensionality of the
enterprise in a form that is understandable to the user. Most importantly, OLAP has the
ability to provide managers with the information they need to make effective decisions
about an organisation’s strategic directions.

5 Integrated logistics information management system

An ILIMS is essentially a data-oriented LIS that integrates all the core logistics processes
together so that logistics services can be provided online. It is a web-based system which
provides a common platform via the internet that allows different parties to transmit,
capture, share and collect the required data or information.
234 J.J. Liu, S.C.K. So, K.L. Choy, H. Lau and S.K. Kwok

5.1 Operation model of ILIMS

A generic operation model is proposed for integrating ILIMS into 3PL providers. The
model consists of three layers, namely, logistics service, logistics process and LIS:
1 Logistics service is essentially the physical activities in the supply chain, including
warehouse operations, inventory management, distribution, reverse logistics,
transportation and freight-forwarding services.
2 Logistics process is the collection of logistics management activities facilitating the
materials and information flow on the supply chain. It connects the business with its
customers and suppliers and supports the delivery of the required logistics services
on the top tier. The activities include order fulfilment processes, customer and
supplier service, procurement and demand management.
3 Logistics Information System (LIS) is a business application for collecting, retaining
and manipulating logistics data. It is a common platform for sharing logistics
information between companies along the supply chain, from customers, service
providers to business partners. LIS underpins the upper tiers of the model by
automating the logistics processes, supports decision-making processes ranging from
strategic to operational ones, and facilitates business transactions. Hence, an efficient
LIS allows 3PL to retrieve, store and transform data into useful information for the
right people at the right time.
LIS is essentially a key enabler in the delivery of logistics services. Therefore, it
is important to integrate the value-added activities for the corresponding logistics
services in the logistics process. By improving the information flow of these logistics
activities, the performance of 3PL providers and the involved parties in the supply
chain is improved.

5.2 System architecture of ILIMS

The multitier system architecture is proposed to be used in ILIMS for realising the
integrated approach of LIS. Figure 4 shows the system architecture of ILIMS, which
comprises user-related functions, business-related functions, data-related functions and
security control functions.
ILIMS employs a distributed computing design embracing the Distributed
Component Object Model (DCOM) technology owing to the fact that the Windows
customer base is widely adopted and a relatively lower cost of investment is
required in implementing the system. The function of each tier is discussed in the
succeeding paragraphs.
 Performance improvement of third-party logistics providers 235

Figure 4 System architecture of ILIMS

Warehouse
Freight Customer
Forwarder 1

PC with Browser
Land PC with Browser
Transport
PC with Browser
Customer
VPN Router
VPN Router 2
Extranet
Connection VPN Router
PC with Browser Extranet (IPSEC) Extranet
Connection Connection
(IPSEC) (IPSEC) PC with Browser
Internet
VPN Router Connection
(TCP/IP) Broadband Modem
Extranet
3PL
Connection
(IPSEC) Internet Provider

Network Parameter
IPSEC of Extranet
Intranet
Connection PC with Browser
(TCP/IP)
Security Tier VPN Firewall
HTTP/HTTPS
Presentation
Tier
Web Server
DCOM

E-mail
SMTP
Business Components Server
Application
Tier ILIMS
OLE DB
Data Components Generic RDBMS

ODBC/OLE DB

Database
Server
OLTP Database
Database DTS
Performance
Tier OLE DB Analysis Report
Performance
Report
OLAP Database Services Performance
Report

5.2.1 The presentation tier

The presentation tier is the User Interface (UI) of the system, which allows users to
access the business functions over the internet with their web browsers. It embraces
client-server models and allows different parties to access business information through
the internet in accordance with the access right granted by the 3PL providers. This tier
provides inputs to the application tier and manages the display of outputs. Users can use
different kinds of services in the system according to their roles. Figure 5 shows the
details of the client-server operation flow.
236 J.J. Liu, S.C.K. So, K.L. Choy, H. Lau and S.K. Kwok

Figure 5 The operation model of the presentation tier

The Presentation Tier

Web page
Suppliers/Customers ILIMS Web Server
Web page
(Client side) (Server side) Web page

Internet HTTP
Request ASP

PC HTTP Web Server DCOM

with Browser Response (Internet Information Server)

Business Components

The web server contains a number of web pages for providing various functions to
different groups of users. The web pages are constructed using Hypertext Markup
Language (HTML). Since HTML is a stateless technology, other technologies such as
Active Server Pages (ASP) are used to create dynamic and interactive web pages. When
the web server receives a request for an ASP file, it processes the server-side script code
contained in the file to build the HTML web page, which is sent to the browser.
In ILIMS, the business functions are implemented as Component Object Model
(COM) components on the application tier. They are accessed through DCOM calls
initiated by ASP when the web server receives requests from the browser. Moreover,
specific sequences of UI access procedures are defined and implemented on the web
pages for executing the related business functions selected over the browser.

5.2.2 The application tier

The application tier delivers business functions and logistics services. It is the business
logic of ILIMS, which provides various application functions, such as quotation requests,
purchase order placements, order status tracking, or customer invoicing, which can be
accessed through the internet. It contains an ILIMS application server, providing a basic
operating environment to various logistics functions delivered by the business and data
component modules. The ILIMS interconnects with the E-mail Server to generate e-mail
notifications that carry business information like invoices or shipping documents to
customers. It also initiates requests to the database tier for synchronising transaction data
with other relational databases.
 Performance improvement of third-party logistics providers 237

5.2.3 The database tier

The database tier of ILIMS is the information repository for storing and retrieving the
business data requested by the business functions for further manipulation. It interfaces
with other Relational Database Management Systems (RDBMS) for exchanging data and
with OLAP applications for producing performance reports.
The database tier stores different kinds of business data, such as information on the
customer, supplier, business transactions, and product and order status, on a database
server. The business entity components that define the specific data characteristics are
invoked by the business components during the business processes. They also expose
methods to retrieve, insert, delete and update the corresponding information to the
database server through Structure Query Language (SQL); the methods are implemented
as stored procedures. A stored procedure is a set of SQL statements that is usually
stored in the server and reused by the SQL database clients, and helps to enhance the
performance and maintainability of data operations. Figure 6 depicts the data operations
between the application tier and database tier. SQL queries are initiated by the business
entity components, which are invoked by the corresponding business components on the
application server of ILIMS.

Figure 6 Data access between the application and database tiers

Application Tier

ILIMS Business Objects

Business Components

Service Price Purchase Customer Order Supplier Delivery Order Document Invoice Payment
Selection Negotiation Request Processing Booking Status Update Tracking Transfer Customer Tracking

Method Calls to
Data Objects

Business Entities Components

Logistics RFQ/ Purchase Booking Delivery Order Shipping Customer Payment

Job Order
Services Quotation Order Order Status Status Documents Invoice Status

Database Tier SQL Commands over ODBC/OLE DB Connections

Stored Procedures
ILIMS Database
Server
Tables

Data Transformation Services (DTS) that are bundled with the SQL database server are
used for exporting data in an appropriate form to other generic database systems. The
database server maps the selected columns of data to a set of transformations, and sends
the transformed data to a destination connection through DTS.
238 J.J. Liu, S.C.K. So, K.L. Choy, H. Lau and S.K. Kwok

5.2.4 The security tier

The security tier supports a Virtual Private Network (VPN) that connects trusted parties
on the supply chain network for sharing business intelligence such as performance
management reports. The Security Socket Layer (SSL) Protocol is deployed for all the
business users in order to provide a minimum level of security control over the public
internet. As web application programs such as ASP files that run on web servers are
easily attacked and compromised, a security system must be established so that the
internet users could not execute programs on the server or read files when they are
not authorised to do so. Therefore, it is necessary to define security control objectives
for addressing the security concerns. Three security control principles are implemented
on ILIMS:
1 Confidentiality – Information transmitted over an untrusted network, such as the
internet, is protected against unintended or unauthorised access.
2 Authentication – The identity of a user who wishes to access the system has to
be verified.
3 Authorisation – Users have the right to access specified information or resources
from the system based on their identities.
The security tier is implemented in ILIMS as a system service to achieve the security
control objectives. Table 2 summarises the required technologies and associated system
components that are designed in ILIMS.

Table 2 Security technologies and associated system components

Security objectives Security technologies System components

Confidentiality Network Level: The IP Security
Protocol (IPSEC) provides data
encryption for tightly connected
suppliers and customers.
System Level: The Security Socket
Layer (SSL) Protocol for all
connected suppliers and customers
Authentication Network Level: The IP Security
Protocol (IPSEC) provides network
authentication for tightly connected
suppliers and customers.
System Level: The Security Socket
Layer (SSL) Protocol for all
connected suppliers and customers
Authorisation Application Level: Role placed on
business components through
programming COM objects
Database Level: SQL Log-on
resource rights
Network Level: A Firewall that
supports IPSEC for building a
Virtual Private Network (VPN)
System Level: A web server that
supports SSL Protocol (Internet
Information Server)
Network Level: A Firewall that
supports IPSEC for building a
Virtual Private Network (VPN)
System Level: A web server that
supports SSL Protocol (Internet
Information Server)
Application Level: A Windows
Server’s users or user groups are
assigned to appropriate COM roles
Database Level: Access privileges
on SQL Database Server (e.g.,
select, insert, delete and update)
 Performance improvement of third-party logistics providers 239

5.3 Multidimensional performance measures by OLAP

In the database tier, the relational database server provides information to create
the multidimensional OLAP database for producing performance measurement reports.
This is done by extracting relevant data columns from the database tables. The data
interested in are extracted through DTS from local or external suppliers’ databases
and transformed into a data structure called star schema to facilitate data retrieval
and analysis.
Two types of performance measures are created by the OLAP tool. They are the
business performance metrics, which measure the financial and operational performance
of 3PL providers, and logistics performance metrics, which represent the service level of
outbound logistics. The business performance metrics are developed in the areas of sales,
operations and support processes. The logistics performance metrics are essentially the
Key Performance Indicators (KPIs) of:
• inventory level
• out-of-stock frequency
• delivery lead time
• total cost of supply.
The corresponding metrics and the dimensions of measurement subsequently
implemented by OLAP data cubes are summarised in Table 3.

Table 3 Proposed performance metrics and dimensions

Business areas Proposed performance metrics Dimensions of measurements

Financial and operational performance
Sales Revenue By Customer/Spatial/Time
Cost By Service/Spatial/Time
Operations Volume By Supplier/Order/Time
Lead time By Supplier/Order/Time
Support processes Customer complaints By Staff/Customer/Time
Key performance indicators of logistics services
Inventory Cost By Supplier/Spatial/Time
Out-of-stock Frequency By Supplier/Order/Time
Delivery lead time Lead time By Service/Spatial/Time
Total cost of supply Cost By Supplier/Order/Time

The cube editor selects the predefined dimensions and measures for building up
corresponding OLAP cubes. OLAP cubes answer the query from users to summarise
data in a multidimensional perspective. Besides, OLAP cubes provide a hierarchical
breakdown on the dimension levels so that aggregated measures can be computed
from more specific data at a lower level of the same dimensions (or ‘drill-down’) or data
can be summarised at the upper level (or ‘roll-up’). Figure 7 defines the hierarchical
summarisation path of dimension levels.
240 J.J. Liu, S.C.K. So, K.L. Choy, H. Lau and S.K. Kwok

Figure 7 Hierarchical summarisation path of dimension levels

Predefined Dimensions

Customer
Supplier
Country
Service

Order

Staff
Year
Quarter
Region

Month
City

Day

Figure 8 OLAP data cubes for analysing performance

OLAP Data Cubes for Measuring OLAP Data Cubes for Measuring
Logistics Performance Business Performance

Inventory Sales-Revenue

Region_Dim
Region_Dim
Supplier_Dim Customer_Dim
Sales-Cost
Time_Dim
Time_Dim
Region_Dim
Service_Dim
Out-of-stock
OLAP Multi-dimensional
Database
Time_Dim

Order_Dim
Supplier_Dim
Operation-Leadtime
Time_Dim

Supplier_Dim Order_Dim
Delivery leadtime
Star Schema Time_Dim
and Tables
Region_Dim
Supplier_Dim
Operation-Volume
Time_Dim Order_Dim

Supplier_Dim
Total-cost-of-supply
Time_Dim
Support Process -Complaints
Order_Dim
Supplier_Dim
Customer_Dim
Staff_Dim
Time_Dim

Time_Dim
 Performance improvement of third-party logistics providers 241

In ILIMS, the OLAP cubes are designed to provide multidimensional views of

performance data through the analysis services available on the OLAP data warehouse.
As shown in Figure 8, nine OLAP data cubes are constructed to provide the desired
performance measurement reports in ILIMS.
The dimensions defined for each business area categorise the measures of the
cube. Each measure is analysed through the analysis tools provided by the OLAP
applications. The tools perform roll-up and drill-down operations to provide performance
reports of different details for evaluating the business performance of 3PL companies.
Besides, the reports are selectively shared among the supply chain members through
the application tier. This reduces the uncertainties caused by lack of information
and knowledge.

6 Case study

To validate the feasibility of ILIMS, the system was developed based on the framework
proposed in this paper. It was tested in Bradford Logistics Service Limited (BLSL), one
of the small and medium 3PL providers in the Pearl River Delta (PRD) region. The
targeted customers of BLSL are primarily overseas high-tech companies, which demand
3PL integrated logistics services from China. Most existing customers are Asian
electronic component manufacturers that do not have logistics operations or distribution
centres in the region. The manufacturing plants and warehouses of these companies are
located in China, where their customers are mainly trading companies or retailers in
Hong Kong and the PRD region. In order to facilitate the outbound logistics processes of
these customers, BLSL has recruited over 30 contracted logistics service suppliers,
including transportation companies, warehouse operators and freight forwarders, to suit
the particular requirement patterns of the supply chain. Figure 9 shows the major business
activities in BLSL, which include sales, delivery and after-sales activities. There are four
core logistics processes underpinning the business activities. They are:
1 customer order acquisition
2 customer order fulfilment
3 customer support
4 billing.

Figure 9 Third-party logistics (3PL) activities in BLSL

Major
Activities
Sales Delivery After-Sales

Logistics Customer Order Acquisition Customer Order Fulfilment Customer Support Billing
Processes

Business Service Price Purchase Customer Order Supplier Delivery Order Document Invoice Payment
Functions Selection Negotiation Req/Ack Processing Booking Status Update Tracking Transfer Customer Tracking

Business Logistics RFQ/ Purchase Booking Delivery Order Shipping Customer Payment
Job Order
Entities Services Quotation Order Order Status Status Documents Invoice Status
242 J.J. Liu, S.C.K. So, K.L. Choy, H. Lau and S.K. Kwok

The operation method adopted by BLSL, like other traditional small and medium
providers, is manual-based, which is inefficient, costly and unreliable, thereby
undermining its business performance and potential growth.

6.1 System implementation and integration

In order to facilitate and better control the information flow between various trading
partners, BLSL has implemented ILIMS. ILIMS integrates the logistics processes and
provides a standard platform as well as systematic means for doing business. Table 4
shows the implementation details of ILIMS in various value chain activities in BLSL
through the integration of the multitier system architecture.

Table 4 Implementation of ILIMS in various value chain activities in BLSL

Logistics activities Presentation tier Application tier Database tier Security tier
Sales support
Service selection Web pages of Select and extract Maintain tables of Provide the
service information information service information following security
Price negotiation E-documents for Auto create Maintain tables of mechanisms to
quotation and RFQ quotations for std transaction records business
services and activities:
documents routing • Network layer:
Order placement E-documents for PO Auto confirm Maintain tables of connects all
and PO confirmation purchase request and transaction records core customers
document routing and suppliers
Service delivery with VPN over
Order processing Web pages of status Select suitable Maintain tables of the internet,
update for customers suppliers according to transaction records and connects
price quoted all non-core
customers and
Supplier booking Web pages of status Prepare booking Maintain tables of
suppliers with
update for BLSL orders to suppliers transaction records
standard HTTP
and job orders as
protocol over
internal records
the internet.
Status update Web pages for Update both BLSL Maintain tables of
• System layer:
suppliers to input and customers with status records
uses SSL
update information new status
Protocol for all
After sales
connected
Order tracking Web pages for Extract order status Read order status suppliers and
customers to track information records customers
order status
• Application
Document Web pages for Route selected Maintain records layer: roles
transfer customers and shipping documents of shipping verification
suppliers to request to requested parties documents for when business
shipping documents each order components
Billing Web pages to present Prepare and route bill Maintain records of (COM objects)
bills for customers to customer after customer invoice are called
completing the order for each order • Database layer:
Controlling enables
Performance OLAP tool to Generate reports Maintain a access-level
management present performance according to database of OLAP privileges for
reports predefined metrics data cubes data operations
Customer Web pages for BLSL Send alert to BLSL Maintain customer
complaint to log complaints for unresolved issues complaint records
 Performance improvement of third-party logistics providers 243

The presentation tier provides a single view of information and an entry point for users to
access various application functions. It is customised for three groups of users: BLSL
staff members, customers and suppliers. In the application tier, the logistics processes are
optimised by ILIMS so that the overall order fulfilment process is speeded up. Moreover,
a single point of control on information routing is provided, and data integrity and
reliability are assured. Figure 10 shows the information flow among various business
entities in the supply chain optimised through ILIMS.
The database tier is a centralised database for storing business data generated in the
transactions that are shared among different groups of users in the supply chain. Business
components in the application tier attend to client requests to trigger data operations such
as the retrieval, insertion and deletion of data, thereby updating transactions. In general,
data objects with their attributes are defined in database tables, and the relationships
among the objects are defined in an Entity-Relation (E-R) model. Figure 11 shows the
E-R model of a customer order.

Figure 10 Information flow optimised by ILIMS

Fulfilment
Notifications

Receiving
Advice
SMTP Dispatch Customer
Server Advice

Order
Billing Payment Status Purchase
Information Received Request Order Quotation

SMTP Messages Order

Shipping
Status
Document
Update

Billing Order Status Purchase

Transaction data
Day-end report
ERP ILIMS
Status Feedback
Supplier Operations
Financial Data Request
Good
Booking
Keeping
Order
Inhouse Operations Status

Good Good
Booking Booking
Keeping Keeping
Order Order
Status Status

Ware-
Land Freight
house
Transport Forwarder
Center
244 J.J. Liu, S.C.K. So, K.L. Choy, H. Lau and S.K. Kwok

Figure 11 E-R model of a customer order

Finally, the security tier integrates BLSL and its core customers and suppliers by means
of VPN. This provides additional security controls on authentication and maintains
confidentiality, which helps in building trust with the trading partners.

6.2 Performance management

The performance-reporting function is accessed through the presentation tier of ILIMS.
It triggers the COM components on the application tier to issue requests to the database
for accomplishing corresponding data operations. By using OLAP functionality, BLSL
users are allowed to manipulate performance data on the multidimensional database
with the predefined calculation logics. In addition, advanced users can perform ad hoc
calculation and data modelling by selecting, mixing and matching their preferred
variables and measures. Figure 12 shows the multitier access model for the OLAP clients
in BLSL.
The performance metrics are defined as measures of the fact table that are stored in
the star schema of OLAP data cubes. With the cube editor, OLAP cubes are constructed
by selecting appropriate dimensions and measures. The performance data can then be
analysed and the results are then presented in the form of pivot tables. Figure 13 shows
the performance report of the sales revenue with the drill-down sales figures. The
roll-up and drill-down features of OLAP are applied to any dimension of measurements,
generating a performance report summary in real time.
 Performance improvement of third-party logistics providers 245

Figure 12 OLAP client/server access model

Web Client OLAP Client

HTML/HTTP

SQL/
DCOM OLEDB
ILIMS Server
Cluster

Web-Server ILIMS RDBMS/MDDB

Server Server

Predefined Ad hoc OLAP

Multidimensional Multidimensional Calculation
Calculations Calculations Logic

OLAP Multidimensional
Database
Star Schema
and Tables

Figure 13 Performance report on sales revenue by region with application of drill-down features

Sales-Revenue Pivot Tables for Performance Reporting

OLAP
Data Cube

Roll-up Drill-down

Performance Data Stored in Star Schema

246 J.J. Liu, S.C.K. So, K.L. Choy, H. Lau and S.K. Kwok

By using the performance reporting function, both the business performance and logistics
service level of BLSL are closely monitored on ILIMS so that appropriate decisions and
their supporting action can be pursued responsively.

7 Results and discussion

With ILIMS, the data generated in the daily operations, such as transaction data and
logistics documents, are captured on the database. Since ILIMS provides a single point of
control on information, the capability of information sharing among the supply chain
parties is enhanced. Consequently, the fulfilment process of the outbound logistics
operation in the supply chain is improved. The improvement is not only beneficial to
BLSL, but also to its customers and suppliers. Figure 14 shows the performance
improvements of BLSL after using ILIMS. It is noted that the performances on various
logistics functions are improved significantly. The average inventory is reduced by 27%,
the out-of-stock frequency by 68% and the average delivery lead time by 32%. Besides,
the total cost of supply is reduced by 40% on average.

Figure 14 Performance improvement measured by KPIs

Performance Improvement Measured by KPIs

120
100
Before using ILIMS
80
(based on 100)
KPIs

60
40 After using ILIMS
(compared to 100)
20
0
Inventory Out-of- Delivery Total cost
stock lead time of supply
frequency
Categories

In respect of system benefits, the presentation tier of ILIMS provides BLSL’s staff and
the supply chain parties with a single view of business information in a user-friendly
approach. The manual procedures in the business activities are automated through ILIMS
by the application tier. Moreover, all logistics documents are now prepared by ILIMS.
Business data generated in the transactions are stored electronically in the database of
ILIMS, which can be shared with other supply chain parties simultaneously.
After using the OLAP analytical tools, performance reports incorporating the
performance metrics and dimensions are provided. Hence, BLSL is able to perform
multidimensional analysis basing on historical data to evaluate the performance of sales,
operations and support processes. Moreover, ILIMS also helps BLSL to identify both
the customers who contribute the most revenue and the underperforming suppliers. In
possessing such information, BLSL is able to provide the right services to the right
people. This helps improve (1) financial performance, such as through increases in
 Performance improvement of third-party logistics providers 247

revenue and the reduction of cost, and (2) nonfinancial performance, especially through
the reduction of customer complaints and the process lead time. The results of these
improvements are shown in Figure 15.

Figure 15 Financial and operational improvement with the ILIMS

Financial and Operational Performance

140
Performance Measures

120
100 Before using ILIMS
80 (based on 100)
60 After using ILIMS
40
(compared to 100)
20
0

complaints
(COGS)

Operations

Process
Revenue

lead time

Customer
Volume
Cost

Categories

Financial Performance Nonfinancial Performance

In summary, ILIMS provides BLSL and its trading partners an innovative way of doing
business, through a comprehensive review of organisational performance for continuous
business improvement.

8 Conclusion and future development

In this study, advanced IT applications are used in designing an Integrated Logistics

Information Management System (ILIMS) for improving the business performance of
small and medium 3PL providers and their trading partners, with a focus on speeding
up the logistics process, enhancing information sharing and improving decision
making. To do this, a generic multitier system architecture of ILIMS and an OLAP
performance-measurement-reporting tool are designed and integrated. ILIMS was
implemented in BLSL and in the companies of its customers and suppliers. The analysis
shows that the adoption of ILIMS has resulted in a significant improvement in business
performance in terms of cost savings, revenue generation and customer satisfaction.
Further work on this growing field of ILIMS is recommended. Two areas are worth
exploring. They are (1) the predictive data analysis and (2) the integration of Radio
Frequency Identification (RFID) technology. Since the performance report function is a
kind of descriptive model based on historical data, it is suggested that a predictive model
be required to provide knowledge functions so that relevant information extracted from
the data can be analysed to obtain indicative patterns for providing better decision
support. Moreover, the data-capturing activities in the outbound logistics process are still
manual based. As a result, the accuracy and efficiency of capturing bulk information,
such as inventory management, and of tracking and tracing are not satisfactory.
Automating the input process with advanced technology such as RFID is therefore
necessary to meet the increasingly intense market competition.
248 J.J. Liu, S.C.K. So, K.L. Choy, H. Lau and S.K. Kwok

Acknowledgement

The authors wish to thank the Research Committee of The Hong Kong Polytechnic
University for the financial support of the project.

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