Application of DEA to Investigate 3PL Efficiency for Asian Countries

Abstract

The third-party logistics (3PLs) providers constantly look for effort to improve productivity and focus on their core competencies in logistics function for the last few years. Indeed, many 3PL providers provide a business opportunity to broaden their services that include manufacturing, warehousing, distribution, and freight forwarding. However, the efficiency and effectiveness of 3PL activities is a major element to improve the performance of the related sector for long-term success.

At present, this study investigates determinants of the efficiency of 3PL companies that focus on strategic and operational management in Asian countries using Data Envelopment Analysis (DEA). The countries are divided into 4 groups: group 1 (Malaysia, Indonesia, Thailand, Philippine), group 2 (Taiwan, Japan, South Korea), group 3 (Singapore, Hong Kong), and group 4 (China, and India). The selected input variables are capital expenditure, operational expense, and the number of employees, which can reflect the competitiveness of core processes such as facility utilization, process efficiency, and labor productivity. Furthermore, the criteria for selecting output variables is to consolidate critical logistics performance such as operating income and revenue. The data analysis for 117 of 3PL providers used consolidated financial report in 2017. In order to understand the contribution effect of the specific input and output variable on 3PL provider’s efficiency, the DEA analysis runs in a stepwise method and compare the results.

In analysis of DMU’s return to scale, group 3 indicates their business strategy in overall efficiency as the best in pure efficiency. The other analysis results informed that group 1 has the lowest average efficiency scores. One of the major causes of 3PL providers’ inefficiency for group 1 is due to operating at IRS (Increasing Return Scale), which showed consolidation opportunity to achieve efficiency by expanding their operation. On the other hand, some 3PL providers of Japan, South Korea, and China are found to less efficient that tend to operate on DRS (Decreasing Return Scale). These countries need to reduce their operation size to achieve its optimal scale of efficiency. Moreover, the omitted of operating income as output variable was indicated to be significant influence in intra country level achieve the 3PL providers’ performance efficiency. Furthermore, the omitted of input variables for operating expenses was shown to be a significant contributor on operational efficiency of 3PL providers as process efficiency.

The findings of this study should be noted that it has been primarily concerned with the number of variables in DEA, in order to determine and configure the input and output variables for a DEA analysis. The research literature specifies the exact logic of which variables to measure the key performance of 3PL providers which are based on financial performance. However, the omitting variables offer some insight into valuable managerial information that the DEA result can demonstrate correlated variables with each countries’ characteristics. Therefore, the stepwise model can provide managerial implications for international 3PL provider in management purpose.