The International Journal of Logistics Management

How logistics-service providers can develop value-added services for SMEs: a dyadic
perspective
Juho Soinio Kari Tanskanen Max Finne
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Value-added
How logistics-service providers services for
can develop value-added services SMEs
for SMEs: a dyadic perspective
Juho Soinio, Kari Tanskanen and Max Finne 31
School of Science and Technology, Alto University, Alto, Finland

Abstract
Purpose This work aims to combine the perspectives of logistics-service providers (LSPs) and small
and medium-sized enterprises (SME) in the development of value-added logistics services. The
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purpose was to create a theory-based and initially tested framework that could help both service
providers and SMEs identify new opportunities for developing their logistics.
Design/methodology/approach The research followed design-science methodology and was
carried out via semi-structured interviews within the case company (a large Finnish LSP), its
customers, and experts from the area of logistics services. Data on companies offering value-added
logistics services were also used in the research. The focus of the research was on advanced value-
added logistics services.
Findings The paper presents a framework for categorizing logistics services for SMEs and
proposes new logistics-service models for SME customers. Altogether, three service models are
proposed to bridge the gap between LSP and SME customers. In particular, the consulting-oriented
approach seemed to be appropriate for the SMEs. The other two models, 3PL with planning and
Outsourced Chief Logistics Officer, require more effort from both parties.
Research limitations/implications The paper presents a theoretical framework for categorizing
logistics services and discusses the strategic options for an LSP to expand its service portfolio.
However, further empirical research related to logistics-service design is needed to develop the
framework further and to improve its external validity.
Practical implications This work offers insights that support LSPs to develop their service
offerings to better match the needs of SMEs, and also allow managers of SMEs to better utilize the
available LSP competence and services.
Originality/value The existing research in the area of value-added logistics services has mainly
focused on either the customer perspective or the service-provider perspective. The dyad combining
these perspectives has been largely neglected. Furthermore, studies in this area have been on large
enterprises as opposed to SMEs. This work fills this gap by designing value-added logistics-service
models that combine SME needs with LSP capabilities.
Keywords Supply chain management, Small to medium-sized enterprises, Third-party logistics,
Value added
Paper type Research paper

1. Introduction
Logistics outsourcing continues to be a growing business. The outsourcing of single
logistics activities (e.g. transportation and warehousing) to logistics-service providers
(LSPs) is not a new phenomenon. However, the range of services currently offered by
LSPs has broadened considerably from transportation and warehousing to more
advanced supply-chain solutions. Recent studies support this trend and indicate that
customers are demanding more value-added services from LSPs (Wagner and The International Journal of Logistics
Franklin, 2008; Van Laarhoven et al., 2000). Furthermore, during the past few decades Management
Vol. 23 No. 1, 2012
this client-LSP relationship has shifted toward a more co-operative mode. The driving pp. 31-49
r Emerald Group Publishing Limited
force is no longer cost and capital reduction. Today, there is a more strategic and long- 0957-4093
term focus to increase market coverage, improve service level or increase flexibility DOI 10.1108/09574091211226911
 IJLM toward end customers (Skjoett-Larsen, 2000). To underline the importance of logistics
23,1 for a commercial enterprise, it can be noted that in Finnish companies, the cost of
logistics is on average 13-16 percent of sales (Hyrsky, 2008). Transportation and
warehousing usually present the most important single elements in logistics costs for
the majority of companies (Hyrsky, 2008).
Small- and medium-sized enterprises (SMEs) have very different needs and
32 operating environments compared to large firms. However, there is a dearth of
literature regarding the use of supply-chain management (SCM) practices and their
effects on the performance of SMEs (Koh et al., 2007; Quayle, 2003; Hemila, 2008). SMEs
have significant impacts on supply-chain performance, where they may serve the roles
of suppliers, distributors, producers, or customers.
This research takes a closer look at the needs and requirements for logistics services
among SMEs and analyzes the potential of these services from the LSP point of view.
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It also tries to establish a better understanding of which type of SMEs could benefit the
most from external services and why.
The research questions are as follows:
. How can we conceptualize the dyad relationship between an LSP and its
customer as a single unit of analysis?
. What kind of innovative logistics services could be offered to SMEs?
. Which logistics-service models are the most suitable for offering services in the
SME sector?
The focus area is the logistics-service models of the case LSP today and in the future.
These logistics models are examined both from LSPs and from customers (SMEs)
perspectives. Based on the research, a framework for categorizing logistics services is
formed and then applied to design proper logistics-service models for SMEs. The aim
is to help LSPs offer relevant services needed by SMEs, thus creating a competitive
advantage for the entire supply chain. Because the success of small businesses has a
large impact on the national economy, this research seeks to add to the body of
knowledge by providing new data and empirical insights into third-party logistics
(3PL)-related services for SMEs.
There is no consensus on the definition of an SME, as variations exist between
countries, sectors, and even different governmental agencies within the same country.
In this work, an SME is defined as a company that employs fewer than 250 persons.
Furthermore, so-called microfirms employing less than ten persons are outside of the
scope of this research.
The paper starts with a literature review. Outsourcing in the logistics industry is
discussed, as well as SCM in SMEs. A gap in the current literature is identified between
the LSPs and customers viewpoints. Then the methodology of the empirical research is
presented. The empirical results are presented as follows: the potential solution
alternatives, the refinement of the solutions, and field testing the refined solutions with
customers. Finally, the implications of the research are discussed both from theoretical
and managerial points of view and conclusions are made.

2. Literature review
2.1 Outsourcing in the logistics industry
According to Langley (2009), an increase in logistics outsourcing is predicted for the
next three to five years. This trend is facilitated by greater integration in supply-chain
 processes that require multiple services of logistics information, operational Value-added
knowledge, and relationships in addition to direct participation in the integration of services for
the supply chain. Thus, LSPs will be required to offer more intelligent services.
However, service innovation is considered to be a challenging task for LSPs. Without SMEs
innovation and the development of new services, LSPs will have to cope with the
transformation of their current service offerings into commodities and thus risk losing
the opportunity for long-term profitable growth. The LSPs role as the key player in 33
any supply chain combined with a lack of innovation will result in suboptimal
performance of the entire supply chain and thus potentially cause losses for the client
(Wagner and Franklin, 2008). Moreover, Wagner and Franklin (2008) point out that
innovation in logistics has traditionally just happened, with the idea of control or
management being secondary.
Chapman et al. (2002) view logistics services as a classical new service-development
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process, transformed from a classical transport service toward the aim of meeting all of
the logistical needs of a client. This view shows the potential flexibility that the LSP
has in the market regarding the services offered. Usually, the LSP adds roles as it
extends the relationship with its clients, reaching a better understanding and
performance in the operational process and in the services provided.
3PL has received significant attention from logistics scholars in the recent past. 3PL
is usually associated with multiple, bundled services, but the terminology is somewhat
overlapping (Selviaridis and Spring, 2007). Prockl et al. (2010) define the general
features distinguishing 3PL from traditional transportation and warehousing as:
complex, individually designed bundles of services; long-term contracts, usually at
least two or three years; and significant volume in terms of service costs. The interest
in 3PL is expected to grow further as an increasing number of companies from
different industries outsource all or part of their logistical activities to 3PL logistics
providers (Marasco, 2008). Despite the growing amount of research in this area, efforts
to synthesize the overall state of 3PL have been rather limited (Marasco, 2008). The
studies to date have lacked a theoretical foundation and often merely describe trends in
the industry (Selviaridis and Spring, 2007). Several frameworks for categorizing 3PL
service offerings have been devised (Berglund et al., 1999; Hertz and Alfredsson, 2002;
Prockl et al., 2010). The major categorization criteria have been: asset based vs non-
asset based, service vs solution, discrete vs integrated, back-office oriented vs front-
office oriented, and co-ordination vs adaptation. However, none of these categorizations
have taken into consideration SME sector differences, such as a lack of resources and
knowledge.
2.2 SCM in SMEs
SCM is especially challenging for SMEs. According to Holter et al. (2008) they lack
essential capabilities and consequently power to carry out SCM. However, both in the
academic journals and trade press the focus of SCM discussions has been on large
enterprises (LEs). Only a few articles in the SME business literature address the SCM
issues and, moreover, their findings have been inconsistent. Especially overlooked have
been the unique characteristics of SMEs (Brau et al., 2006):
. fewer financial resources, longer cash-to-cash cycles, no ability to implement
strategic initiatives;
. demonstration of short-term P&L impact is difficult for many SCM initiatives; and
. lack of time for management to implement changes.
 IJLM Despite the commonly acknowledged substantial benefits of SCM implementation in
23,1 LEs, it is also clear that SCM implementation has costs, hazards, and challenges
regardless of company size. Arend and Wisner (2005) even question the applicability of
SCM for SMEs. They state that SMEs are not able to achieve the benefits and often
face insurmountable challenges when implementing SCM practices. Furthermore, their
study indicated that SCM implementation negatively affects SME performance
34 because SMEs do not implement SCM with the same focus on physical proximity to
partners, on improving the chains performance, and on extending the chain; SMEs do
not appear to implement SCM as deeply as LEs do. Without such deep involvement in
the supply chain, SMEs receive fewer benefits from the partnership. Moreover, SMEs
must often follow norms fixed by the buyer. In addition, Wagner et al. (2003) found
significant differences between SMEs and LEs regarding systems, tools, and methods.
LEs have the resources and technical budgets to implement e-business and e-supply
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strategies, while SMEs will continue to be challenged by resource limitations (Wagner

et al., 2003).
Toyli et al. (2008) offered insights on the suitability of SCM for SMEs by studying
the links between SCM performance and financial performance in over 400 Finnish
SMEs; they were unable to find statistically significant differences in terms of
profitability and growth between firms performing well with respect to SCM and other
firms in the same industry. According to the authors, this was because SMEs might
still be far from the productive frontier, which should thus potentially allow them to
simultaneously reduce costs and increase service levels. Furthermore, their findings
suggest that SCM may just be starting to gain more attention among SMEs in Finland,
and thus it might be relatively easy for SMEs to gain a competitive advantage by
focussing more on SCM performance.
There remains, however, a scarcity of literature on SMEs and SCM practices within
them (Quayle, 2003). It seems that the SMEs view of SCM is beset by the exertion of
power by customers, and SCM is thus seen by SMEs as a one-way process. Moreover,
SMEs do not employ SCM; rather, they are managed at arms length by large customers
(Quayle, 2003). Also LSPs may be able to exert more power than SMEs regarding SCM
(Holter et al., 2008). Arend and Wisner (2005), however, point out that even when an
SME is bullied into a supply-chain relationship by its more powerful partners, the
SME nevertheless benefits from this relationship. In other words, in exchange for
remaining a key supplier to its customers and reaping the performance benefits, SMEs
can suffer a performance loss by taking part in the supply-chain partnership; however,
the benefits generally more than compensate for the costs. Thus, SMEs and SCM are a
poor fit when SMEs have a truly independent choice, but a better fit when the choice is
forced by a key partner (Arend and Wisner, 2005). These articles illustrate that current
SME literature is inconclusive regarding the impact of SCM on SME performance.
Hence, it seems evident that SMEs need assistance in implementing SCM practices.
The challenge is that SMEs are not interesting customers for global LSPs and thus
seemingly lack the required business potential (Hemila, 2008). Holter et al. (2008) focus
on ocean transport sector and present a framework that would help SMEs purchasing
transportation services to improve their purchasing processes. Hemila (2008) called for
new logistics services for Finnish SMEs in the manufacturing industry. Especially
missing are total outsourcing service providers who could manage all of the logistical
processes. Mason et al. (2007) point out that both customers and LSPs need to re-orientate
their thinking away from the functional-oriented mentality toward process orientation.
They argue, that new superior business models are created with collaboration between
 parties on vertical and horizontal levels. Thus, new logistics-service models are needed to Value-added
attempt to bridge the gap between the customer and the LSP. services for
2.3 The gap between the LSP and customer viewpoints SMEs
To bridge the gap between LSP and the customer, Punakivi and Hinkka (2006) turned
their attention toward LSP service offerings. According to these authors, the evolving
service needs of the customers will require a notably broader expertise area from 35
LSPs in the future. These service characteristics are also strongly similar to the fourth-
party logistics (4PL) concept presented by van Hoek and Chong (2001), who define
4PL as a supply chain service provider that participates rather in supply chain
co-ordination than operational services. It is highly information based and co-ordinates
multiple asset-based players on behalf of its clients (van Hoek and Chong, 2001,
p. 463). The main difference between 4PL and 3PL is that 4PL focusses on supply-chain
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co-ordination, while 3PL focusses on bundling operational services.

Some solutions to bridge the gap between client and LSP have been conceptualized.
Bitran and Arroyo-Lopez (2007) presented the potential contribution of a neutral third
party to the integration of the supply chain by introducing the concept of a maestro.
This external party would co-ordinate the entire network and operate as the link
between the client firm in the supply chain, the suppliers, the customers, and 3PLs,
with the aim of aligning the incentives for all the members in the supply chain.
Furthermore, a LSP is expected to have more powerful SCM capabilities than a
single or local service provider (Punakivi and Hinkka, 2006). According to Punakivi
and Hinkka (2006), some of the companies are ready to give a fairly central role in their
supply chain to a capable LSP, which would benefit all parties. However, the market
leaders in their business sectors were more careful and willing to manage the supply
chain themselves. Thus, the centralized-service-provider concept would presumably
bring more benefits to smaller companies than to large, market-leading enterprises.
In summary, there is a gap related to logistics services for SMEs and, furthermore,
a gap related to the lack of concrete solutions to combine the customer-supplier
viewpoints into a single unit of analysis. Furthermore, Prockl et al. (2010) identified a
gap regarding research addressing the fit between customer needs and structural
resource settings on the LSP side. This work aims to fill these gaps.

3. Research method and design

3.1 Case description
The case company is a large Finnish logistics-service company. The main business
area of the company is trucking and warehousing services. Majority of its customers
are long term and the company has established sound presence in the Finnish market.
Due to high competition, the margins in the current business have diminished.
Therefore, the case LSP is looking into expanding its business areas by developing
new logistics services for the SME sector. The potential in these markets is presumed
to be substantial, as many of the SMEs have neither the time nor the resources to
properly focus on logistics and SCM-related issues within the company. Furthermore,
the LSP is attempting to establish another market foothold to accompany its existing
transportation and warehousing business.

3.2 Research methodology

The research began with a literature review in the areas of logistics outsourcing,
3PL and 4PL services, and new-service development. The empirical research followed
 IJLM the design-science methodology presented by Holmstrom et al. (2009), Denyer et al.
23,1 (2008), and Simon (1997). The idea of design science is to integrate the exploratory and
explanatory research by starting from a specific problem situation and creating new
theoretical knowledge as means to an end artifacts that can be applied to other
similar situations (Niiniluoto, 1993). It is especially important when trying to close the
gap between managerial relevance and theoretical contributions (Holmstrom et al.,
36 2009). In design science, the scientists are viewed as active problem solvers as well as
observers and theorists. Holmstrom et al. (2009) define design science as research that
seeks to explore new solution alternatives to solve problems, explain this explorative
process, and improve the problem-solving process.
Design-science methodology can be divided into four phases (Holmstrom et al.,
2009):
In Phase 1, the problem is framed and a basis for potential solutions developed.
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. Phase 2 is an iterative, trial-and-error type process where the solution is refined.

It consists of design improvements, implementation, and evaluation.
. In Phase 3, theoretical relevance will be established; the solution is examined and
evaluated from a theoretical point of view. Theoretical justification and a
demonstration of theoretical utility are sought by introducing the solution in
several contexts.
. In Phase 4, the last phase, the researchers seek broader generalizations with
applicability beyond the limitations of the empirical context of the study.
Phases 1 and 2 depict the exploratory research (design science), in which design
scientist create the artificial phenomenon that can be analyzed at the explanatory
Phases (theoretical science) 3 and 4. Since it takes several years before the artificial
phenomenon created at Phases 1 and 2 are so widely adopted that enough data for
explanatory research is available, researchers at Phases 3 and 4 typically are not
the same scientists who developed the solution design (Holmstrom et al., 2009). The
focus in the current work was on Stages 1 and 2. Figure 1 shows a flowchart of the
research process.

Solution
incubation Solution refinement

Framing the Case

research company
Customer
problem workshops
input

Model
Literature refinement
review
Preliminary
interviews
External Model Discussion and
benchmarking finalization conclusions
Figure 1.
Research process
 Because these steps need an in-depth understanding of the practical problems, we Value-added
spend six months in the case companys premises. During that time, we had daily services for
discussions with the company people, and we participated to the meetings with case
companys customers. We started by framing the research problem in such a way that SMEs
the customer-supplier dyad was the unit of analysis. To look for innovative service
models outside the domain of logistics, we benchmarked successful implementations
from other industries such as IT and financial services to foster a best-practice focus in 37
the service business of the LSP. Based on these preliminary findings, service-model
rudiments were refined through iteration with the case LSP and potential customers for
their services. The aim was to discover customers evident and latent service needs,
which imply the service strategy and thus the required service capabilities from the
LSP side. These are linked together by four different types of logistics-service models.
We made four customer interviews during the spring of 2010 in order to understand
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their challenges in logistics and SCM. The customer firms were selected based on LSPs
interest for business potential. Two of the case customers were from the manufacturing
industry, one was mainly operating as a distributor with some contribution to the final
product, and the fourth case company was from the healthcare services sector. The
persons interviewed were part of their companys top management and/or responsible
for the SCM in the company. Their titles ranged from CEO to plant manager. All of the
interviews were recorded and later all relevant information from the interviews was
transcribed and systematically analyzed.
In the data analysis we followed the three steps of Miles and Huberman (1994):
(1) data reduction;
(2) data display; and
(3) conclusions and verification.
At the first step we scanned and manually coded all information that we found relevant
for service-model refinement. The second step started by sorting the data into three
categories: current state of the SME in logistics; needs of the SME in terms of logistic
service; potential and interest of the SME to the presented service model rudiments.
The second and third steps formed an iterative process that took place in 25 workshop
meetings over a six-month period with the case LSP representative(s). In this
process, literature was utilized in several ways. First, several models from literature
were applied for displaying, organizing, and analyzing the data. Second, we scanned
ideas for solution refinement from the literature and combined those ideas with the
input from the customer interviews. Third, we compared our findings with those
found in the literature. Especially, when considering the business potential of each
model, the innovation characteristics presented by Rogers (2003) were taken into
account. The most important was the criterion that the service model should have a
clear relative advantage over the existing way of operating and that the innovation
complexity must be within the realm of customer comprehension. This process had
characteristics of abductive reasoning, which is a creative iterative process of
systematic combining in an attempt to find a possible matching framework (Kovacs
and Spens, 2006). Several service-model rudiments were scrapped during the iteration
rounds, and the models deemed most suitable by the LSP management and the
researchers were further developed. In this process, several innovative models were
deemed unsuitable for LSP strategies, such as those offering logistical IT systems
designed for the SME sector.
 IJLM 3.3 Framing the research problem
23,1 Every industry has its core product or service. In logistics, this core service is
transportation. Without the need for the transportation of goods, the need for any
additional (value-added) service is generally nonexistent. The key to framing the
research problem is therefore the realization of how the demand for transportation
services arises. Thus, in developing the service models, the scheme of Holmstrom et al.
38 (1999) for modeling the demand-supply chain was adopted to elaborate the LSP-
customer relationship in the SME context.
Holmstrom et al. (1999) considered how the demand for goods and services is
transformed from markets to suppliers in the demand chain (Figure 2). The customers
demand chain is linked to the suppliers supply chain in two places: the value-offering
point (VOP) and the order-penetration point (OPP). The VOP is the point in the
customers demand chain at which the customer allocates the demand to a specific
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supplier. Typically, the VOP is located at the customers purchasing function; however,
moving the VOP to an earlier phase of the demand chain benefits the customer and
requires the supplier to be responsible for more functions. In the goods industry,
the supplier can, for example, handle customer inventory through a vendor-managed
inventory solution (Hoover et al., 2001). The value of this framing comes from the
ability to explicitly connect the customer and supplier perspectives through the
demand-supply-chain model. Framing the problem in a unique way offers a fresh point
of view in analyzing the case (Figure 2).
The demand chain for transportation services resembles that of a goods demand
chain. In the goods industry, the manufacturers move to an earlier phase in the
customers demand chain by offering maintenance services, etc. (Holmstrom et al.,
2010). We argue that, in much the same way, the LSPs should attempt to seek
new business opportunities in the earlier phases of the customers demand chain.
By this we refer to the activities that customer performs prior to transportation
(e.g. transportation planning). In other words, LSPs should find the appropriate
logistical service models to offer value for the customer other than in the last stage of
the demand chain (i.e. purchasing the transportation service).

4. Results
4.1 Exploration of solution alternatives
Customer point of view. Design-science research starts by exploring potential solution
alternatives. As argued above, our starting point for exploring solution alternatives
was the customers demand chain for transportation service. Based on the customer
interviews, the demand chain could be described on either of two levels based on
whether the nature of the activity is execution (operational) or planning (tactical)
(Figure 3). The customers viewed the planning as being integrated with the operational
level but clearly separate from it.

Order penetration point
Determines supplier response,
i.e. how and when is the product
allocated to the customer
Supply
Figure 2.
VOP/OPP model
Source: Holmstrm et al. (1999)
Customer
demand
Value offering point
Defines customer decision making,
i.e. how and when is customer demand
allocated to the supplier
 The simplest form of relationship between the LSP and the customer is when the Value-added
transportation of goods is outsourced but all the preceding activities (e.g. services for
transportation planning, etc.) are handled by the customer. Referred to as buy in
Figure 3. This was also the case in the interviewed companies. Exceptions do exist but, SMEs
for the majority of customers, owning the vehicles does not make business sense. Thus,
we determined that the VOP lies in the transportation activity of the customers
demand chain. In order to generate more business the case LSP is now turning its 39
attention toward the preceding activities in the demand chain. In this case the customer
has viable option to perform activities such as transportation planning in-house or
outsource it to the LSP (i.e. make-or-buy in Figure 3). Thus, the LSP is seeking to
move the VOP further in the customers demand chain. Arguably there is, however, a
limit to how far the VOP can be moved. In the case LSP situation the activities such
manufacturing planning were deemed out of their experience scope (i.e. make in
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Figure 3). One of the LSP managers phrased this as: we want to focus on planning,
optimizing and moving our customers goods, not running their manufacturing
operations.
What was more interesting, although not surprising, is the seemingly low level of
effort put into the development of the supply chain by the interviewed companies.
When discussing with the customers issues such as network design, one CEO said that
We are fairly open to external assistance, but I dont see how these services could
work in our business. The lack of effort for SCM issues can only partially be explained
by the simplicity of the supply chain (i.e. one factory with warehouses and slow-
moving goods). Thus, we argue that there is a third level of activity in the demand
chain. In the SME context, the challenge is that some functions are missing from the
demand chain (e.g. inventory optimization). This is because SMEs often do not possess
the knowledge or the resources to aptly perform these functions. These activities may
often simply be left undone if the SME is unable to recognize their necessity.
Link to supplier point of view. Each of the activities in the customer demand chain
can be replaced by a logistics service provided by an LSP. According to several authors
(Fisher, 1997; Collin et al., 2009), the supply chain for products or services must be
defined on the basis of the customers demand chain. Thus, the activity-categorization
framework has direct implications for the LSPs service supply chain or, in other words,
the logistics-service model. Next, we turned our attention to the LSP and started
constructing rudimentary service models.
The first service-model proposition (shown in Figure 4) purely concerns the
transportation of goods. When looking for opportunities to expand their service
offerings, one option is for LSPs to expand on the operational level into activities such
as warehousing, picking, kitting, labeling, etc., which would move the VOP backwards
in the customers demand chain. Synergies between these activities are present.

Buy Make-or-buy Make

Transportation Inventory Sales and

Tactical operations Procurement
planning planning planning

In-bound Figure 3.
Operational Transportation Warehousing Manufacturing
logistics Tactical and operational
levels of demand-supply
chains
LSP value offering point
 IJLM #3 Consulting

23,1
Inventory optimization

Demand forecasting
Strategic
Network design
40
Carrier selection/management

Inventory Sales and

Tactical Transportation operations Procurement
planning planning planning

In-bound
Operational Transportation Warehousing Manufacturing
logistics
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Figure 4.
The service model
propositions #1 Transportation #2 3PL with planning
#4 Outsourced CLO

However, if we consider the tactical-level activities, the possibility of finding synergies

with the operational level is far greater. For example, by integrating transportation
planning into the operational-level services, the LSP can achieve the visibility to better
utilize its own transportation capacity. Thus, in the second service model, 3PL with
planning, the VOP is located further upstream in the demand chain. The aim here is to
capture complete parts of the demand chain, both on the operational and tactical levels.
The third service offering again has to match the strategic, and possibly latent,
needs of the SME, for which the lack of resources and knowledge in developing the
supply chain must be taken into account. The nature of this service offering differs
greatly from that of the other two. The operational/planning levels are left aside, and
the focus is on conceptual issues such as network planning and inventory optimization.
This is termed consulting. The fourth service offering outsourced Chief Logistics
Officer (CLO) model covers operational-, tactical-, and strategic-level activities. Next
we will move on to having a closer look to each of the refined service models.

4.2 Refining the logistics-service model propositions

As stated above, each of the three categories of customer needs (operational, tactical,
strategic level) must match the LSPs three separate logistics-service models. When
considering the logistics-service model from the LSP point of view, each of these
service categories requires a different approach (i.e. a different service model).
The logistics-service model matching the operational-level customer needs is the
traditional transportation and/or warehousing services (logistics-service model #1:
transportation). In this study, we concentrated on the tactical and strategic levels
and focussed on how to refine them into actual (tangible) logistics-service models.
Altogether three new models (#2, #3, and #4) will be presented.
Service model #2: 3PL with planning. The exploration for refining the solutions for
the case companys service model started with an internal workshop in the LSP. When
looking at the first stage in the operational category, activities such as picking, kitting,
labeling, etc. are present. However, in this study, the need to consider, for example,
packaging-service logistics-service models was perceived as uninteresting by the LSP
management. This was because these activities were considered to be fairly similar to
 the transportation service in the customer demand chain and thus of low margin. We Value-added
do not want to just replace a person with another one; we want to offer more complete services for
solutions. Thus, consideration of VOP possibilities further on in the customers
demand chain was deemed necessary. SMEs
This notion turned the attention toward the tactical-level and transportation/
inventory planning. Perhaps the LSP could integrate into an earlier phase in the demand
chain by offering managed service in the areas of transportation scheduling and 41
planning. Furthermore, the LSP would thus gain information valuable for planning its
own operations due to the possibility of moving the OPP (Figure 5). This information
could be used to increase the LSPs operational efficiency (Auramo et al., 2004).
Thus, the proposition for the logistics-service model 3PL with planning was
created. Based on the drive toward complete solutions, this model was chosen to be an
asset-based, one-window solution to cover the customers transportation and planning
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needs. In this solution, the LSP would assume responsibility over the distribution
network after manufacturing and possible warehousing to end customers. Customers
would pay for this solution based on delivered volumes. From the LSP point of view,
the operational-level service would be operated with its existing assets and the tactical
level with either existing or newly acquired knowledge. A win-win situation arises
mainly through improved visibility and thus the possibility to optimize transportation
and warehousing capacity planning. Additionally, the economies of scale would be
further emphasized with increased volumes. This model was also seen by the LSP
management as improving the current business brand and easier to sell within the
company.
Service model #3: consulting. The logistics-service model considerations in the
strategic-level category require another point of view. To address the challenge of
designing the logistics-service model for this category, it might be tempting to resort to
a modular service portfolio. However, while this may be the case when dealing with
services for LEs, such an approach is questionable in an SME context because this
approach presumes that the SME is able to identify its own challenges and choose the
necessary service from the portfolio to solve its challenges. According to our case-
study research material, this is not the case for SMEs. It was difficult to find a common
language when discussing the SCM-related challenges that the companies face. One
CEO identified the feasibility of loading the trucks as the biggest challenge. Altogether,
the orientation was hands-on with respect to operational-level issues. Moreover,
it seemed that almost everything was seen as fixed in the supply chain by the
SME management. Very little room for improvement was seen as possible by the SME
management.

Demand chain

Transportation Inventory
planning planning

Order penetration point Transportation Warehousing Manufacturing

Value offering point

Figure 5.
Fleet and Capacity
asset Transportation Demand-supply chain in
management planning
3PL with planning
service model
Note: Service supply chain for 3PL with planning
 IJLM The problem for the SMEs seemed to be mainly related to identifying the challenges on
23,1 the strategic level and solving them. Thus, a comprehensive approach is clearly
needed. The consulting logistics-service model is based on an analysis project that
draws results from industry benchmarks, key performance figures, and interviews in
the client company. This logistics-service model specifically addresses the two major
hurdles in developing SME supply chains:
42 . SME management often has difficulty identifying SCM-related challenges.
. SME management often lacks the expertise to solve these challenges once
identified.

In this way, the areas of improvement can be identified and, additionally, development
of certain areas can be judged to be worth or not worth the costs. Once the
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challenges are identified through the analysis, the solutions can be implemented
through the development project. The resemblance to common management consulting
is fairly obvious; however, as mentioned above, the SMEs currently lack this type of
service.
Service model #4: outsourced CLO. At the strategic level there is also the
possibility for another logistics-service model: the outsourced CLO. The basis for
this model was drawn from the ideas presented by Bitran and Arroyo-Lopez (2007)
and insights gained from interviews within the areas of accounting and accounting
management outsourcing. In the accounting industry, the outsourced Chief
Financial Officer (CFO) has become popular among SMEs, especially in the
USA. The idea is to outsource some or all CFO-related tasks to a highly skilled
individual working part-time in multiple companies. Thus, the SME receives
the professional expertise needed without having to hire a full-time CFO. The same
model can, to some extent, be applied to SCM logistics in the form of an
outsourced CLO. This experienced individual can take over the logistical tasks from
the SME manager, thus leaving the SME manager more time to focus on other
management areas. In addition to managing the usual tasks, the CLO may possibly
have a clearer view of the SME supply chain and thus spot and improve the possible
challenge areas.
Furthermore, the CLO logistics-service model is similar to the 4PL concept first
presented by Andersen Consulting in 1996 (from Selviaridis and Spring, 2007).
We argue that 4PL service is ill-suited to be performed by heavily asset-based
firms such as DHL, UPS, etc.; rather, it is more suitably operated by a party equipped
with a thorough understanding of a customers business and the capability to
analyze the challenges facing the customer. This party would also have a knowledge
of the service providers that are operating in the industry. The CLO would then
be the logistics integrator, understanding the customers needs and bringing the
best-in-class solutions from the service providers. Currently, it seems that the
companies that could afford 4PL do not need it because they have sufficient in-house
resources. Conversely, the companies that need 4PL cannot really afford it. Our
analysis of SME customers, however, revealed that 4PL is a potential solution for
SMEs if the service offering is designed in a new way. Instead of offering 4PL to large
companies and executing it with heavily asset-based organizations, 4PL should be
offered to SMEs and executed with a very light organization. Thus, when designed
appropriately, the SME segment may well be a more fruitful market for the outsourced
CLO logistics-service model.
 4.3 Customer input Value-added
The three logistics-service models were received by the customers with reserved services for
acceptance. The consulting analysis and development project was seen as a fairly
feasible service for the SMEs. However, some originally unforeseen consequences were SMEs
identified. First, two of the companies had a large corporation (as a customer or a
supplier) that more or less dictated the supply-chain operating practices. Hence, very
few possibilities for improvement were seen in the supply chain as a whole. 43
Improvements could certainly be made within the four walls of these companies, but
further changes were seen as difficult. The second observed challenge hindering the
possibility of developing the supply chain was the number of moving parts, or
actually the lack thereof. Apart from the healthcare company, the three others had a
fairly straightforward supply-chain construction: one factory with materials and
finished-product warehouses in the building, and direct deliveries to customers by an
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external LSP. Thus, in this sense, the development and SC design options were found to
be limited. Furthermore, the companies were, not surprisingly, customer oriented. This
meant that SCM was largely seen as reactive rather than proactive.
However, the 3PL with planning model was seen as a somewhat unsuitable solution
for the companies. The main problem here was the possible lack of physical presence;
thus, the responsibilities would have to be carefully decided. In particular, the
connection with manufacturing planning was seen as difficult to establish. Moreover, it
seemed that logistics management was seen as far too important to fall outside of the
companys own management. Furthermore, customers were aware of the risks of
outsourcing associated with the change itself and with possible failure. The clear
finding was that supply chains in SMEs are not scaled-down replicas of those in LEs.
Applying the best-known practices from SCM in LEs is difficult, if not impossible, in
SMEs. However, both strategic logistics-service models may possibly be successful
once the proper clientele is found.
In light of the customer interviews, the development possibilities were in some cases
fairly minimal. Thus, there is the risk of trying to micromanage, i.e. developing areas
not worth the development costs. Hence, the main customer characteristics affecting
the business potential were also considered. First, naturally, company size is
meaningful to some extent, as the microcompanies were not considered as potential
customers due to their small business volumes. It is perhaps more interesting to
consider the industry characteristics and the way that production has been organized
(make-to-stock vs make-to-order). Clearly, industries with a high amount of
warehousing and transportation between non-value-adding production phases can
be considered a target market for the new services, especially on the strategic level. The
make-to-stock organization perhaps has more potential than make-to-order, as here
inventory control plays a larger role than production planning. Moreover, the
increasing complexity of the supply chain offers more potential for value creation.
Furthermore, the relative sizes of the parties in the supply chain were deemed an
important criterion in customer selection. Based on the interviews, it was fairly evident
that when the SME was a customer or a supplier of a large (multi-)national enterprise,
the possibilities of development were diminished to some extent. Also, if the SME was
a subsidiary of a larger enterprise the development decisions were seen as not
independent but dictated from above. Finally, for existing clients the consulting and
outsourced CLO business models were seen as risky by the LSP management, as the
improvements could cannibalize the existing transportation and warehousing
business. The main criteria affecting customer potential are presented in Figure 6.
 IJLM Factors reinforcing Factors weakening
Service
23,1 customer potential customer potential

High logistics costs

3PL with planning
Existing client

44 High growth

Make-to-stock production Existing client

Consulting
Figure 6. Retail and distribution industry Clients SC structure fixed
Factors affecting customer
Outsourced CLO High relative logistics costs Relative size small
potential of the proposed
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service models High growth SCM core competence of client

5. Discussion
5.1 Theoretical contributions
The earlier studies on logistics services have commonly taken an existing service
model (e.g. 3PL or 4PL) as a starting point, and studied purchasing, usage, marketing,
and growth strategies of those service models. The dyad-level studies have focussed on
management of client-service provider relationships, information exchange, success
factors, and logistics partnership models. The studies on logistics service offerings
have focussed on the demand side (Selviaridis and Spring, 2007). Also, the previous
studies do not take into account the needs of SMEs (Holter et al., 2008). In this study we
explored new logistics service offerings that would suit SMEs and provide the LSP
new business opportunities. Toward this end, we took both clients and LSPs
perspective, and through an iterative process we ended up proposing four service
models. Service model #2 (3PL with planning) can be considered a modification of 3PL
and service model # 4 (outsourced CLO) can be considered a modification of 4PL. In the
process of exploring the new logistics-service offerings to SMEs, we also made some
observations that have more general theoretical implications. The first implication
involves the separation between back-office and front-office orientations of the services
(Shostack, 1984). The operational-level services have to be back-office oriented, i.e.
mostly conducted without interaction with the customer, for example transportation. In
contrast, the strategic-level services require high customer participation in terms of
shared information and transferred knowledge and are thus front-office oriented.
Similar reasoning can also be applied when considering whether or not the service
should be tied to an LSPs own assets (here referring to trucks and warehouses).
Operational-level services are naturally asset based, whereas the strategic-level
services should not be connected to LSP assets for the sake of credibility. In other
words, a conflict of interest may occur if the same party is responsible for, e.g. both the
network planning and warehouse operations:

P1. Strategic-level services should not be offered together with operational and
tactical-level services.

It is interesting to consider the orientation of the tactical services. We would argue that
the orientation can be selected by the service provider, but asset-based back-office
 orientation makes more sense because of the possibility to gain synergies. Certainly it Value-added
would be possible to offer, for instance, transportation planning without tying it to LSP services for
assets. Thus, an LSP could, in a sense, offer only the front-office part of the service and
let the SME choose another LSP to perform the transportation itself. This approach SMEs
would, however, severely limit the synergistic possibilities compared to performing the
transportation with the LSPs own assets. The initial view of the case LSP management
was to separate all new service from the current transportation business. However, 45
currently they are viewing the possibilities of leaving tactical-level services to be
coupled with existing transportation service and separating only the strategic level:

P2. Tactical-level logistics services should be tied to an LSPs existing asset-based

operational services.
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Based on the findings, a distinction between different services is made by separating

service/solution and asset/non-asset-based services (Figure 7). The transportation and
3PL with planning service models require LSP-owned assets with which to conduct
them. They differ in that the transportation service is more short-term oriented,
whereas the 3PL with planning is a long-term solution to cover the operational and
tactical logistics needs of the SME customer. We believe that these logistics-service
models can to some extent answer the challenges posed by Toyli et al. (2008), Wagner
and Franklin (2008), and Arend and Wisner (2005).

5.2 Managerial implications

When reviewing the strategic options of the LSP, two strategies seem to be valid. The
distinction is based on whether or not the services are tied to the service providers
assets. It is possible to grow by assuming more tasks from the SME customers
demand chain and packaging these into one-window solutions that are highly
efficiency focussed and back-office oriented (the extension strategy in Figure 7).
Conversely, there is the option to enter the service market from a strategic point in the
customers demand chain (the knowledge strategy in Figure 7) by offering a non-asset-
based consulting service or a long-term solution in the form of an outsourced CLO.
To avoid possible conflicts of interest, these non-asset-based services must be
Non-asset based

#3 #4

Consulting Outsourced CLO

Knowledge strategy

#1 #2
Asset based

Transportation 3PL with planning

Extension strategy

Figure 7.
Service Solution Service model portfolio
transactional-oriented relationship-oriented
 IJLM organizationally separate (i.e. another division or company) from the asset-based
23,1 services. This notion somewhat differs from the initial thoughts of the case LSP. At the
beginning of this study, the need to separate all new services to another unit separate
from the core transportation unit seemed clear. However, during the research the
understanding of synergies became more evident and the strategic options are now
under review.
46
6. Conclusions
Although there have been advances in the theories of SCM, the SME sector in Finland
has been slow to take advantage of them. The growth of 3PLs through new services
remains difficult unless SMEs can be convinced to relinquish control over their supply
chain, both on the tactical and strategic levels. Companies no longer compete against
each other; supply chains do (Christopher, 2005; Holland, 1995). This has become the
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adage of SCM, and the 3PLs play a crucial role in the supply chain. However, the 3PLs
are currently positioned as operational contractors, and this position leads to
suboptimal supply-chain effectiveness. Arguably, this problem is even more evident in
the SME context, as the demand for value-added services is latent and supply is
virtually nonexistent. The findings raise concern over the state of SCM within Finnish
SMEs and, moreover, the obstacles faced when trying to develop service models to
match customer needs. We concur with Vaaland and Heide (2000) in that, for the sake
of the SME, we hope that SCM will attain a higher level of importance in the future.
This is critical for the future design of value-added services for the SME sector.
The implications of the research findings are applicable to a number of parties. First,
for the LSP management, the findings enable them to review their strategic position and
to consider the possibility of implementing the presented service models. Understanding
the options for expanding their business scope and the necessary related resources is
important when considering how the LSP positions itself to offer value for customers.
However, the size and the attractiveness of the market remains an open question. The
logistics-service models presented in this paper are three approaches to offering SCM
services for SMEs when considering a large-LSP viewpoint.
The focus of this research was on the first two phases of design-science
methodology; thus, generalizations and more comprehensive interpretations are to be
avoided. However, the logistics-service models presented above and the service-
categorization framework can offer considerations related to new studies contributing
to the literature on SCM services for SMEs. Furthermore, a deeper analysis is needed
regarding the possibility for developing SCM in SMEs and how these services may
contribute to the financial success of the client company as well as the LSP.
The strength of this case study is that it has transformed the SME needs into
tangible service models. However, it is important to note that LSPs and SME customers
are both fairly heterogeneous groups in terms of resources. Further studies should
be conducted to evaluate how these models actually work. In our view, this should be
conducted via in-depth studies in a limited number of SME companies rather than
through large surveys. Pilot studies of these services in two to three customers would
be an ideal topic for further descriptive research.

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strategic perspective, Journal of Business & Industrial Marketing, Vol. 16 No. 6,
pp. 470-86. SMEs
About the authors
Juho Soinio is Researcher at Aalto University School of Science and Technology. His research 49
interests are logistics outsourcing and 3PL services.
Kari Tanskanen is Professor of Logistics at Aalto University School of Science and
Technology. His research interests are managerial issues of purchasing and supply chain
management. Kari Tanskanen is the corresponding author and can be contacted at:
kari.tanskanen@tkk.fi
Max Finne is Researcher at Aalto University School of Science and Technology. His research
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interests are service supply chains and industrial services.

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