Logistics contracts to increase supply chain effectiveness – an illustration of a two-way penalty contract
by N. Rangaraj, S.K. Sinha, N. Hemachandra
International Journal of Logistics Systems and Management (IJLSM), Vol. 4, No. 3, 2008

Abstract: A contractual arrangement between supply chain partners improves the coordination between partners, thereby improving the supply chain performance. This paper models the impact of asset investment (vehicles) by the carrier (logistics provider) on a supply chain. The decision of asset investment by the carrier is driven by its own operational goal of profit maximisation rather than the overall supply chain performance. We define a two sided penalty contract between the shipper and the carrier to achieve supply chain coordination, in terms of optimal investment of asset by the carrier. Under this contract setting, the carrier (shipper) has to pay a penalty (demurrage) if shipments (vehicles) wait for vehicles (shipments). To avoid the oversupply of the vehicles (shipments), demurrage (penalty) is paid only for one vehicle (shipment) at any time. We first propose a set of conditions that define a feasible and viable contract. The study examines when the feasible region is non empty (in the space of contract parameters) and also its sensitivity with regard to major external parameters, the cost parameters and the arrival rate of shipments. We provide a brief analysis of the multi-objective nature of the problem of setting contract parameters.

Online publication date: Wed, 12-Mar-2008

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