Decision-making and sub-coordination in a newsvendor model with a third party logistics service provider

Abstract

This paper examines the logistics strategy in a newsvendor model and considers a supply chain (SC) comprising one manufacturer, one retailer, and one third party logistics service provider (TPLSP). The retailer is responsible for transporting the products from the manufacturer to the market, and it faces a decision problem whether the product logistics functions should be outsourced to the TPLSP. Logistics outsourcing will reduce logistics cost. However, logistics outsourcing also causes classic double marginalisation because of the price of the TPLSP. Only if the TPLSP's cost is small enough to cover double marginalisation, the logistics outsourcing can be accepted. This paper proposes a proper rule of logistics outsourcing and suggests reasonable outsourcing strategies of the retailer. Moreover, channel coordination after logistics outsourcing is discussed. Coordination schemes are often difficult to implement due to information sharing limits or administrative burden. Thus, coordination among some members of the SC, which we call sub-coordination, is easier to obtain than the coordination of all members. This paper studies two types of sub-coordination mechanisms and analyses how sub-coordination affects the newsvendor problem model with a TPLSP. [Submitted: 21 January 2022; Accepted: 31 August 2022]