Penalty and reward contracts between a manufacturer and its logistics service provider

Date published

2016-05-21

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Volume Title

Publisher

Springer

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Type

Article

ISSN

1865-035X

Format

Citation

Aktas E, Ulengin F, Penalty and reward contracts between a manufacturer and its logistics service provider, Logistics Research, Volume 9, Issue 8, December 2016

Abstract

Contracts are used to coordinate disparate but interdependent members of the supply chain. Conflicting objectives of these members and lack of coordination among the members lead to inefficiencies in matching supply with demand. This study reviews different types of contracts and proposes a methodology to be used by companies for analyzing coordinating contracts with their business partners. Efficiency of the contract is determined by comparing the performance of independent companies under the contract to the supply chain performance under the central decision maker assumption. We propose a penalty and reward contract between a manufacturer and its logistics service provider that distributes the manufacturer’s products on its retail network. The proposed contract analysis methodology is empirically tested with transportation data of a consumer durable goods company (CDG) and its logistics service provider (LSP). The results of this case study suggest a penalty and reward contract between the CDG and its LSP that improves not only the individual firm’s objective functions but also the supply chain costs. Compared to the existing situation, the coordination efficiency of the penalty and reward contract is 96.1 %, proving that optimizing contract parameters improves coordination and leads to higher efficiencies.

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Github

Keywords

Logistics contract, Case study, Newsvendor problem, Consumer durable goods sector, Third-party logistics service provider

DOI

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Attribution 4.0 International

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