Logistics outsourcing strategy with online freight platforms

The emergence of OFP facilitates manufacturers’ outsourcing transportation tasks to third-party logistics providers due to OFP’s flexible and integrated arrangements of logistics outsourcing strategies. The differences between the OFP and TLSP operating modes are shown in Fig. 1 below. Regardless of OFP presence, a TLSP owns trucks and provides logistics service directly to consignors in the market. In contrast, OFP cooperates with private trucks and brings them together to create a fleet pool of huge capacity to meet the growing demand for transportation. Therefore, acting as a platform coordination center in actual shipping, OFP has the advantages of more flexibility and lower costs in allocating resources for transportation due to the consolidation of a large number of scattered trucks. During operations, a TLSP has more control over its service level because it owns the vehicles and employs its own drivers, while OFP cooperates with private trucks in the personal freight market. This means that TLSPs can control service level facets such as professionalism and safety to a greater extent than OFPs.

Comparative advantages of each channel

When outsourcing logistics services, manufacturers are often most concerned about the price and service levels of transportation. The transport price is the cost of the manufacturer’s logistics outsourcing, and the transportation service level affects the quality status of the goods that manufacturers sell to downstream firms. The transportation service level is considered here in the sense of its effect on the timeliness and safety of transport. This is because delayed delivery affects production scheduling, or goods may be damaged during transport. Thus, the transportation service level affects the quality of the products eventually delivered to the downstream firms. Compared to TLSP, OFP has more extensive transportation resources and a larger capacity pool, but it is not necessarily the preferred transportation channel. According to the survey report in 2020,6 OFPs currently engage in vicious competition in the supply of goods and lower prices, which eventually leads to prices that stabilize the markets. However, TLSPs often offer price concessions to retain customers, which is common in the freight market, whereas OFPs do not offer any price concessions because they have no shortage of customers. At the same time, OFP transportation service is not standardized because its actual carriers are usually private trucks.

TLSP often offer price concessions to retain customers, whereas OFPs do not offer any price concessions because they have no shortage of customers.

In this paper, we study a manufacturer’s production, distribution, and in-bulk transportation of a product to a downstream firm via different transportation channels (i.e., TLSP and OFP). The two channels offer different operational modes, service levels, and contract prices. Specifically, we are interested in examining the following research questions: (1) How does OFP affect the decisions of the manufacturer and TLSP? (2) What is the manufacturer’s optimal transport strategy for shipping goods to downstream firms in the presence of an OFP? To address these research questions, this study expands the classic newsvendor model and comprehensively considers two key features, price and transportation service level, in this study of a manufacturer’s shipping outsourcing under uncertain demand.

The best of both worlds?

Based on the aforementioned model, we obtain the optimal transportation contract signed by the manufacturer and the carrier who chooses to ship under different transport channel scenarios. Comparing the results in different channel scenarios shows that, compared to the benchmark in the traditional transportation market, after the emergence of OFP, the differences in transportation service levels and in dispatch transportation prices affect the decisions of the manufacturer and TLSP in the truck reservation contract to varying degrees. OFP, due to its dispatching advantages, can be entrusted to dispatch transportation in the subsequent real-time transportation at a lower price, so the number of trucks reserved in the contract will change. However, the optimal choice also depends on OFP’s transportation service level, i.e., the manufacturer will consider both the price and service quality. A TLSP can also determine the discount menu based on the disadvantage of scheduling price or the advantage of transportation service instead of simply increasing the discount. In other words, a TSLP could vary the changes for a different number of booked trucks to maximize profit.

OFP, due to its dispatching advantages, can be entrusted to dispatch transportation in the subsequent real-time transportation at a lower price.

Note that the truck reservation contract determines the number of reserved trucks and the price of planned transportation. If the allocated trucks fail to meet the real demand, more transportation capacity will need to be dispatched immediately, and the dispatched price will be slightly higher. In contrast to conventional intuition, the emergence of OFP does not always threaten TLSP operations. Quantity discounts and transportation service level control are TLSP’s advantages, making it more attractive to the manufacturer under some circumstances. However, when OFP’s transportation service reaches a certain level, the manufacturer will contract with OFP.

Contribution of the study to the current advancement of the topic

This research makes the following main contributions. First, it introduces the emerging OFP channel for logistics outsourcing, which competes with the traditional logistics outsourcing strategy. This work studies how OFP changes the manufacturer’s logistics outsourcing strategy when both OFP and TLSP are available. Next, this paper considers a quantity discount contract in shipping outsourcing based on the traditional full-quantity discount. Specifically, a TLSP provides a quantity discount in transportation contracts to retain long-term customers. We convert the full-unit quantity discount into a continuous function of the number of reserved vehicles. Furthermore, we consider both price and transportation service levels to determine the manufacturer’s logistics outsourcing strategy. Apart from prices, the transportation service level is related to the safety and timeliness of transportation, and these factors affect the manufacturer’s profit because the cost of damaged or delayed goods will be borne by the manufacturer. In practice, this research also provides managerial implications for logistics outsourcing strategies for manufacturers.

Methodology

We adopt a Stackelberg game for signing the contract with the carrier (an OFP or TLSP) being the leader and the manufacturer the follower. That is, the carrier sets the price first, and then the manufacturer determines the number of truck reservations. Note that when the manufacturer chooses to transport through the OFP channel, the carrier is considered to be the OFP platform. With OFP available, manufacturers have two possible transportation channels, so we analyze two situations: manufacturers signing a transportation contract with a TLSP or with an OFP. We examine the optimal decisions of the two players in different situations and analyze the related properties of the optimal decisions. We also identify the optimal outsourcing strategy of manufacturers by comparing the profits of manufacturers in different situations. Furthermore, by comparing the TLSP profits before and after the presence of OFP, we can characterize the effect of OFP on the performance of TLSP.

Applications and beneficiaries

1. Manufacturers: In practice, this research also provides managerial implications for logistics outsourcing strategies for manufacturers.
2. Traditional Logistics Service Provider (TLSP): we analyze how the emerging of Online Freight Platform (OFP) affect the performance and prospect of TLSPs, as well as discussing whether OFP is always beneficial.

Reference to the research

Yang, C., Bian, J., Guo, X., & Jiang, W. (2024). Logistics outsourcing strategy with online freight platforms. Omega, Volume 125, 103042.

Consult the research paper