Supplier–carrier–buyer channels: Contractual pricing for a carrier serving a supplier–buyer partnership

Increased transportation costs and tense competition necessitate that carriers coordinate with the other members of the supply chain for realizing potential savings due to channel coordination. We address such coordination issues in an operational setting where a carrier is to ship the items within a two-echelon supply channel consisting of a supplier (e.g., manufacturer) and a buyer (e.g., retailer) operating under the assumptions of the traditional economic order quantity (EOQ) problem setting. We consider the case where the supplier–buyer pair is operated in a centralized fashion, potentially under a Vendor-Managed Inventory (VMI) agreement, and, hence, referred to as the supplier–buyer partnership, whereas the carrier is a separate entity. We examine the optimal solutions of the parties under various freight schedules, i.e., transportation pricing mechanisms, including freight discounts, fixed charges for each shipment, and fixed charges for each truck used in the delivery. Our goal is to identify alternative transportation pricing contracts serving the carrier and supplier–buyer partnership from the carrier’s perspective and coordinating the supply chain system at hand. We find that freight discounts and per shipment fixed charges may not offer an effective contractual mechanism, and sometimes it is better for the carrier to offer negative discounts or fixed rewards per shipment. We also show that asking for a fixed charge per truck would always motivate the supplier–buyer partnership to operate at the centralized solution if the carrier sets the fixed charge per truck equal the fixed cost per truck reflecting its own operating costs in the asking price and achieving positive profits through the additional per unit freight rate. In an extensive numerical study, we benchmark the cost efficiency of centralized versus decentralized channels and illustrate that the benefits of the three transportation pricing mechanisms considered in this paper.