The Benefits of Vendor-Managed Delivery Contracts Under Explicit Transportation Considerations

by

Aysegul Toptal
Bilkent University 

In this research, we study a generalization of the deterministic demand buyer-vendor coordination problem to simultaneously consider cargo capacity constraints and general inbound/outbound transportation costs. To this end, we first consider a replenishment cost structure that includes a fixed cost as well as a stepwise freight cost for the vendor. We then extend our results to consider the case where both the buyer and the vendor are subject to this freight cost structure. For both cases, we prove that the vendor's profit is not increasing in buyer's order quantity. Therefore, unlike the earlier work in the area, it is not always profitable for the vendor to encourage larger order quantities to coordinate the system. Using this nontraditional result, we analyze different contracts, and demonstrate the financial gain associated with different delivery arrangements. Although we take the viewpoint of supply chain coordination and our goal is to provide insights about the effect
  of transportation considerations on the channel coordination objective and contractual agreements, this study also contributes to the literature by analyzing and developing efficient approaches for solving centralized and decentralized inventory replenishment problems with stepwise freight costs