Fourth party logistics service quality management with logistics audit

Abstract

The logistics audit is an effective instrument for assessing logistics performance and identifying potential problems. The fourth party logistics firm (4PL) deputes the client's logistics delivery tasks to the third party logistics firm (3PL). To improve the service quality of the 3PL, we investigate the optimal contracting problem of the 4PL with logistics audits and examine the effect of the audit instrument. We model the issue with and without audit in the menu of contracts, and the cooperative bargaining contract. By comparing the optimal contract with and without audit, we find that the audit contract improves the service quality, and can reduce the information rent of the 4PL. The numerical results show that the audit contract yields higher expected profits to the 4PL when the rectification cost is lower. The proposed model can provide a potentially useful tool to help the 4PL manager decide on designing the optimal contract for controlling the logistics service quality.