Mixing contract-based and on-demand sourcing of transportation services for improved supply chain performance under supply uncertainties

Abstract

With increasing demand volatility, companies must develop flexibility at multiple supply-chain stages, including in transportation. One method for doing this is combining long-term contract carriers with on-demand sourcing of transportation capacity from the spot market. In line with the growth of online riding services, on-demand sourcing for trucking services is now emerging. This study investigates mixing contract-based and on-demand sourcing for transportation services in the currently uncertain transportation supply. We describe the uncertainty stemming from the contract market’s rejection rate, the variability in terms of truck availability and response times, and the prices offered on the spot market. The situation is modelled using a discrete-event simulation approach to capture the complexity of the system. Our experiment indicates that greater reliance on the spot market could result in a better fill rate but lower delivery punctuality and higher transportation costs. The decision to mix contract-based and on-demand sourcing should consider uncertainty factors on the supply side, including (i) the rejection rate from contract-based carriers, (ii) the availability and waiting times for services from the spot market, and (iii) price uncertainty in the spot market.