Pricing and timing of consolidated deliveries in the presence of an express alternative: Financial and environmental analysis

Abstract

Shipment consolidation has been advocated by researchers and politicians as a means to reduce cost and improve environmental performance of logistics activities. This paper investigates consolidated transport solutions with a common shipment frequency. When a service provider designs such a solution for its customers, she faces a trade-off: to have the most time-sensitive customers join the consolidated solution, the frequency must be high, which makes it difficult to gather enough demand to reach the scale economies of the solution; but by not having the most time-sensitive customers join, there will be less demand per time unit, which also makes it difficult to reach the scale economies. In this paper we investigate the service provider’s pricing and timing problem and the environmental implications of the optimal policy. The service provider is responsible for multiple customers’ transports, and offers all customers two long-term contracts at two different prices: direct express delivery with immediate dispatch at full cost, or consolidated delivery at a given frequency at a reduced cost. It is shown that the optimal policy is largely driven by customer heterogeneity: limited heterogeneity in customers’ costs leads to very different optimal policies compared to large heterogeneity. We argue that the reason so many consolidation projects fail may be due to a strategic mismatch between heterogeneity and consolidation policy. We also show that even if the consolidated solution is implemented, it may lead to a larger environmental impact than direct deliveries due to inventory build-up or a higher-than-optimal frequency of the consolidated transport.