Service Channel Choice for Supply Chain: Who is Better Off by Undertaking the Service?

Abstract

In recent years, increasing interests have arisen in adding product value through the provision of service. This study considers the problem in which a demand‐enhancing service can be provided by different supply chain parties, resulting in four alternative service channels: (a) manufacturer undertaking service, namely M‐channel, (b) retailer undertaking service, namely R‐channel, (c) manufacturer outsourcing service to third‐party (3P), namely M‐3P‐channel, and (d) retailer outsourcing service to 3P, namely R‐3P‐channel. We quantitatively model these service channels and derive the optimal decisions with the following observations: When the service costs are equal for the different parties, there is a conflict in service channel choice since both the manufacturer and the retailer prefer to undertake the service or hire the 3P by themselves, although M‐channel generates the highest market demand and system profit; When the service costs are different among these parties, R‐channel and 3P‐channels are more preferable if the service cost is less sensitive to the service level and if the market demand is more sensitive to the service level. We also conduct an empirical study to test some of the insights developed from the analytical models; our empirical findings support the analytical results.