Strategic logistics service procurement in shipping supply chains

Abstract

This paper develops a game-theoretic model to explore the strategic procurement of logistics services in a shipping supply chain, where a freight forwarder canvasses orders and provides one-stop service to shippers. The forwarder faces a decision between in-house and outsourcing modes for inland logistics services, as well as the choice to purchase ocean shipping services through a forward agreement or in a spot market. The spot prices of inland logistics and ocean shipping services are positively correlated with shipper demand, meaning that changes in shipper demand can affect the spot prices. Our analysis indicates that the responsiveness of spot prices could be beneficial to the carrier but detrimental to the forwarder. Hence, the forwarder would adopt a forward agreement to purchase ocean shipping service even when the forward price is slightly higher than the expected spot price. Moreover, a forward agreement could be reached if the market size is relatively small. Finally, we show that the forwarder should adopt the in-house mode for inland logistics services, even when the in-house mode cost is higher than the expected outsourcing cost. This study contributes the literature by revealing how the correlation between shipper demand and spot prices for two types of logistics services affects the procurement decisions of a freight forwarder.