Upstream encroachment and downstream outsourcing in competing shipping supply chains

Abstract

In practical business, freight forwarders not only cope with homogeneous competition, but also may face with the potential threat from ocean shipping (OS) companies who encroach on the downstream market for cargo-canvassing. Meanwhile, freight forwarders can tactically decide whether to outsource both ocean shipping and inland shipping tasks or only ocean shipping task to OS companies (i.e., turnkey or consignment). To reveal the interaction between OS companies' cargo-canvassing encroachment and freight forwarders' service outsourcing tactics, we propose an analytical model, which consists of two competing shipping supply chains, and obtain several interesting findings. Our study shows that, cargo-canvassing encroachment benefits OS companies but hurts freight forwarders when they have no significant cargo-canvassing advantages. However, with increased cargo-canvassing capability, freight forwarders possess a “capability effect” that can deter OS companies' encroachment by transforming outsourcing tactic from turnkey to consignment. Surprisingly, entrant OS company's direct encroachment enables to benefit its exclusive freight forwarder in the presence of counterpart OS company's indirect encroachment, that is, a choice between the lesser of two evils, because the direct encroachment has an additional price advantage in driving down ocean shipping service fee for its exclusive freight forwarder. Further, freight forwarders might fall into a “prisoner's dilemma” if both of them choose consignment in a two encroaching shipping supply chains, and turnkey is a more profitable decision for them under such a circumstance.