Optimal business policies for a supplier-transporter-buyer channel with a price-sensitive demand

As the third party logistics partners (carriers) taking a more and more significant role in supply chain practices and customer service performance improvement, there is an emerging need for the studies on optimal channel coordination policies for business processes involving not only supplier and buyer, but also transportation partners. In this paper, we explicitly add a transportation partner with concave cost functions into the analysis for supplier-buyer channel coordination policies, and analyze the impact of coordination and pricing policies on supply chain profitability. The market demand (D(x)) is assumed to be a decreasing convex function of buyer’s selling price (x), or D(x)=d/x, where 1 > e stands for the index of price elasticity. Under this assumption, we quantify the improvement on total supply chain profitability when moving from a non-cooperative environment to a cooperative environment. Our result demonstrates the importance of the transporter’s role in this collaboration. Using D(x)=d/x as an example, we show that the joint annual profit of three partners in a fully cooperative environment can be at least twice of what may be achieved by three independently operated companies in a leader-follower business game. While in a real world business environment, a perfect collaboration is hard to achieve, this result can be used to provide a quick estimation on the upper bound on the budget for profit sharing among the supply chain partners or discount offers.