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Lump‐Sum versus Pay‐As‐You‐Go: The Moderating Effect of Contract Types on the Optimal Logistics Decisions
Author(s) -
Tran Thanh,
Yoon Kanghyun,
Genchev Stefan
Publication year - 2017
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.2802
Subject(s) - outsourcing , payment , schedule , lump sum , business , microeconomics , control (management) , economics , marketing , finance , management
When outsourcing their logistics operations to transportation companies, manufacturers/retailers need to design a contract, under which payment can be made either in a lump sum or over time (i.e., per each delivery). This paper investigates how the payment method (i.e., type of contracts) impacts the transporter's delivery schedule by developing an analytical model based on the optimal control and game theories. Our findings show that the transporter's delivery schedule depends on the method of payment and the overall cost of hiring a transporter varies with the types of contracts. We provide theoretical explanations to these findings along with managerial implications. Copyright © 2016 John Wiley & Sons, Ltd.