Journal Article

Option contracts: a solution for overloading problems in the delivery service supply chain

Liang, Liang, Alwan, Layth, Liu, Xin, Gou, Qinglong

2016

Overview

Owing to the limited service capacity of express delivery providers, most online retailers have to reject many orders during hot selling seasons. In this paper, we consider an express delivery service supply chain consisting of an express delivery provider and an online retailer whereby the selling season includes both regular periods and online sales periods. Utilizing a modified newsvendor model, we derive the express delivery provider's optimal capacity decision and find that the overloading problem cannot be avoided because delivery service cannot be inventoried. To solve such a problem, we introduce an option contract to coordinate the supply chain. By allowing the online retailer to book the capacity, the express delivery provider can rent capacity from a third party in advance. Results show this approach can mitigate the problem significantly. We also extend our model to a supply chain consisting of a delivery provider and two retailers.

• Publisher: Taylor & Francis,Palgrave Macmillan,Palgrave Macmillan UK,Taylor & Francis Ltd
• Subject: Brand loyalty / Business and Management / Business to consumer / Channel coordination / Coordinate systems / Customer services / delivery capacity / delivery service supply chain / Delivery services / Electronic commerce / General Paper / Logistics / Management / Operations research / Operations Research/Decision Theory / option contract / Options contracts / Profits / Random variables / Retail stores / Retail trade / Salvage value / Studies / Suppliers / Supply chain management