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Outsourcing Logistics: Designing Transportation Contracts Between a Manufacturer and a Transporter

University of Alberta, School of Business, Finance and Management Science Department, Edmonton, Alberta, Canada T6G 2R6
Industrial Engineering Department, Middle East Technical University, Inonu Bulvari, 06531 Ankara, Turkey
Industrial Engineering Department, Middle East Technical University, Inonu Bulvari, 06531 Ankara, Turkey
oalp{at}alberta.com
erkipn{at}metu.edu.tr
gullu{at}ie.metu.tr

In our environment, a manufacturer procures material from a supplier and the supplier brings it in bulk to a warehouse. This material is then consigned to the plant area, where it is utilized as an input of the production process. This consignment process is outsourced by the manufacturer and a transportation company is selected via a bidding mechanism. Primarily, we consider the problem of designing parameters of a given contract for the transportation activity. We define three subproblems within the contract design problem that interact with each other to a certain extent. These subproblems are the vehicle dispatching problem, inventory control problem, and contract value problem. We define these problems, exploit their interactions, and propose solution methods. Moreover, we present an approach to design such transportation contracts, which is based on solving these subproblems in an order for an adequate number of contract parameter combinations and selecting the one that minimizes expected total costs for the manufacturer.

History: Received: April 2001; revised: December 2001; accepted: April 2002.