SC&L Seminar Series :: Facilitating the Sharing of Demand Risk in Transportation Contracting with the Percent Deviation Contract
We invite you to join us for the first meeting of our seminar series. Our goal is to introduce and promote the work of students engaged in supply chain and logistics research. A 30 minute presentation will be followed by informal discussion and networking, and refreshments will be provided. Please see Matt'ss abstract below.
We analyze the structure of a truckload transportation contract that encourages information and demand risk sharing between the shipper and the carrier. The carrier may preposition trucks at a low cost in response to an initial order estimate from the shipper. The shipper finalizes the order and is charged a per-truck penalty for orders above or below a specified percent deviation from the forecast. We characterize the optimal decisions for each party that induce a coordinated channel under a variety of compliance scenarios, and we discuss ways to set the parameters in order to coordinate the channel. In order to aid the implementation of the percent-deviation contract in practice, we develop ways to set the parameters to satisfy both parties' individual-rationality constraints. Since the shipper attains less expected profit than she would under a traditional contract, we consider the discounted wholesale price that the shipper would require to endorse this contract. We also analyze the cost reduction the carrier would need to be willing to offer this discount.