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Pricing and timing of consolidated deliveries in the presence of an express alternative: Financial and environmental analysis

Berling, Peter LU and Eng-Larsson, Fredrik (2016) In European Journal of Operational Research 250(2). p.590-601
Abstract
Shipment consolidation has been advocated by researchers and politicians as a means to reduce cost and improve environmental performance of logistics activities. This paper investigates consolidated transport solutions with a common shipment frequency. When a service provider designs such a solution for its customers, she faces a trade-off: to have the most time-sensitive customers join the consolidated solution, the frequency must be high, which makes it difficult to gather enough demand to reach the scale economies of the solution; but by not having the most time-sensitive customers join, there will be less demand per time unit, which also makes it difficult to reach the scale economies. In this paper we investigate the service... (More)
Shipment consolidation has been advocated by researchers and politicians as a means to reduce cost and improve environmental performance of logistics activities. This paper investigates consolidated transport solutions with a common shipment frequency. When a service provider designs such a solution for its customers, she faces a trade-off: to have the most time-sensitive customers join the consolidated solution, the frequency must be high, which makes it difficult to gather enough demand to reach the scale economies of the solution; but by not having the most time-sensitive customers join, there will be less demand per time unit, which also makes it difficult to reach the scale economies. In this paper we investigate the service provider's pricing and timing problem and the environmental implications of the optimal policy. The service provider is responsible for multiple customers' transports, and offers all customers two long-term contracts at two different prices: direct express delivery with immediate dispatch at full cost, or consolidated delivery at a given frequency at a reduced cost. It is shown that the optimal policy is largely driven by customer heterogeneity: limited heterogeneity in customers' costs leads to very different optimal policies compared to large heterogeneity. We argue that the reason so many consolidation projects fail may be due to a strategic mismatch between heterogeneity and consolidation policy. We also show that even if the consolidated solution is implemented, it may lead to a larger environmental impact than direct deliveries due to inventory build-up or a higher-than-optimal frequency of the consolidated transport. (C) 2015 Elsevier B.V. and Association of European Operational Research Societies (EURO) within the International Federation of Operational Research Societies (IFORS). All rights reserved. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
OR in environment and climate change, Shipment consolidation, Incentives, Supply chain management
in
European Journal of Operational Research
volume
250
issue
2
pages
590 - 601
publisher
Elsevier
external identifiers
  • wos:000369196400021
  • scopus:84954026078
ISSN
0377-2217
DOI
10.1016/j.ejor.2015.09.041
language
English
LU publication?
yes
id
6364152f-7487-4b5c-975c-084560af2114 (old id 8728482)
date added to LUP
2016-02-26 10:32:53
date last changed
2017-10-01 03:28:38
@article{6364152f-7487-4b5c-975c-084560af2114,
  abstract     = {Shipment consolidation has been advocated by researchers and politicians as a means to reduce cost and improve environmental performance of logistics activities. This paper investigates consolidated transport solutions with a common shipment frequency. When a service provider designs such a solution for its customers, she faces a trade-off: to have the most time-sensitive customers join the consolidated solution, the frequency must be high, which makes it difficult to gather enough demand to reach the scale economies of the solution; but by not having the most time-sensitive customers join, there will be less demand per time unit, which also makes it difficult to reach the scale economies. In this paper we investigate the service provider's pricing and timing problem and the environmental implications of the optimal policy. The service provider is responsible for multiple customers' transports, and offers all customers two long-term contracts at two different prices: direct express delivery with immediate dispatch at full cost, or consolidated delivery at a given frequency at a reduced cost. It is shown that the optimal policy is largely driven by customer heterogeneity: limited heterogeneity in customers' costs leads to very different optimal policies compared to large heterogeneity. We argue that the reason so many consolidation projects fail may be due to a strategic mismatch between heterogeneity and consolidation policy. We also show that even if the consolidated solution is implemented, it may lead to a larger environmental impact than direct deliveries due to inventory build-up or a higher-than-optimal frequency of the consolidated transport. (C) 2015 Elsevier B.V. and Association of European Operational Research Societies (EURO) within the International Federation of Operational Research Societies (IFORS). All rights reserved.},
  author       = {Berling, Peter and Eng-Larsson, Fredrik},
  issn         = {0377-2217},
  keyword      = {OR in environment and climate change,Shipment consolidation,Incentives,Supply chain management},
  language     = {eng},
  number       = {2},
  pages        = {590--601},
  publisher    = {Elsevier},
  series       = {European Journal of Operational Research},
  title        = {Pricing and timing of consolidated deliveries in the presence of an express alternative: Financial and environmental analysis},
  url          = {http://dx.doi.org/10.1016/j.ejor.2015.09.041},
  volume       = {250},
  year         = {2016},
}