Quality risk management of outsourcing logistics service: A fourth party logistics perspective

Outsourcing logistics enables a global manufacturer to focus on core business, reducing the investment in assets and costs and increasing operational flexibility. However, increasing logistics outsourcing activities also bring a lot of quality risk to the client, such as time delay, goods loss and damage, inadequate order and so on. In this paper, considering a class of quality risk called loss and damage, we study the quality risk management of outsourcing logistics service from a fourth party logistics. Using concepts from contract design and game theory, we develop a model to address this problem, and derive optimal decisions in both centralized and decentralized respectively. The optimal contract can guide the third party logistics to exert a maximum effort level in the logistics service activities. We also investigate how the asymmetric quality cost information affects the system profit performance. The results show that it is necessary to coordinate fourth party logistics and third party logistics to improve system performance in a private information scenario.