Decision and coordination in a competing retail channel involving a third-party logistics provider q Lin Jiang a,b , Yong Wang a,⇑ , Xiaoming Yan c a School of Economics and Business Administration, Chongqing University, Chongqing, China b School of Mathematics and Information Engineering, Chongqing University of Education, Chongqing, China c School of Computer, Dongguan University of Technology, Dongguan, China article info Article history: Received 13 November 2012 Received in revised form 27 December 2013 Accepted 28 July 2014 Available online 7 August 2014 Keywords: Third-party logistics provider Competing retailers Balance Coordination abstract This paper investigates decision and coordination in a supply-chain-wide system consisting of a manu- facturer, a third-party logistics (3PL) provider, and two competing retailers. The product distribution functions may be implemented by the 3PL provider or the two retailers who face a decision problem that whether the 3PL provider should be introduced. The advantage of introducing the 3PL provider lies in his/ her lower logistics cost. The drawback lies in the 3PL provider’s profit margin which leads to classic dou- ble marginalization. A new insight provided by this paper is that whether or not introducing the 3PL pro- vider depends on the balance of these two effects. This paper reveals the conditions of the balance and explores the effect of retail competition on this balance. Furthermore, we discuss the dominant retailer model where one retailer is a price leader, and the other is a price follower. Whether the 3PL provider should be introduced under the dominant retailer model is also analyzed. Finally, three contracts: a span- ning revenue-sharing contract, a quantity discount contract and a two-part tariffs contract are devised to effectively coordinate the decentralized system involving the 3PL provider. Ó 2014 Elsevier Ltd. All rights reserved. 1. Introduction In recent years, third-party logistics (3PL), also referred to as logistics outsourcing (Knemeyer, Corsi, & Murphy, 2003; Maltz & Ellram, 1997; Razzaque & Sheng, 1998), has received considerable attention. The term 3PL today encompasses a wide range of supply chain management services that includes a firm’s sourcing, materi- als management, and distribution responsibilities (Jayaram & Tan, 2010). To the best of our knowledge, the 3PL provider is an external provider who manages, controls, and delivers logistics activities on behalf of a shipper (Hertz & Alfredsson, 2003) and he/she plays a key role in facilitating supply chain integration and in some cases even managing the entire supply chain. The literature on the 3PL provider is evolving rapidly (Jung, Chen, & Jeong, 2008; Lieb, 1992; Maloni & Carter, 2006; Marasco, 2008; Mortensen & Lemoine, 2008). Today, most firms use the logistics service of the 3PL provider (more than 70% of companies in Western Europe, USA, and Asia Pacific have logistics outsourcing experience), so what we are really talking about is having the profit margin of the 3PL provider be considered in supply chain decisions instead of using an exoge- nous logistics service cost. However, in most researches on the 3PL provider (Jharkharia & Shankar, 2007; Knemeyer & Murphy, 2004; Stank & Goldsby, 2000), little attention has been given to the profit margin. Generally speaking, most firms prefer to choose logistics outsourcing rather than to do it themselves because of the lower logistics cost and specialization of the 3PL provider. For example, GOME, a retailer who sells all kind of electronics products in China, chooses to outsource the cellphone’s logistics service to DTW Logistics in order to decrease the logistics cost, and logistics out- sourcing causes a 20% decrease in cost. However, we must point out that it is not always beneficial for a firm to choose logistics out- sourcing because of the profit margin of the 3PL provider. The fact that the 3PL provider charges a higher logistics service price than his/her logistics cost will destroy the supply chain profit. This sit- uation is well known double marginalization, and it must be con- sidered in the decision-making process. We define the lower cost effect of the 3PL provider as follows: When logistics service is outsourced, the lower logistics cost of the 3PL provider improves the supply chain performance and enables chain members’ profits to increase (see Section 4 in detail). We define the profit margin effect of the 3PL provider as follows: When logistics service is outsourced, the 3PL provider adds the http://dx.doi.org/10.1016/j.cie.2014.07.026 0360-8352/Ó 2014 Elsevier Ltd. All rights reserved. q This manuscript was processed by Area Editor Ozlem Ergun. ⇑ Corresponding author. Tel.: +86 2363622951, mobile: +86 13527546605. E-mail addresses: jlin666@163.com (L. Jiang), wangyongkt@163.com (Y. Wang), yanxiaoming325@126.com (X. Yan). Computers & Industrial Engineering 76 (2014) 109–121 Contents lists available at ScienceDirect Computers & Industrial Engineering journal homepage: www.elsevier.com/locate/caie