Capacity Procurement in Logistics Service Supply Chain with Demand Updating and Rational Expectation Behavior

Abstract

This paper discusses the applicable conditions of two capacity procurement sub-strategies with two ordering opportunities, namely, sub-strategy I in which only increasing purchase quantity is allowed during the second ordering opportunity, and sub-strategy II in which either increasing or reducing order quantities is possible when the second order is placed. Our research is in the context of a logistics service supply chain (LSSC) consisted of a logistics service integrator (LSI) and a functional logistics service provider (FLSP). LSI purchases first a service capacity from FLSP long before demand is realized and then adjusts this ordering quantity based on demand updating. We developed the profit models for LSI and FLSP which also include the constraints of rational expectations. Based on the assumption of Bayesian updating, this paper investigates the conditions for sub-strategy II outperforming sub-strategy I. The main results are verified through numerical analysis. Counter-intuitively, sub-strategy II is not necessarily always better than sub-strategy I. When using sub-strategy II, LSI needs to purchase more service the first time of placing orders, but the expected profits increase for both LSI and FLSP only with certain conditions, which have been derived as propositions in this paper.