Risk Management Strategies in Transportation Capacity Decisions: An Analytical Approach

Abstract

In recent years, access to freight transportation capacity has become a constant issue in the minds of logistics managers due to capacity shortages. In a buyer-seller relationship, reliable, timely, and cost-effective access to transportation is critical to the success of such partnerships. Given this, guaranteed capacity contracts with third-party logistics providers (3PLs) may be appealing to shippers to increase their access to capacity and respond effectively to customer requirements. With this new opportunity, 3PLs must focus on approaches that can assist them in analyzing their options as they promise guaranteed capacity to shippers when faced with uncertain demand and related risks in transportation. In this paper, we analytically analyze three capacity-based risk mitigation strategies and the mixed use of these individual strategies using industry-based data to provide insights on which strategy is preferable to the 3PL and under what conditions. We posit that the selection of a strategy is contingent on several conditions faced by both the shipper and the carrier. Although our approach is analytical in nature, it has a high degree of practical utility in that a 3PL can utilize our decision models to effectively analyze and visualize the trade-offs between the different strategies by considering appropriate cost and demand data.