Disclosing products' freshness level as a non-contractible quality: optimal logistics service contracts in the fresh products supply chain

Abstract

The growth of digital shopping for fresh products necessitates the provision of cold chain logistics services. The present study constructed an optimal control model to investigate how to incentivize logistics service providers' efforts to preserve product freshness during transport. The freshness level constantly evolves, unobservable and unverifiable, and thus cannot be explicitly specified in the contract. We studied a two-echelon supply chain consisting of a retailer and a logistics service provider. Our research aimed to design a menu of contracts that will induce the logistics service provider to pick the actions desired by the retailer in the absence of information on product freshness. The results suggested that a flexible revenue-sharing policy is preferable, as it increases alignment on the target of delivering fresh products. It essentially coordinates the supply chain regardless of whether the retailer has sufficient oligopoly power to dictate sales prices. In contrast, a simple transfer payment contract and fixed lump-sum bonus policy are also useful for aligning the freshness-keeping action, but they rely on the retailer's sufficient oligopoly power. The findings have managerial significance in decreasing the occurrence of customer complaints on product freshness. Retailers may be able predict the regions in business practices that can offer a freshness guarantee.

Keywords: supply chain management; non-contractible quality; perishable product; freshness level.