Flexibility of Delivery Frequency in Logistics Competition

We investigate the strategic impact of flexible delivery frequencies on the competition of logistics service providers (LSPs) in a supply chain. LSPs compete for customers who choose an exclusive service provider based on their individual preference, prices and inventory costs. The service provider which offers the higher delivery frequency is more attractive to customers, because inventory holding costs are kept low. In reverse, higher delivery frequencies entail higher transportation costs for the LSPs (frequency effect), which is only partially offset by a community cost effect that captures the economies of scale from larger market share and synergies from increased load efficiency. We consider a scenario in which only one of the two LSPs can choose its delivery frequency strategically. Our main result is that flexibility in frequency choice is only a strategic advantage for the LSP if customers’ inventory holding costs are relatively high compared to transportation costs. In this case customers especially appreciate the high delivery frequencies and the flexible LSP is able to satisfy this demand. However, when inventory holding costs are comparably small with respect to the LSPs’ transportation costs, the inflexible LSP is at an advantage. In this case, inflexibility acts as a credible strategic commitment which the flexible LSP can only react to. Furthermore, low inventory holding costs lead to a situation in which the LSP with the flexible delivery frequency faces the dilemma whether to choose its optimal delivery frequency and to make less profit than his competitor or to forfeit some of its own profits in order to make larger profits than the other LSP.