Mechanism design for the city logistics alliance

Abstract

In the field of city logistics, companies traditional make their own decisions unilaterally to deliver their own commodities to their own customers using their own vehicles. To improve the vehicle utilisation rate, increase the total profits, and reduce the environmental and noise pollution, promoting the collaboration between different logistics companies can be one of the most cost-effective measures. To implement the concept of collaboration in the city logistics industry, two problems need to be solved. One is how to form a stable logistics alliance involving the relevant logistics companies; the other is how to fairly allocate the total attainable profits to each member. This research focuses on solving the above two problems by designing reasonable contracts to allocate all the profits obtained from the grand alliance of logistics companies. The designed contracts will ensure that each member in the alliance is satisfied with the profit allocation. In other words, the profits allocated to each member is no less than the profits they could earn under non-collaborative and sub-collaborative situations. Mathematical models are developed to measure the total profits each member can earn under the following three circumstances: non-collaboration, ideal collaboration and a logistics alliance with contracts. The cases of non-collaboration and ideal collaboration are solved using conventional Integer Programming method. Game theory is applied into the case of logistics alliance to design appropriate contracts that can fairly allocate the profits obtained by the grand alliance to each member. The capacity exchange costs between different logistics companies are proposed and then used as the main control parameters in the contract design. Inverse programming is then applied to determine the best values of the capacity exchange costs that can maximise the system profits and also ensure that each member in the logistics is better off than running their business individually. After examining the outcomes of the above three models based on the extensive numerical case, it has been found that collaboration of logistics companies under reasonable contracts can generate higher profits than non-collaboration. What’s more, the members in the alliance are satisfied with the profit allocation plan under the majority of the circumstances. It is suggested that the contracts designed in this research can be applied to encourage logistics companies in practice to form a stable logistics alliance