Evaluating the efficacy of emerging third-party logistics role : an examination of potential limitations

Abstract

Some third-party logistics (3 PL) companies recently take on a new role to help achieve advance payment. Specifically, 3 PL helps pay supplier soon after receiving the logistics fee and order payment from retailer. However, the retailer may incur opportunity cost via paying earlier to the 3 PL if considering the time value of cash. In contrast to the current literature that demonstrates possible advantages brought by 3 PLs, we instead find that when supply chain players face a homogeneous time value of cash, the 3 PL's advance payment brings no profit growth for all players under the 3 PL's leadership. The supplier cannot enjoy a profit increase as the retailer reduces the wholesale price to compensate for the opportunity cost loss. The 3 PL has to lower the service fee to attract the retailer to join the game, thus weakening its profitability. Furthermore, we extend our study to two scenarios. The first is when the retailer dominates the supply chain and the second is when the 3 PL offers discount coupons to the retailer. In the first extension, we identify that the merit of the 3 PL's new role only exists for the 3 PL when players face a heterogeneous time value of cash under certain conditions. Alternatively, the second extension illustrates that only a small-scale coupon creates a triple-win situation and facilitates flexibility in making decisions. In summary, based on the 3 PL's existing practice, this study points out its potential limitations when involved in supply chain cash flows.