Logistics contracts to increase supply chain effectiveness – an illustration of a two-way penalty contract

A contractual arrangement between supply chain partners improves the coordination between partners, thereby improving the supply chain performance. This paper models the impact of asset investment (vehicles) by the carrier (logistics provider) on a supply chain. The decision of asset investment by the carrier is driven by its own operational goal of profit maximisation rather than the overall supply chain performance. We define a two sided penalty contract between the shipper and the carrier to achieve supply chain coordination, in terms of optimal investment of asset by the carrier.