Warehouse Location in An Emerging Country: A Win–Win Proposition?

Warehouse solutions in emerging countries near suppliers have been adopted to achieve cost efficiency in offshore procurement. Previous academic literature ignores logistics operations costs in supply chain contracting. In this paper, we study contracting between a retailer in a developed country and a supplier in an emerging country while incorporating total landed cost (including logistics operations costs) in contracting. The retailer faces stochastic demand and stochastic lead time and determines the warehousing strategy. She can hold cycle stock and safety stock at the retail location (developed country warehousing) or allow the supplier to hold second‐tier cycle stock at a warehouse in the emerging country in addition to her holding inventory at the retail location (emerging country warehousing). We study the retailer’s optimal warehousing strategy in a centralized supply chain and a decentralized supply chain with the retailer as the Stackelberg leader. When emerging country warehousing is adopted in the decentralized supply chain, the retailer and supplier could achieve a win–win or a win–lose outcome compared to developed country warehousing. Our results show that the retailer’s warehousing strategies in the centralized and decentralized supply chains could be different. We further study the retailer’s optimal warehousing strategy under the Nash bargaining framework where the wholesale price and logistics decisions are negotiated simultaneously given the warehousing strategy. We compare this contract to that where logistics costs are excluded from contract negotiation. Our results show that by including logistics costs into contract negotiation the retailer and supplier could achieve lose–win, win–win and win–lose outcomes.