Study On Moral Hazard Prevention Of 3PL Provider In Company A

A company is one of the car engine manufacturing companies in China. In order to focus on core business and reduce costs, it has determined to outsource the plant logistics to one of its controlled logistics companies at first. This decision has a clear advantage, but there are two problems. On one hand, the company will meet a principal-agent problem when it outsource its logistics, and the performance is"adverse selection","moral hazard","ripped off"etc. On the other hand, as its partner is so special, there will be lack of incentive and supervision between client and agent. It will finally exacerbate the moral hazard problem. How to prevent the moral hazard to ensure a good performance of outsourcing? It has been an urgent issue for companies.This paper studies the case of company A with the following theories: principal-agent theory, formal contract theory and relational contract theory. It finally create a effective solution within the formal and relational contracts.Firstly, it breaks the formal contractual relationship that is lack of incentives and constraints. It creates a new contract by establishing a formal contract fixing incentive with reward as well as by reducing the partners'information asymmetry level. Under the new contract, 3PL provider prefer"work hard"than"hidden action"in the cooperation process, because the punishment causing by its"hidden action"may be greater than the benefits it gains. Therefore, 3PL provider will give up the"hidden action", it will reach the agent's expect without moral hazard risk.Secondly, the formal contract is not suitable for the complicate relationship between company A and 3PL provider. Relational governance has become an important supplement of preventing moral hazard for formal contract. With a relational governance of initiative investment and jointly enjoying the benefits from company A, it will greatly improve the trust and dependency between company A and 3PL provider to make sure a long-term strategic relationship. Therefore, when 3PL provider is going to complete its outsourcing business, it will focus on the long-term benefits from cooperation by avoiding the behavior of speculation. It makes a difference to preventing the moral hazard.From this practical effect, studying on moral hazard prevention of 3PL provider from formal contract theory and relational contract theory is very meaningful. It is an effective solution for the situation of company A and 3PL provider. It can implement to similar companies in the future.