Transshipment of Inventories: Dual Allocations vs. Transshipment Prices

Xiao Huang · Greys Sošić

56 citations0/0 files storedManufacturing & Service Operations Management

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Supply Chain and Inventory Management Sustainable Supply Chain Management Game Theory and Applications

Abstract

We study a newsvendor game with transshipments, in which n retailers face a stochastic demand for an identical product. Before the demand is realized, each retailer independently orders her initial inventory. After the demand is realized, the retailers select an optimal transshipment pattern and ship residual inventories to meet residual demands. Unsold inventories are salvaged at the end of the period. We compare two methods for distribution of residual profit—transshipment prices (TPs) and dual allocations (DAs)—that were previously analyzed in literature. TPs are selected before the demand is known, and DAs, which are obtained by calculating the dual prices for the transshipment problem, are calculated after observing the true demand. We first study the conditions for the existence of the Nash equilibria under DA and then compare the performance of the two methods and show that neither allocation method dominates the other. Our analysis suggests that DAs may yield higher efficiency among “more asymmetric” retailers, whereas TPs work better with retailers that are “more alike,” but the difference in profits does not seem significant. We also link expected dual prices to TPs and use those results to develop heuristics for TPs with more than two symmetric retailers. For general instances with more than two asymmetric retailers, we propose a TP agreement that uses a neutral central depot to coordinate the transshipments (TPND). Although DAs in general outperform TPND in our numerical simulations, its ease of implementation makes TPND an attractive alternative to DAs when the efficiency losses are not significant (e.g., high critical fractiles or lower demand variances).

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References

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2010A coordinating contract for transshipment in a two-company supply chain 2019Incorporating risk aversion and fairness considerations into procurement and distribution decisions in a supply chain 2014Stability and Endogenous Formation of Inventory Transshipment Networks 2009Repeated newsvendor game with transshipments under dual allocations 2019A review of non-cooperative newsvendor games with horizontal inventory interactions

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