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Transshipment of Inventories: Dual Allocations vs. Transshipment Prices

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  • Xiao Huang

    () (Desautels Faculty of Management, McGill University, Montréal, Québec H3A 1G5, Canada)

  • Greys Soši'{c}

    () (Marshall School of Business, University of Southern California, Los Angeles, California 90089)

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).

Suggested Citation

  • Xiao Huang & Greys Soši'{c}, 2010. "Transshipment of Inventories: Dual Allocations vs. Transshipment Prices," Manufacturing & Service Operations Management, INFORMS, vol. 12(2), pages 299-318, February.
  • Handle: RePEc:inm:ormsom:v:12:y:2010:i:2:p:299-318
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    File URL: http://dx.doi.org/10.1287/msom.1090.0267
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    References listed on IDEAS

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    1. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 1-26.
    2. Nils Rudi & Sandeep Kapur & David F. Pyke, 2001. "A Two-Location Inventory Model with Transshipment and Local Decision Making," Management Science, INFORMS, vol. 47(12), pages 1668-1680, December.
    3. Philip J. Reny, 1999. "On the Existence of Pure and Mixed Strategy Nash Equilibria in Discontinuous Games," Econometrica, Econometric Society, vol. 67(5), pages 1029-1056, September.
    4. Xinxin Hu & Izak Duenyas & Roman Kapuscinski, 2007. "Existence of Coordinating Transshipment Prices in a Two-Location Inventory Model," Management Science, INFORMS, vol. 53(8), pages 1289-1302, August.
    5. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, II: Applications," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 27-41.
    6. Ravi Anupindi & Yehuda Bassok & Eitan Zemel, 2001. "A General Framework for the Study of Decentralized Distribution Systems," Manufacturing & Service Operations Management, INFORMS, vol. 3(4), pages 349-368, February.
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    Citations

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    Cited by:

    1. Summerfield, Nichalin S. & Dror, Moshe, 2012. "Stochastic programming for decentralized newsvendor with transshipment," International Journal of Production Economics, Elsevier, vol. 137(2), pages 292-303.
    2. Paterson, Colin & Kiesmüller, Gudrun & Teunter, Ruud & Glazebrook, Kevin, 2011. "Inventory models with lateral transshipments: A review," European Journal of Operational Research, Elsevier, vol. 210(2), pages 125-136, April.
    3. Hezarkhani, Behzad & Kubiak, Wieslaw, 2010. "A coordinating contract for transshipment in a two-company supply chain," European Journal of Operational Research, Elsevier, vol. 207(1), pages 232-237, November.
    4. Ji, Xiang & Sun, Jiasen & Wang, Zebin, 2017. "Turn bad into good: Using transshipment-before-buyback for disruptions of stochastic demand," International Journal of Production Economics, Elsevier, vol. 185(C), pages 150-161.
    5. Jing Shao & Harish Krishnan & S. Thomas McCormick, 2011. "Incentives for Transshipment in a Supply Chain with Decentralized Retailers," Manufacturing & Service Operations Management, INFORMS, pages 361-372.
    6. Yan, Xinghao & Zhao, Hui, 2015. "Inventory sharing and coordination among n independent retailers," European Journal of Operational Research, Elsevier, vol. 243(2), pages 576-587.
    7. repec:eee:jomega:v:74:y:2018:i:c:p:37-49 is not listed on IDEAS

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