Simultaneous inventory competition and transshipment between retailers

In this paper, we consider a supply chain with one supplier and two competing retailers. We make a major contribution by studying simultaneous inventory competition and transshipment between the retailers. Specifically, we focus on the following research questions: how should the retailers order before demand uncertainty is realized? How should they transship between themselves after demand uncertainty is realized? How can they achieve coordination in the presence of both inventory competition and transshipment? To answer these questions, we first derive the retailers' optimal ordering quantities under both centralization and decentralization. By comparing the optimal ordering quantities under centralization and decentralization, we further derive the optimal transshipment price. We find that if the competitive intensity, represented by customer switching rate, is low, the decentralized retailers can achieve lateral coordination by setting an appropriate transshipment price. Otherwise, the decentralized retailers' optimal transshipment price equals the transshipment cost and they cannot achieve lateral coordination via transshipment. We then propose an overstock-risk and transshipment-cost sharing contract with vendor-managed inventory and prove that it can coordinate this supply chain and provide arbitrary profit allocation. To gain more managerial insights, we also conduct numerical analysis to illustrate how various parameters such as the competitive intensity, the transshipment cost, and the product's profit margin impact the inventory competition and transshipment.