Risk pooling via unidirectional inventory transshipments in a decentralized supply chain

We study risk pooling via unidirectional lateral transshipments between two locations under local decision-making. Unidirectional transshipments can be applicable when cost structures and/or capabilities differ between locations, and it is also a common practice in dual channel supply chains with online and offline sales channels. We show that such a system cannot be coordinated only with varying transshipment prices. The transshipment receiver orders more and the transshipment giver orders less than the respective optimal centralised order quantities. In order to remove this discrepancy, we suggest horizontal coordination mechanisms by introducing a leftover subsidy for the location providing the transshipments or a shortage subsidy for the location receiving transshipments as well as a combination of shortage and leftover subsidy. Further, we evaluate the impact of network structure by comparing the equilibrium order quantities and profits under the uni- and bidirectional systems as well as a system without transshipments. Since demand correlation is a critical aspect in risk pooling we provide a detailed numerical study to discuss its impact on our findings.