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The transshipment fund mechanism: Coordinating the decentralized multilocation transshipment problem

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  • Eran Hanany
  • Michal Tzur
  • Alon Levran

Abstract

The multilocation replenishment and transshipment problem is concerned with several retailers facing random demand for the same item at distinct markets, that may use transshipments to eliminate excess inventory/shortages after demand realization. When the system is decentralized so that each retailer operates to maximize their own profit, there are incentive problems that prevent coordination. These problems arise even with two retailers who may pay each other for transshipped units. We propose a new mechanism based on a transshipment fund, which is the first to coordinate the system, in a fully noncooperative setting, for all instances of two retailers as well as all instances of any number of retailers. Moreover, our mechanism strongly coordinates the system, i.e., achieves coordination as the unique equilibrium. The computation and information requirements of this mechanism are realistic and relatively modest. We also present necessary and sufficient conditions for coordination and prove they are always satisfied with our mechanism. Numerical examples illustrate some of the properties underlying this mechanism for two retailers. © 2010 Wiley Periodicals, Inc. Naval Research Logistics, 2010

Suggested Citation

  • Eran Hanany & Michal Tzur & Alon Levran, 2010. "The transshipment fund mechanism: Coordinating the decentralized multilocation transshipment problem," Naval Research Logistics (NRL), John Wiley & Sons, vol. 57(4), pages 342-353, June.
    • Handle: RePEc:wly:navres:v:57:y:2010:i:4:p:342-353
    DOI: 10.1002/nav.20405
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    References listed on IDEAS

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    2. Hui Zhao & Vinayak Deshpande & Jennifer K. Ryan, 2006. "Emergency transshipment in decentralized dealer networks: When to send and accept transshipment requests," Naval Research Logistics (NRL), John Wiley & Sons, vol. 53(6), pages 547-567, September.
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    5. Ping Zhang & Hong Yan & King Wah Pang, 2019. "Inventory Sharing Strategy for Disposable Medical Items between Two Hospitals," Sustainability, MDPI, vol. 11(22), pages 1-21, November.

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