Transshipment and coordination in a two-echelon supply chain^∗

¹ School of Economics and Management, Southeast University, Si Pai Lou 2, Nanjing 210096, P.R. China.
hy@seu.edu.cn
² Lazaridis School of Business and Economics, Wilfrid Laurier University, Waterloo, ON, N2L 3C5, Canada.

Received: 30 December 2015
Accepted: 28 August 2016

Abstract

To better match supply and demand, many distributors need to make the strategic decision on whether to collaborate with their competing distributors by adopting the transshipment strategy. In this paper, we mainly aim to answer the following questions: whether and when distributors should adopt the transshipment strategy in the presence of inventory competition? If the transshipment strategy is adopted, how supply chains can be coordinated? To answer these questions, in this paper, we model a supply chain with one manufacturer selling to two competing distributors. For the first question, we find that regardless of centralization or decentralization, the transshipment strategy is better when transshipment cost is lower or competition is less intense. Moreover, under decentralization, there always exists a threshold of transshipment cost. When transshipment cost is lower than the threshold, regardless of the competitive intensity, the distributors should always adopt the transshipment strategy. We further extend the model from symmetric distributors to asymmetric distributors and show our results are robust using numerical studies. For the second question, we design a buyback with sale rebate and penalty contract which can achieve coordination as well as win-win outcomes for all supply chain members.