Inventory Sharing Under Decentralized Preventive Transshipments

Abstract:     
We consider preventive transshipments between two stores in a decentralized system with two demand subperiods. Replenishment orders are made before the first subperiod, and the stores may make transshipments to one another between the subperiods. We prove that the transshipment decision has a dominant strategy, called a control-band conserving transfer policy, under which each store chooses a quantity to transship in or out that will keep its second-subperiod starting inventory level within a range called a control band. We prove that the optimal replenishment policy is a modified base-stock policy in which the order-up-to level depends on the initial inventory and capacity level at the other store. Finally, we prove that there does not exist a transfer price that coordinates the decentralized supply chain. Our research also explains many of the differences between preventive and lateral transshipments, including differences in the optimal transfer policies and the existence or nonexistence of transfer prices that coordinate the system.

Keywords: preventive transshipment, dominant strategy, iterated strict dominance

Working Paper Series