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 coordinationmechanisms 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

Inventory Sharing and Demand-Side Underweighting

Problem definition: Transshipment/inventory sharing has been used in practice because of its risk-pooling potential. However, human decision makers play a critical role in making inventory decisions in an inventory sharing system, which may affect its benefits. We investigate whether the opportunity to transship inventory influences decision makers’ inventory decisions and whether, as a result, the intended risk-pooling benefits materialize. Academic/practical relevance: Previous research in transshipment, which is focused on finding optimal stocking and sharing decisions, assumes rational decision making without any systematic bias. As one of the first to study inventory sharing from a behavioral perspective, we demonstrate a persistent stocking-decision bias relevant for inventory sharing systems. Methodology: We develop a behavioral model of a multilocation inventory system with transshipments. Using four behavioral studies, we identify, test, estimate, and mitigate a demand-side underweighting bias: although inventory sharing brings both a supply-side benefit and a demand-side benefit, players underestimate the latter. We show analytically that such bias leads to underordering. We also explore whether reframing the inventory sharing decision reduces this bias. Results: Our results show that subjects persistently reduce their order quantities when transshipments are allowed. This underordering, which persists even when a decision-support system suggests optimal quantities, causes insufficient inventory in the system, in turn reducing the risk-pooling benefits of inventory sharing. Underordering is evidently caused by an underweighting bias; although players correctly estimate the supply-side potential from transshipment, they only estimate 20% of the demand-side potential. Managerial implications: Although inventory sharing can profitably reduce inventory, too much underordering undermines its intended risk-pooling benefits. The demand-side benefits of transshipment need to be emphasized when implementing inventory sharing systems

Transshipment timing in inventory competition

We study retailers’ preferences for transshipment timing in the presence of product substitution in overlapping markets where there is either pre-substitution transshipment (TS) or post-substitution transshipment (ST). By building a two-retailer game model, we find that when the retailer with excess inventory can dictate the transshipment price, there always exists a unique pair of equilibrium order quantities. We also find that the equilibrium order quantity in the post-substitution transshipment will always be larger than that in the pre-substitution transshipment in the symmetric case. But surprisingly, the expected profit of the post-substitution transshipment always dominates that of the pre-substitution transshipment, though the presubstitution transshipment has mitigated the inventory competition. We then examine the impact of the transshipment price, the switching probability, and transshipment cost to the retailers’ profit. Through extensive numerical experiments, we find that when a large proportion of customers are willing to switch and the transshipment price is low, retailers prefer pre-substitution transshipment; but when there are almost no switching customers or the transshipment price is high, retailers prefer postsubstitution transshipment. We further study an asymmetric game and find that asymmetry benefits the retailer with cost advantage but damages the other retailer. We also find that two asymmetric retailers may prefer different transshipment timings in the asymmetric case

On Transshipment Games with Identical Newsvendors

In a transshipment game, supply chain agents cooperate to transship surplus products. This note studies the effect of size of transshipment coalitions on the optimal production/order quantities. It characterizes these quantities for transshipment games with identical newsvendors and normally distributed market demands. It also gives a closed form formula for equal allocation in their cores

Strategic Behaviors and Market Outcomes: Two Essays

This dissertation is comprised of two essays related, broadly, to themes of competitive dynamics and economic consequences. In Essay One, "Many Fields of Battle: How Cost Structure Affects Competition across Multiple Markets," a conjectural variation model is developed to examine what role cost structure and product differentiation play in affecting the mutual forbearance outcome arising from multi-market contact. The analytical results show that the degree of collusion (as measured by the price level) enhanced through multimarket contact is greater when multimarket contact occurs between firms with similar production costs and undifferentiated products. This hypothesis is then tested using data from the U.S. airline industry. The empirical results provide support for the view suggesting that multimarket contact blunts the edge of competition between firms. Moreover, it is found that rival carriers with similar production costs are more likely to experience such collusion facilitating effects from multimarket contact than those with dissimilar production costs. The second essay in this dissertation is entitled, "A Two-Location Inventory Model with Transshipments in a Competitive Environment." In this study, an analytical model is developed to assess the impact of transshipments on inventory replenishment decisions and the implications for firm profitability in a competitive, uncertain market environment. To incorporate the competition between stocking locations, the analytical model developed in this paper uses a marketing variable, customer's switching rate, to measure the probability of an individual consumer choosing an alternative source of supply in the event of stockout. In such an environment, firms not only cooperate through the practice of transshipments but also compete for business. A number of interesting conclusions are drawn from numerical optimization results. For instance, it is found that when firms differ in market demand, small firms benefit more from transshipments than do large firms. In addition, it is shown that there is an inverted u-shaped relationship between transshipment price and the profit improvements that large firms gain through transshipments, whereas such benefits are monotonically decreasing with transshipment price for small firms. These findings provide several managerial implications with regard to the role of transshipment price in creating benefits for participating firms

Inventory models with lateral transshipments : a review

Lateral transshipments within an inventory system are stock movements between locations of the same echelon. These transshipments can be conducted periodically at predetermined points in time to proactively redistribute stock, or they can be used reactively as a method of meeting demand which cannot be satised from stock on hand. The elements of an inventory system considered, e.g. size, cost structures and service level denition, all in uence the best method of transshipping. Models of many dierent systems have been considered. This paper provides a literature review which categorizes the research to date on lateral transshipments, so that these dierences can be understood and gaps within the literature can be identied

Behavioral perspectives on risk sharing in supply chains

Over the past decade, we have witnessed the emergence of a vast body of literature contributing to our understanding of how supply chains should be designed and executed from a normative perspective. Along the way, the gap between ever-more sophisticated theory and industrial reality increased. A growing stream of recent research relaxes the overly simplistic assumptions on human behavior commonly made in supply chain models. This thesis contains a set of research papers on human behavior, casted in a unified framework of supply chain inventory risk management

Inventory and pricing management in probabilistic selling

Context: Probabilistic selling is the strategy that the seller creates an additional probabilistic product using existing products. The exact information is unknown to customers until they receive the probabilistic products. This strategy is still a relatively new area for both researchers and practitioners. Many of the corresponding operations problems need to be solved to take full advantage of the opportunity of this innovative marketing strategy. However, limited attention has been paid to examining the inventory management of probabilistic selling from the perspective of Operations Management, which cannot meet the needs of decision-making in reality. Objectives: Considering different characteristics of the probabilistic product, the buyer, and the seller involved in probabilistic selling, i.e., the probabilistic product form, the buyers’ behaviours of demand switch and barter exchange, and the seller's product allocation behaviour, we establish models and solve the decision problems of pricing, inventory, joint decision of pricing-inventory, and product allocation, etc. Based on the analysis of optimal decisions and strategy comparison results, we shed some lights on the effectiveness of probabilistic selling on managing uncertainty, and its profitability. Method: First, we analyze the practice scenarios of probabilistic selling. Next we mainly use newsvendor inventory model, hotelling model, and optimization theory to model, solve, and analyze the operational problems. Then we give some analytical results. Next we conduct the numerical analysis using softwares of Matlab and Mathematica. Finally, we provide insightful managerial implications for the practice of probabilistic selling. Results: The thesis derives the optimal operational decisions of inventory order, pricing, inventory allocation, and product line design in probabilistic selling. Overall, the analysis of the results show that probabilistic selling can benefit the seller with higher expected profit by reducing demand/supply uncertainty and improving inventory efficiency. The performance of probabilistic selling is closely dependent on customers' price sensitivity, product similarity, and uncertainty level, etc. Main results considering different research scenarios are as follows: 1) When the price for the probabilistic product is independent on demand reshape, a proper cannibalization can benefit the retailer in terms of yielding a higher expected profit. Probabilistic selling is more profitable with relatively lower product similarity and higher price-sensitive customers, while inventory substitution strategy outperforms probabilistic selling with higher product similarity. 2) When the price for the probabilistic product is dependent on demand reshape, probabilistic selling can benefit the seller with higher expected profit and lower inventory. Probabilistic selling is more profitable with lower product differentiation, higher customers' price sensitivity, and higher demand uncertainty. Improper pricing would undermine the seller's profit. 3) When the seller offers physical probabilistic product, he can benefit from two effects, namely the risk pooling effect due to demand reshape and the risk diversification effect due to inventory flexibility. 4) When the seller offers barter choice in probabilistic selling, he may benefit from the marketing effect in the barter process. Offering barter choice can broaden the application range of probabilistic selling, which will increase with successful barter probability. Conclusions/Implications: First, the thesis helps sellers understand how to manage their inventory, pricing and related implementation issues to take full advantage of probabilistic selling. Second, this thesis explores the mechanism of this innovative marketing strategy as an inventory management tool to combat uncertainty which also riches the literature on Operations Management, especially inventory management.Antecedentes: Los productos probabilísticos son productos adicionales creados por un proveedor que combina productos existentes y oculta parte de la información del producto. Es decir, cierta información de atributos de los productos probabilísticos es opaca para el cliente. El cliente que compra el producto probabilístico obtiene una de las combinaciones de productos con una cierta probabilidad. Las ventas probabilísticas son una estrategia de ventas que permite la venta de productos probabilísticos. Todavía es un modelo de ventas relativamente nuevo para empresas e investigadores. La implementación de ventas probabilísticas es diversa y aún no se ha verificado la rentabilidad de las diferentes formas de ventas probabilísticas. Se deben abordar las situaciones de inventario y fijación de precios que tengan en cuenta las diferentes realidades. Por el momento, desde la perspectiva de la gestión operativa, existen pocos estudios sobre la toma de decisiones de inventario y fijación de precios bajo el modelo de ventas probabilísticas, que no puede satisfacer las necesidades de las empresas para tomar decisiones científicas en el proceso de implementación. Objetivo: Este documento se centra en los tres actores principales en el proceso de venta probabilística: los productos probabilísticos, compradores y vendedores. Considere el afecto de las diferentes realidades y circunstancias (en concreto, la forma de productos probabilísticos, la demanda de transferencia y el comportamiento de intercambio del comprador, y si el vendedor reemplaza el producto en el proceso de distribución de los productos) sobre la fijación de precios y las decisiones de inventario. Al establecer un modelo que considera los factores realistas antes mencionados, se resuelve el problema de fijación de precios, la decisión conjunta de inventario- precios y la asignación de productos bajo el modelo probabilístico de ventas. Finalmente, a través del análisis de las decisiones y la comparación de estrategias, se obtendrá sugerencias de gestión para la implementación de ventas probabilísticas. Método: En primer lugar, este documento analiza los escenarios de diferentes ventas de probabilidad. En segundo lugar, utilizando el modelo de vendedor de periódicos, el modelo de Hotelling y la teoría de optimización, se intenta resolver y analizar la fijación de precios, el inventario, la toma de decisiones conjunta de inventario-precios y los problemas de decisión de asignación de productos. Luego, da el teorema y analízalo. Finalmente, proporcione asesoramiento de gestión de inventario- precios para los comerciantes que implementan ventas probabilísticas. Conclusión: Este documento ha encontrado las decisiones operativas óptimas para el inventario, fijación de precios, asignación de inventario y diseño de línea de producto en ventas probabilísticas. Los resultados generales muestran que las ventas probabilísticas pueden aumentar la eficiencia del inventario al reducir la incertidumbre de la demanda / oferta, lo que permite a los vendedores obtener mayores ganancias esperadas. El rendimiento de las ventas probabilísticas está estrechamente relacionado con factores tales como la sensibilidad del precio del cliente, la similitud y la incertidumbre del producto. Significado: Primero, permita que los vendedores hagan un buen uso de las ventas probabilísticas. Este artículo los ayuda a comprender cómo resolver problemas de inventario, precios y decisiones operativas relacionadas en modelos de ventas probabilísticas. Segundo, consideramos esta estrategia de marketing innovadora como una herramienta de gestión de inventario, por lo que este documento enriquece la investigación de gestión operativa, especialmente la teoría de gestión de inventarioPostprint (published version

Lateral transshipment of slow moving critical medical items

This research studies lateral transshipment of critical medical items that have low demands. Due to the high prices of medical items and their limited shelf lives, the expirations contribute significantly to the current prohibitively high cost of the healthcare system. Lateral transshipment between hospitals in a medical system provides opportunities to reduce the expiration costs. This paper studies the decision rule for lateral transshipment in a two-hospital system and extends the rule for the multiple-hospital cases. The decision rule takes the myopic best action by assuming no transshipments will be performed in the future. Numerical experiments demonstrate significant cost savings and the decision rule has a small gap from the upper bound of the total saving. The savings are more considerable when the difference of demand rates at different locations is large and the life time of the medical item is not too long or too short