Coordination in a Single-Supplier, Multi-Retailer Distribution System: Supplier-Facilitated Transshipments

We consider supplier-facilitated transshipments for achieving supply chain coordination in a single supplier, multi-retailer distribution system with non-cooperative retailers. The previous transshipment literature has focused on coordination through retailer-negotiated transshipments and thus does not consider the supplier's decision-making. In contrast, in this study, we assume the supplier is an active participant in the system and we seek to understand how the supplier can facilitate the implementation of coordinating transshipments. We study a two-period model with wholesale orders at the start of the first period and preventive transshipments performed at the start of the second period. Inspired by a supplier-facilitated transshipment scheme observed in practice, we assume the supplier implements transshipments through a bi-directional adjustment contract. Under this contract, each retailer can either buy additional inventory from, or sell back excess inventory to, the supplier. We show that coordination can be achieved through carefully designed contracts with state-dependent adjustment prices and a wholesale price menu. We demonstrate that the supplier's role in facilitating coordinating transshipments is critical. In addition, we use our understanding of the coordinating contract form to derive some simpler and easier-to-implement heuristic contracts. We use a numerical study to demonstrate the value, to the supplier, of using the coordinating adjustment and wholesale prices, and to evaluate the heuristics’ performance.