Supplier-facilitated transshipments with positive shipping costs

We study the role of inventory transshipment for achieving supply chain coordination in a multi-retailer distribution system. The previous transshipment literature focuses on coordination via retailer-negotiated transshipments, which requires a certain degree of cooperation among the independent retailers. We find that to achieve coordination in a system with non-cooperative retailers, including the supplier in the transshipment system is critical. We thus propose and examine a new coordination scheme: supplier-facilitated transshipments. We study a two-period production and inventory distribution problem in which transshipments among the retailers occur at the start of second period. These transshipments are implemented through a bi-directional adjustment contract, offered by the supplier to each retailer. Under this contract, in the second period, each retailer can buy additional inventory from the supplier or sell back excess inventory to the supplier. We show that a properly designed adjustment contract, along with a wholesale price contract with appropriately chosen price, can be used to achieve coordination.