Joint inventory and transshipment decisions with consumer behavioral heterogeneity

Abstract

Transshipment is an effective method for reducing mismatches between supply and demand among retailers. Consumers attempting to purchase out-of-stock items may wait for transshipment, purchase at another store, or choose not to buy. In this paper, the consumer behavioral heterogeneity is characterized using the transshipment request rate and consumer switching rate. It affects the replenishment and transshipment decisions, as well as the system profits. The inventory replenishment and transshipment decisions are studied in both centralized and decentralized two-location inventory systems with consumer behavioral heterogeneity. We characterize optimal replenishment decisions in a centralized system, prove the existence of a unique Nash equilibrium in a decentralized system with a specific demand distribution, and determine the coordinating transshipment price for some decentralized systems. In numerical studies, the performance of various systems is analyzed for consumers with identical (symmetric) or differing (asymmetric) behavior between retailers. For scenarios with symmetric consumers, a higher transshipment request rate and consumer switching rate resulted in increased total profit in all systems. For scenarios with asymmetric consumers, the retailer with the higher consumer switching rate should reduce ordering in a centralized system but increase ordering in a decentralized system. Moreover, the retailer with the higher transshipment request rate reduces ordering to increase profit, whereas the other retailer increases order quantity yet earns less profit.