Balancing Inventory and Stockout Risk in Retail Supply Chains Using Fast-Ship

Hao Wei Chen, Diwakar Gupta, Haresh Gurnani

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

In this study, we consider a two-retailer, one-supplier supply chain in which retailers satisfy excess demand by offering to directly ship out-of-stock items on an expedited basis at no extra cost to customers. This practice is referred to as the fast-ship option. We consider two scenarios along with the fast-ship option. In the first scenario, retailers transship when out of stock, whereas in the second scenario, they do not. If they do not transship, some customers may perform the search on their own. In each scenario, the wholesale prices are either exogenous, or chosen endogenously by the supplier. For both cases, we determine the supplier's and the retailers’ optimal decisions. The key research question we ask and answer is the following: which of the two scenarios is preferred by either player when all decisions are made optimally? We show that when fewer customers are willing to search on their own and wholesale prices are exogenous, both the supplier and the retailers prefer to transship. In addition, the decision maker in a centralized chain will have the exact same preference as that of players in a decentralized setting when the retailers’ and the supplier's preferences coincide and wholesale prices are exogenous. This preference concordance does not hold if wholesale prices are endogenous.

Original languageEnglish (US)
Pages (from-to)2103-2115
Number of pages13
JournalProduction and Operations Management
Volume25
Issue number12
DOIs
StatePublished - Dec 1 2016

Bibliographical note

Publisher Copyright:
© 2016 Production and Operations Management Society

Keywords

  • Nash equilibrium
  • customer search
  • fast-ship option
  • newsvendor model
  • retailer cooperation

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