Application of Lateral Transshipment in Cost Reduction of Decentralized Systems

Yi Liao, Jun Li, Xinxin Hu, Ying Li and Wenjing Shen
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Yi Liao: School of Business Administration, Southwestern University of Finance and Economics, Chengdu 610074, China
Jun Li: School of Business Administration, Southwestern University of Finance and Economics, Chengdu 610074, China
Xinxin Hu: Marilyn Davies College of Business, University of Houston-Downtown, Houston, TX 77002, USA
Ying Li: Mays Business School, Texas A & M University, College Station, TX 77843, USA
Wenjing Shen: LeBow College of Business, Drexel University, Philadelphia, PA 19104, USA

Sustainability, 2020, vol. 12, issue 12, 1-21

Abstract: COVID-19 has exposed the global supply chains to great vulnerability. In such extreme circumstances, product availability becomes a primary concern. This paper studies a basic inventory management strategy—lateral transshipment—under decentralized systems, which may play an important role in dealing with stockouts during unexpected crises. Lateral transshipments not only react quickly to stockout, but are also environmentally friendly due to the significant reduction of production and transportation pollution. This paper studies optimal lateral transshipment and replenishment decisions under a decentralized setting. We construct a multi-stage stochastic model that captures demand uncertainty and customer switching behavior. We demonstrate that, similar to the centralized setting, the optimal transshipment decision follows a double-threshold structure. The optimal replenishment quantities are determined under two pricing mechanisms—individual mechanism (IP) and negotiated mechanism (NP). Numerical examples are provided to demonstrate the impact of lateral transshipment on supply chain cost reduction.

Keywords: supply chain management; lateral transshipment; sustainability; random switching (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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