A two-location inventory model with transshipments in a competitive environment

This paper analyzes the implementation of transshipments among competing firms and the impact of transshipments on their inventory replenishment decisions. Previous studies have shown that transshipments, when implemented between stocking locations operating in the same echelon, improve firm financial performance and customer service through risk sharing and inventory reallocation. However, these studies have not investigated transshipments in a competitive environment: that is an environment where two firms both cooperate through transshipments and compete for customers. In this paper, the rivalry intensity between firms is assessed through a variable, customer's switching rate, measuring the percentage of consumers switching sellers in the event of a stockout. The impact of various switching rates on the performance benefits from transshipments is investigated, leading to several important managerial implications. In particular, numerical analyses suggest that transshipment price plays a unique, crucial role in creating benefits for participating firms with asymmetric market demands and various degrees of customer loyalty. (C) 2010 Elsevier B.V. All rights reserved.