Joint Inventory and Transshipment Decisions with Consumer Behavioral Heterogeneity

Transshipment is one of the most effective policies to reduce the mismatch between supply and demand. Consumers show distinguished behaviors when facing stockout: some may accept transshipped items, some may search in another store by themselves, and others may give up buying. We define the transshipment request rate and consumer switching rate to characterize consumer behavioral heterogeneity. Such behavioral heterogeneity directly affects the optimal inventory, transshipment decisions, and furthermore, the system performance of retailers. This study investigates the replenishment and transshipment decisions in a two-location inventory system in the presence of consumer behavioral heterogeneity. We develop two stylized models for this problem under centralized and decentralized control. First, we characterize optimal replenishment decisions in a centralized system. Second, we prove the existence of unique Nash equilibrium in a decentralized system under specific demand distribution. Third, we figure out the coordinating transshipment price for the decentralized system, which induces both retailers to achieve centralized solutions. We analyze the performance of each system considering symmetric and asymmetric consumers in the numerical study. For the scenario with symmetric consumers, a higher transshipment request rate and consumer switching rate lead to a profit increase in both systems. For the scenario with asymmetric consumers, the retailer with increased consumer switching rate should order less in a centralized system but order more in a decentralized system. Moreover, the retailer facing a higher transshipment request rate orders less and gains more profit, whereas the other retailer increases his order quantity yet gains less profit in the decentralized system