Inventory control in a two-location transshipment model

Abstract

Transshipment is widely adopted in multiple location inventory management. We study a two-location inventory model with finite time horizon in which at most one transshipment is allowed between two locations. We first study a centralized controlled system. We prove that the expected revenue function is concave with respect to the transshipment amount at any point of time. The optimal decision process is developed to determine the initial order quantity for each location, the time to conduct transshipment and the transshipment amount. The model is further investigated from the supply chain coordination aspect. We study a decentralized system with two decision makers. Each decision maker only concerns his own benefit. We find that the system-wide revenue shrinks along with the transshipment amount in a decentralized system. The transshipment deal may also fail if either party finds it is nonprofitable for him to conduct the transshipment.