Inventory Coordinating Contract for the Two-location Supply Chain with Lateral Transshipment

Lateral transshipment within an inventory system reallocate the inventory of locations to match the demand and supply again when demand is completely observed. This paper addresses issues about the coordination mechanism for the lateral transshipment problem in two-location system with identical product. Firstly, we introduce the conditions for coordination mechanism proposed by Rudi et al. Then, we propose the Mutual Compensation contract considering arbitrage behavior at shipping stage and ordering stage. We find that there exist Nash equilibrium and the Mutual Compensation contract can coordinate the two-location system.