Stochastic programming for decentralized newsvendor with transshipment

Abstract

This paper discusses a family of two-stage decentralized inventory problems using a unifying framework (taxonomy) depicted as a multilevel graph. This framework allows us to model and link different problems of competing retailers who independently procure inventory in response to uncertain demand and anticipated inventory decisions of other retailers. In this family of problems, in the ex-post stage, the retailers exercise recourse actions in response to the realized demand and competitors' chosen procurement levels. For example, retailers could coordinate inventory transshipment to satisfy shortage with overage based on profit sharing agreements. Our framework provides a unifying parsimonious view using a single methodological prism for a variety of problems. Equally importantly, as recourse options are laid out, our framework clarifies and contributes a modeling connection between problems in a clear taxonomy of models. This unifying perspective explicitly links work that appeared in isolation and offers future research directions. ► A detailed taxonomy for a two-stage decentralized inventory problems is presented. ► This taxonomy is based on stochastic programming with recourse. ► This taxonomy links a plethora of problems that appeared in isolation.