Cooperation vs. Non-Cooperation: Balancing Inventory and Stockout Risk in Retail Supply Chains Using Fast-Ship

In this paper, we consider a two-retailer and one-supplier supply chain in which retailers make an extra effort to satisfy demand from customers who experience stockouts — retailers offer to direct-ship out-of-stock items on an expedited basis at no extra cost to customers. This practice is referred to as the fast-ship option. By supporting the fast-ship option, retailers and suppliers can reduce stockout risk without excessively increasing any one party’s inventory risk (excess inventory). These risks are also affected by retailers’ decision to cooperate or not when either one of them runs out of stock, and customers decision to search for the item at the other retailer when their firstchoice retailer stocks out. We characterize the supplier’s and the retailers’ optimal decisions and identify situations in which cooperation may not be the retailers’ best strategy. Similarly, having noncooperative retailers may not maximize the supplier’s profit among the two configurations considered. We also identify different regions of parameter values for which the retailers prefer to cooperate.