Multiple Retailer Cooperation for Joint Transportation and Inventory Decisions

In this paper, we address a cooperative game application to supply chain management. Specifically, we study a distribution system where a set of retailers may order for a single product from a unique supplier to satisfy a deterministic and constant rate demand of final customers. Each retailer, when ordering for a quantity of product, has to pay a fixed ordering cost and a transportation cost. Moreover, the delivered products generate some holding cost. The transportation cost is function of the distance separating the supplier from the retailer. Retailers may choose to cooperate in order to realize some cost saving benefits. The cooperating retailers may then group their orders and be delivered during the same trip. The centralized situation resulting from such cooperation is analyzed using cooperative game theory concepts and compared to the decentralized situation and to cooperative inventory games. We show that, unlike these games, under explicit transportation considerations, cooperation interest is no longer obvious for any retailer. Further, we prove that benefits do not necessarily increase with the number of retailers implied by the cooperation and give a sufficient condition for some coalition to be profitable. Finally, we propose a rational benefit sharing scheme.