Inventory Sharing in the Presence of Commodity Markets

Park, S J and Lai, G and Seshadri, S (2016) Inventory Sharing in the Presence of Commodity Markets. Production and Operations Management, 25 (7). pp. 1245-1260. ISSN 1937-5956

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This paper investigates the value of inventory sharing in the presence of spot and forward markets. We consider a multi-period setting where two firms process a common commodity to meet stochastic demands. They can buy and sell the commodity through both the spot and forward markets. They can also share the commodity if one has leftover inventory while the other has excess demand. We first characterize the equilibrium strategies of the two firms. Our analysis reveals that in such a context, the value of inventory sharing is low when the forward price is directly used to value the sharing transactions. We then develop a structured transshipment price scheme that uses a linear combination of the spot and forward prices. We show that this method can substantially increase the value of inventory sharing. Our analysis also reveals that in the presence of liquid spot and forward markets, the value of inventory sharing mainly results from the difference of the transaction costs, and it increases if the market in which firms operate becomes more competitive.

Item Type: Article
Subjects: Business and Management
Date Deposited: 11 Feb 2016 12:58
Last Modified: 09 Jul 2023 13:27

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