Inventory Sharing in the Presence of Commodity Markets

Seung Jae Park, Guoming Lai, Sridhar Seshadri

Research output: Contribution to journalArticle

9 Citations (Scopus)

Abstract

This study 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 trans-shipment 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.

Original languageEnglish
Pages (from-to)1245-1260
Number of pages16
JournalProduction and Operations Management
Volume25
Issue number7
DOIs
Publication statusPublished - 2016 Jul 1

Fingerprint

Liquids
Costs
Financial markets
Commodity markets
Forward markets
Spot market
Commodities
Forward price
Transshipment
Excess demand
Transaction costs
Stochastic demand
Spot price

All Science Journal Classification (ASJC) codes

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

Cite this

Park, Seung Jae ; Lai, Guoming ; Seshadri, Sridhar. / Inventory Sharing in the Presence of Commodity Markets. In: Production and Operations Management. 2016 ; Vol. 25, No. 7. pp. 1245-1260.
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Inventory Sharing in the Presence of Commodity Markets. / Park, Seung Jae; Lai, Guoming; Seshadri, Sridhar.

In: Production and Operations Management, Vol. 25, No. 7, 01.07.2016, p. 1245-1260.

Research output: Contribution to journalArticle

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