Turn bad into good: Using transshipment-before-buyback for disruptions of stochastic demand

This paper presents a general characterization of demand disruption in the supply chain for stochastic consumer demand, which has an increasing generalized failure rate. A heuristic transshipment-before-buyback (TBB) contract is developed for the managers of both manufacturers and retailers to enable them to benefit from the demand disruption. A TBB contract is theoretically shown to be better than a classical pure buyback contract, which has the same buyback price as the TBB contract. Our results also show that, in the presence of a buyback promise, the transshipment price has no impact on the manufacturer's incentive to induce retailers to undertake transshipment. In addition, the manufacturer has an incentive to meet part of the transshipment cost when it is sufficiently large. This effect is greater when the manufacturer is loss averse.