Warehouse capacity sharing via transshipment for an integrated two-echelon supply chain

•We study warehouse capacity sharing via transshipment.•We propose a nonlinear programming model by considering fixed transshipment cost.•An efficient algorithm is developed to find the channel-wide optimal solution.•Warehouse sharing with transshipment can significantly reduce the channel-wide cost.•Parameters have different impacts on the performance of this inventory policy. Warehouse capacity constraint has been one obstacle to achieving the channel-wide optimal decision in inventory management. We studied an integrated inventory model consisting of a single vendor and multiple buyers with warehouse capacity sharing via transshipment. We proposed an optimal transshipment policy by developing nonlinear programming models and genetic algorithms as well as obtaining Karush-Kuhn-Tucker points. This inventory policy can significantly reduce the channel-wide cost and the performance is influenced by the consideration of fixed transshipment costs. Sensitivity analyses show that parameters have different impacts on the channel-wide cost and the performances of the algorithms.