A distribution inventory model with transshipments from a support warehouse

Abstract

This article considers a distribution inventory system consisting of N retailers and a regional support warehouse, all being replenished from a central warehouse/outside supplier. For the case where stock-outs occur, the retailers receive transshipments from the support warehouse at an extra cost. A model is presented for cost evaluation and optimization of the reorder points in the system under fill rate constraints. The solution method is designed to handle large real-life systems and is fast enough to be directly implemented in practice. A numerical study illustrates that (i) the model renders near-optimal solutions; (ii) the value of using a support warehouse can be significant even for large transshipment costs; and (iii) significant cost savings can be obtained using the proposed model. Using real data for a sample of 50 representative products, the proposed model reduces the expected holding and transshipment costs by 29% while still meeting target fill rates. [Supplemental materials are available for this article. Go to the publisher's online edition of IIE Transactions to view the supplemental file.]