A lateral transshipment model for perishable inventory management

Abstract

Since inventory costs account for half of logistics costs, optimal inventory management to minimise total inventory costs remains a sustainable competitive advantage. Lateral transshipment (LT) is evidently a proven strategy to minimise total inventory costs. The additional LT costs are more than compensated by lowering the stock-out costs. Previous LT models have not been applied to perishable products. Our proposed LT model embodies spoilage costs in the total inventory costs function with the other cost components (purchase from a regular supplier, LT, backordering and holding), and optimises the trade-off among these five key cost components. Numerical examples from a supermarket chain case study demonstrate that, as compared against the no or lower spoilage costs scenarios, lower LT costs are required to trigger the decision point for implementing LT in the higher spoilage costs scenario. However, common to both the with and without spoilage costs scenarios, LT is still the preferred strategy to minimise total inventory costs, given the decision rules are satisfied.