A New Decision Rule for Lateral Transshipments in Inventory Systems

Abstract

This paper deals with a single–echelon inventory system consisting of a number of parallel local warehouses facing compound Poisson demand. There are standard holding and backorder costs as well as ordering costs at all warehouses. Normally, the warehouses replenish from an outside supplier. However, lateral transshipments between the warehouses are also possible. Such transshipments take no time but incur additional costs. When a demand occurs at a warehouse, the question is whether the whole demand or part of it should be covered by a lateral transshipment from another warehouse. Given a set of alternative decisions, our decision rule minimizes the expected costs under the assumption that no further transshipments will take place. This rule is then used repeatedly as a heuristic. A simulation study illustrates how the suggested technique performs under different conditions.