Lateral Transshipment and Rationing Policies for Multi-Retailer Systems

Abstract

Many retailers discriminate among their customers based on their value to the firm. Instead of losing a customer due to this discrimination or lack of inventory, a retailer might prefer to request that other retailers satisfy the customer's demand. The system as a whole can benefit from this types of transshipments. In this paper, we study a multi-retailer system with each retailer serving two types of customers: high and low priority. Each retailer employs a rationing, critical-level policy in the context of a continuous-review (r,Q) inventory model with lost sales. Retailers can transship items from either other retailers or a central depot. Therefore, no demand is lost; all demand is satisfied by the system. We propose an approximate iterative procedure to find the cost-minimizing policy parameters for individual retailers and propose an iterative heuristic, which relies on adjusting the demand arrival rates and the transshipment costs for both types of customers at all retailers, to solve the overall rationing and transshipment problem. Via numerical analysis, we identify the conditions under which a retailer can benefit from transshipments by changing its rationing policy. In addition, we study the sensitivity of the cost benefit resulting from transshipments with regard to different system parameters.