Modelling a two-retailer inventory system with preventive lateral transshipment using expected path approach

Abstract

The paper presents the formulation of a mathematical model using the expected path approach in order to minimise the expected long-run total system cost per cycle of a two-retailer inventory system with preventive lateral transshipment. Each retailer employs base stock periodic review policy. The model assumes Poisson distributed demand and instantaneous transshipment. Unsatisfied demands are fully backlogged. Transshipment quantity is controlled by the hold-back inventory level. The benefits of inventory redistribution are illustrated by percentage reduction of system cost. The results show that cost parameters play a substantial role in transshipment decision. The benefits of lateral transshipment increase with either four conditions; unit transshipment cost is lower, unit backorder cost per unit time is higher, the transshipment point is scheduled near the end of the cycle, and regular replenishment lead time is longer. Furthermore, the decrease in system cost mainly comes from the reduction of the expected holding inventory cost.