Strategic hybrid lateral transshipment for cost-optimized inventory management

Abstract

PurposeLogistics practitioners must continually improve inventory management processes as they daily respond to the twin drivers of customer satisfaction and cost efficiency. The purpose of this paper is to investigate the scenario of sourcing goods through lateral transshipments in a periodic-review policy setting, against a backdrop of cost optimization objectives.Design/methodology/approachThe authors develop decision rules that make cost-optimized selection between backordering and combined reactive and proactive lateral transshipment options possible. This necessarily takes account of the trade-off between purchasing, holding and backorder cost components. In addition, the authors use simulation studies to illustrate the superior performance of the proposed decision options.FindingsAccording to results of the simulation studies, the proposed two-step decision rule generates the lower inventory cost than the alternative decisions rules. The outperformance of proposed two-step decision rule is valid in different scenario.Practical implicationsThis study develops the decision rules to assist wholesaler logistics practitioners to make optimized decisions with regard to whether they should proactively lateral transshipments and if selected, the optimum size of the extra lateral transshipment.Originality/valueThis study has made a significant contribution to the existing knowledge base as it develops decision rules for a combined proactive and reactive approach using lateral transhipments to meet both urgent demand and a part of the demand expected during the supplier lead time in a cost-efficient way.