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 place a transshipment request with other retailers to satisfy the customer’s demand. The system as a whole can benefit from this type of transshipments. In this paper, we study a problem of a centrally controlled system with multiple retailers. Each retailer serves two types of customers: high priority and low priority. Each retailer employs a rationing policy with a rationing level k in the context of a continuous-review (r, Q) inventory replenishment model. The overall policy is referred to as an (r, k, Q) policy. Retailers can transship items from either other retailers or a more expensive central depot. We propose an enumeration-based approximation to find the cost-minimizing policy parameters for the individual retailers and an approximation procedure to solve the combined rationing and transshipment problem. The latter relies on adjusting the demand arrival rates and the unit transshipment costs for both types of customers at all retailers. An extensive numerical study highlights the impact of transshipments on the retailers’ rationing policies. Without transshipment opportunities among each other, retailers set their policy parameters so that the resulting service levels are high for both types of customers. Allowing transshipments results in more aggressive rationing policies, and retailers with aggressive rationing policies benefit from the transshipments the most.
Highlights
Practitioners and academics have proposed multiple strategies for achieving significant cost and service benefits that increase the competitiveness of multi-echelon inventory systems
Given that we know how to solve the problems of individual retailers, we introduce our approximation procedure to solve the overall problem with transshipment opportunities among retailers
We observe that when transshipments are allowed, retailers start to incline toward a policy of type k ≥ r and the greatest cost reductions occur when more retailers are of type k < r before transshipments and of type k ≥ r after transshipments
Summary
Practitioners and academics have proposed multiple strategies for achieving significant cost and service benefits that increase the competitiveness of multi-echelon inventory systems. Transshipments provide an efficient mechanism for correcting mismatches between locations demands and their available inventories They can improve customer service levels and lead to cost reductions without the need to increase stock. Using the same pool of inventory to satisfy demands from different customer classes without differentiating them would result in increased inventory costs, since the highest required service level is generally used to determine inventory levels That particular Amazon distribution center will not transship this item elsewhere after reaching a critical level needed to stay competitive locally Motivated by these examples, we provide an approximation procedure to solve transshipment problems, which involve multiple stock-keeping locations receiving demands from two customer types.
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