The use of simple calibrations of individual locations in making transshipment decisions in a multi-location inventory network

Abstract

Demands occur at each location in a network of stock-holding retail outlets. Should a location run out of stock between successive replenishments, then subsequent demands may be met either by transshipping from another location in the network or by an emergency supply from a central depot. We deploy an approximate stochastic dynamic programming approach to develop a class of interpretable and implementable heuristics for making transshipment decisions (whether and from where to transship) which make use of simple calibrations of the candidate locations. The calibration for a location depends upon its current stock, the time to its next replenishment and the identity of the location needing stock. A numerical investigation shows strong performance of the proposed policies in comparison with standard industry practice (complete pooling, no pooling) and a recently proposed heuristic. It points to the possibility of substantial cost savings over current practice.

Keywords:

• dynamic programming
• inventory
• stochastic process

Acknowledgements

The authors acknowledge the support of the EPSRC for this work through the award of grants GR/T08562/01 and GR/S45188/01. They also would like to express their appreciation of the helpful comments of a referee.