Heuristics in the Multi-Location Inventory System with Transshipments

Summary

When managing inventory systems with multiple locations, the inherent uncertainty of demand in many cases results in some locations having a shortage of inventory while others have a surplus inventory. One popular action against the costs of not having supply meet demand is the use of transshipments between the locations. We consider a multi-location inventory system with transshipments. Transshipments are allowed as recourse actions occurring after demands are realized and before they must be satisfied (in order to reduce the cost of shortage and surplus inventory). We examine the effect on the expected profit from using an ordering policy based on a greedy transshipment policy. While this policy is optimal for two and three locations, our numerical results show that it is near-optimal for medium sized problem instances. The main advantage of this policy is that the computational complexity is significantly reduced compared to a policy based on an optimal transshipment policy. A greedy transshipment policy would also be much easier to implement in practice.