Optimal and Approximate Policies in Multiperiod, Multilocation Inventory Models with Transshipments

This paper examines the effects on the optimal ordering policy (and its cost) of allowing for interactions among retail outlets. Specifically, transshipments are allowed as recourse actions occurring after demands are realized but before they must be satisfied. The resultant savings in holding and shortage costs are balanced against the costs of transshipment. A base stock ordering policy is optimal for this model. If the final period base stock order-up-to point is nonnegative, then it will be the base stock order-up-to point for all periods; unfortunately, it can be found analytically only for two special cases, where either the cost parameters are equal at every outlet or there are only two outlets. These two special cases are used to validate a heuristic solution technique employing Monte Carlo integration, which is then compared to an easily calculated base policy in order to gauge the contribution of this model. The additional savings from using this heuristic policy are significant, particularly for problems with many retail outlets and low transshipment costs.