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An index heuristic for transshipment decisions in multi-location inventory systems based on a pairwise decomposition

Listed author(s):
  • Archibald, T.W.
  • Black, D.
  • Glazebrook, K.D.
Registered author(s):

    In multi-location inventory systems, transshipments are often used to improve customer service and reduce cost. Determining optimal transshipment policies for such systems involves a complex optimisation problem that is only tractable for systems with few locations. Consequently simple heuristic transshipment policies are often applied in practice. This paper develops an approximate solution method which applies decomposition to reduce a Markov decision process model of a multi-location inventory system into a number of models involving only two locations. The value functions from the subproblems are used to estimate the fair charge for the inventory provided in a transshipment. This estimate of the fair charge is used as the decision criterion in a heuristic transshipment policy for the multi-location system. A numerical study shows that the proposed heuristic can deliver considerable cost savings compared to the simple heuristics often used in practice.

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    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 192 (2009)
    Issue (Month): 1 (January)
    Pages: 69-78

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    Handle: RePEc:eee:ejores:v:192:y:2009:i:1:p:69-78
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    1. T. W. Archibald & S. A. E. Sassen & L. C. Thomas, 1997. "An Optimal Policy for a Two Depot Inventory Problem with Stock Transfer," Management Science, INFORMS, vol. 43(2), pages 173-183, February.
    2. Anil Kukreja & Charles P. Schmidt & David M. Miller, 2001. "Stocking Decisions for Low-Usage Items in a Multilocation Inventory System," Management Science, INFORMS, vol. 47(10), pages 1371-1383, October.
    3. George Tagaras & Morris A. Cohen, 1992. "Pooling in Two-Location Inventory Systems with Non-Negligible Replenishment Lead Times," Management Science, INFORMS, vol. 38(8), pages 1067-1083, August.
    4. Nils Rudi & Sandeep Kapur & David F. Pyke, 2001. "A Two-Location Inventory Model with Transshipment and Local Decision Making," Management Science, INFORMS, vol. 47(12), pages 1668-1680, December.
    5. Minner, Stefan & Silver, Edward A. & Robb, David J., 2003. "An improved heuristic for deciding on emergency transshipments," European Journal of Operational Research, Elsevier, vol. 148(2), pages 384-400, July.
    6. Hau L. Lee, 1987. "A Multi-Echelon Inventory Model for Repairable Items with Emergency Lateral Transshipments," Management Science, INFORMS, vol. 33(10), pages 1302-1316, October.
    7. Wong, Hartanto & Cattrysse, Dirk & Van Oudheusden, Dirk, 2005. "Inventory pooling of repairable spare parts with non-zero lateral transshipment time and delayed lateral transshipments," European Journal of Operational Research, Elsevier, vol. 165(1), pages 207-218, August.
    8. H. Jönsson & E. A. Silver, 1987. "Analysis of a Two-Echelon Inventory Control System with Complete Redistribution," Management Science, INFORMS, vol. 33(2), pages 215-227, February.
    9. Burton, Jonathan & Banerjee, Avijit, 2005. "Cost-parametric analysis of lateral transshipment policies in two-echelon supply chains," International Journal of Production Economics, Elsevier, vol. 93(1), pages 169-178, January.
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