Pooling in multi-location periodic inventory distribution systems

Risk pooling through lateral transshipment in inventory distribution systems is an effective means of improving customer service and reducing total system costs. The objective of this paper is to study the performance of an inventory system with one central warehouse and multiple retail outlets, collaborating in the case of imminent shortage by moving inventory between them. The analysis concentrates on the case of three outlets (stocking locations), which captures most of the characteristics and tradeoffs of multi-location systems with complete pooling. In addition to determining order-up-to quantities for the stocking locations, the decision maker must also specify the details of the transshipment policy when one or two locations face shortages. Simulation with a wide choice of model parameters leads to some very interesting and practically useful conclusions, including the following: (a) the benefits of risk pooling through transshipment are substantial and increase with the number of pooled locations; (b) the type of transshipment policy in case of shortages does not affect significantly the system's performance; and (c) it is preferable to form ‘balanced’ pooling groups, consisting of locations that face similar demand.