A Semi-Markov decision problem for proactive and reactive transshipments between multiple warehouses

Lateral transshipments are an effective strategy to pool inventories. We present an exact Semi-Markov decision problem formulation for proactive and reactive transshipments in a multi-location continuous review distribution inventory system with Poisson demand and exponential replenishment lead times. In a numerical study, we investigate the benefits of proactive over different reactive transshipment rules depending on the design of the distribution network, cost parameters, and demand and supply parameters. We find that the benefits of proactive transshipments are the largest for networks with intermediate opportunities of demand pooling and that the difference between reactive transshipment rules is negligible.