A pragmatic stochastic decision model for supporting goods trans-shipments in a supply chain environment

a r t i c l e i n f o Keywords: Lateral transshipments Stochastic demand Wholesaler operations Inventory replenishment This paper develops a set of decision rules to assist wholesalers to decide whether it is more cost effective to transship urgent outstanding retailer orders from other wholesalers, very fast but at a higher purchase cost, or to order from their suppliers. By considering the uncertainty in demand, it models the total cost encountered by wholesalers, including purchasing, backordering and holding costs in the inventory replenishment process. Unlike previous models that are complex, highly mathematical and difficult to apply, this model provides a pragmatic and less complex method adoptable by ordinary logistics managers and requires input data that are accessible from the previous transaction records of an organization. The application of the proposed decision rules are illustrated considering different scenarios of wholesaler–supplier combinations. Ever increasing market competition forces wholesalers to be ever cost conscious and responsive to the changing needs of the market. A consequence is that wholesalers maintain a low inventory for the purpose of buffering in order to minimize the possible costs. However, the criticality of losing the sales due to stock outages with consequent possible lost profit and decreased customer satisfaction are no less important. To manage these potentials, wholesalers adopt a mix of urgent order lateral transshipments from other wholesalers at a higher cost, while at the same time backordering from their usual suppliers to meet the continuing stochastic retailer demands — this produces flexibility in the inventory system. Rules that assist wholesalers' decision making processes have practical importance for inventory management. Supply chain management concepts that streamline the flow of goods have been the focus of research for a considerable time. Previous research into wholesaler inventory management has presented complex criteria drawn from diverse information sources that are problematic to adopt in real-world practice. There remains a need for simpler and more readily applicable rules for lateral transshipment decisions. In a multi-location setting under a continuous review (R,Q) ordering policy Axsäter [3] considers a decision rule for determining how many units should be transshipped , depending on the complete state of the system. The decision is optimal and can be repeatedly used as a heuristic. He puts a significant focus on future cost difference for a certain initial state and the highly mathematical analysis and probability assumptions may not be easily understood by ordinary managers. …