Multi-location transshipment problem with capacitated production

We consider coordination among stocking locations through replenishment strategies that explicitly take into account lateral transshipments, i.e., transfer of a product among locations at the same echelon level. Our basic contribution is the incorporation of supply capacity into the traditional transshipment model. Our goal is to analyze the impact on system behavior and on stocking locations’ performance of the fact that the supplier may fail to fulfill all the replenishment orders. We therefore formulate the capacitated supply scenario as a network flow problem embedded in a stochastic optimization problem. To solve this problem, we devise a sample path optimization method together with infinitesimal perturbation analysis (IPA) for computing gradients. We find that, depending on the production capacity, system behavior can vary drastically. Moreover, in a productioninventory system, we find evidence that either capacity flexibility (i.e., extra production) or transshipment flexibility (i.e., pooling) is required to maintain a desired level of service. Simulation applications: Sample Path Optimization; Infinitesimal Perturbation Analysis. Inventory/Production: Multi-location Transshipments.