European Journal of Operational Research 149 (2003) 438447 www.elsevier.

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Production, Manufacturing and Logistics

Evaluation of unidirectional lateral transshipments and substitutions in inventory systems

Sven Axs ater
*
Department of Industrial Engineering, Lund University, P.O. Box 118, 22100 Lund, Sweden Received 12 January 2001; accepted 3 May 2002

Abstract One interpretation of the model considered in this paper is a single-echelon inventory system consisting of a number of local warehouses, which normally replenish from an outside supplier. In case of a stockout at a warehouse an emergency lateral transshipment from another warehouse may be possible. However, such transshipments are only allowed in one direction, i.e., the ow structure is unidirectional. Such policies can be of interest if the warehouses have very dierent shortage costs. Another interpretation is substitution in an inventory system. We then instead consider dierent items in a single warehouse. When a demand for a low quality item cannot be met directly, the item can be replaced by another high quality item. We provide a simple and ecient approximate technique for policy evaluation in such systems. The performance of this technique is evaluated in a simulation study. Although the errors are not always negligible, the suggested method gives a good picture of how the considered lateral transshipments or substitutions aect the inventory system. 2002 Elsevier Science B.V. All rights reserved.
Keywords: Inventory; Emergency transshipments; Substitution; Stochastic demand

1. Introduction When distributing products over a large geographical region it is common to use several local warehouses in order to provide adequate service. These warehouses normally replenish from a common supplier, or possibly from dierent suppliers. However, when a demand cannot be met at a warehouse due to a stockout it is often possible to get a quick emergency replenishment from another warehouse with stock on hand. In general,

Tel.: +46-46-2223387; fax: +46-46-2224619. E-mail address: sven.axsater@iml.lth.se (S. Axs ater).

it is dicult to evaluate the consequences of such lateral transshipments in terms of service levels, stocks on hand, backorder levels, etc. In this paper we provide a simple technique for approximate evaluation of policies with unidirectional lateral transshipments, i.e., transshipments that are only allowed to go in one direction. Such policies may be of interest in some practical situations. Consider, for example, two local warehouses with very dierent shortage costs. If there is a transshipment cost it may be economically infeasible to transship items to the warehouse with the low shortage cost. A simple reasonable policy is then to always allow lateral transshipments from the warehouse with a low shortage cost to the

0377-2217/03/$ - see front matter 2002 Elsevier Science B.V. All rights reserved. doi:10.1016/S0377-2217(02)00447-2

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warehouse with a high shortage cost but not allow any transshipments in the other direction. By using our approach it is possible to evaluate such policies eciently. Although we shall describe our model in terms of lateral transshipments, the considered technique can also be used for modeling substitution in an inventory system. In that case we consider dierent items in a single warehouse. When a demand for a low quality item cannot be met directly, the item can be replaced by another high quality item. There are quite a few earlier papers dealing with various aspects of lateral transshipments. Generally these papers focus on transshipments that are not limited to one direction. However, in some papers the decision rules considered are general enough to make it possible to consider also unidirectional transshipments (see e.g., Tagaras and Cohen, 1992). Most previous papers deal with relatively complex inventory systems, often with more than one echelon, and do not provide exact results. Examples are Lee (1987), Axs ater (1990), Dada (1992), Alfredsson and Verrijdt (1999). A few papers present results on optimality (see Das, 1975; Robinson, 1990; Archibald et al., 1997). There are also a number of papers that consider substitution in inventory systems. Bassok et al. (1999) have recently provided exact results for a single-period Newsvendor type model. Various substitution models are also analyzed in e.g., Veinott (1965), McGillivray and Silver (1978), Parlar and Goyal (1984), Pasternack and Drezner (1991), Bitran and Dasu (1992), Gerchak et al. (1996), Hsu and Bassok (1999). This paper is organized as follows. In Section 2 we give a detailed problem formulation. The suggested approximate evaluation technique is described in Section 3. In the numerical study in Section 4 we compare our approximate results to results from a simulation study. Finally we give a few concluding remarks in Section 5.

Fig. 1. Material ow.

2. Problem formulation Consider N 3 warehouses facing independent stochastic customer demand. Fig. 1 illustrates the material ow.

The warehouses normally replenish from an external supplier with innite supply. The leadtimes for these replenishments are constant. In case of a shortage at warehouse 1 a lateral transshipment from warehouse 2 takes place if warehouse 2 has stock on hand. Such transshipments are for simplicity assumed to take no time. (However, delay costs can be included in a possible transshipment cost.) Similarly warehouse 2 can obtain transshipments from warehouse 3. This means indirectly that warehouse 1 can obtain transshipments from warehouse 3 if neither warehouse 1 nor 2 has stock on hand. Transshipments in the other direction, from warehouse 1 to 2 or from warehouse 2 to 3, are not allowed. (In case of substitution the three warehouses in Fig. 1 are replaced by three items such that item 2 has higher quality than item 1, and item 3 has higher quality than item 2.) We shall assume that the warehouses apply continuous review order-up-to S policies, and more generally (R, Q) policies, when replenishing from the supplier. Assume that all warehouses apply S policies and consider the demand for one unit at a warehouse. If possible this demand is satised by stock on hand. A corresponding replenishment order is then triggered at the considered warehouse. If the demand is not possible to satisfy by stock on hand the possibility of a lateral transshipment is evaluated. Such a transshipment from another warehouse is handled as a normal demand at the other warehouse and means that a corresponding replenishment order is triggered at the delivering warehouse. If the demand cannot be satised by a transshipment it is backordered at

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the warehouse where the demand originally took place. Also this will lead to a corresponding replenishment order. Let us introduce the following basic notation: N li ri Vari Li Si Ri Qi ai bi ci number of warehouses average customer demand per time unit at warehouse i, standard deviation of customer demand per time unit at warehouse i ri 2 , variance of customer demand per time unit at warehouse i lead-time for replenishments from the supplier for warehouse i order-up-to level at warehouse i reorder point at warehouse i batch quantity at warehouse i direct ll rate (directly from stock on hand) at warehouse i ll rate (including lateral transshipments) at warehouse i bi ai , indirect ll rate (only lateral transshipments) at warehouse i.

in the interval (t; t Li ) have not been delivered at time t Li . Consequently, we obtain the inventory level (stock on hand minus backorders) at time t Li as Si DLi ) where DLi ) is the stochastic lead-time demand. Very often DLi ) is approximated by a normal distribution with mean li Li and variance Vari Li . Consider now warehouse 1 in the case with unidirectional lateral transshipments. The demand is then cut o during certain times when warehouse 1 has no stock on hand while at least one of the other warehouses has stock. Assume that the indirect ll rates ci are known. It is then reasonable to model the mean and the variance of the leadtime demand, l01 and Var01 as l01 l1 1 c1 L1 ; Var01 Var1 1 c1 L1 : 1 2

Our purpose is to evaluate the resulting ll rates ai , bi and ci as well as the average stocks on hand and the backorder levels in the considered inventory system. Given an ecient evaluation procedure a policy optimization is, in general, straightforward. We shall, for simplicity, concentrate on the case with N 3 warehouses. Note that a3 b3 . The corresponding solution with N 2 is obtained as a special case, and the extension to higher values of N is immediate.

Note that (1) and (2) are obviously approximations since the demand that is transferred to other warehouses will depend on the demands at all warehouses. Similarly we can model the means and variances of the lead-time demand at the other warehouses as l02 l2 l1 c1 1 c2 L2 ; 3 Var02 Var2 Var1 c1 1 c2 L2 ; and l03 l3 l2 l1 c1 c2 L3 ; Var03 Var3 Var2 Var1 c1 c2 L3 : 5 6 4

3. Evaluation technique 3.1. Order-up-to-S policies Let us rst consider the standard approach for policy evaluation when no lateral transshipments are possible. Warehouse i keeps its inventory position (stock on hand plus stock on order minus backorders) at Si at all times. Consider an arbitrary time t and also the time t Li . Everything that is included in the inventory position at time t has been delivered at time t Li . Orders triggered

Recall that a3 b3 so c3 0. Given these means and variances of the leadtime demand for the warehouses we can obtain the direct ll rates ai by a standard procedure as   Si l0i ai U ; 7 r0i where Ux is the distribution function for a standardized normal distribution with mean 0 and standard deviation 1, and r0i Var0i 1=2 . The demand at warehouse i that is delivered by lateral transshipments is the demand that cannot be delivered directly but can be covered by ware-

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house i 1 (including transshipments from other warehouses). Consequently, we have c2 1 a2 b3 1 a2 a3 ; and thereafter, c1 1 a1 b2 1 a1 a2 c2 : 9 The direct ll rates ai are nonlinear functions of the indirect ll rates c1 and c2 through (1)(7). Therefore, (8) and (9) can be seen as two nonlinear equations in the indirect ll rates c1 and c2 . Note that a solution of (1)(9) must have 0 6 ai , bi , ci 6 1. For ai this follows from (7). This means that it is also true for b3 a3 . For c2 it then follows from (8). Furthermore we have b2 a2 c2 a2 a3 a2 a3 . Note that b2 is nonnegative and increasing with both a2 and a3 so unity is an upper bound. For c1 the bounds follow from (9). Finally b1 a1 c1 a1 b2 a1 b2 is nonnegative and increasing with both a1 and b2 so unity is an upper bound. Given a solution, we can also easily estimate average inventory and backorder levels (see e.g., Axs ater, 2000). Let ILi be the stochastic inventory level at warehouse i; x maxx; 0, and x maxx; 0. We obtain the average backorder level as   Si l0i EILi r0i G ; 10 r0i and the average inventory on hand as   Si l0i : EILi Si l0i r0i G r0i 8

11

In (10) and (11) we use the so-called loss function Gx ux x1 Ux where ux is the density of the standardized normal distribution. It remains to prove that a solution exists and is unique. Proposition. The system of Eqs. (1)(9) has a unique solution. Proof. Let rst c1 be given and consider (3)(7). If we increase c2 this means that a portion of the demand at warehouse 2 is moved to warehouse 3. When applying (7) we will get a higher a2 and a lower a3 . The c2 obtained from (8) will consequently decrease. Furthermore, if we insert c2 0

in (3)(7) we will get c2 > 0 from (8). Similarly, if we insert c2 1 in (3)(7) we will get c2 < 1 from (8). This is because (7) provides a probability. It is also obvious that the output c2 is a continuous function of the input c2 . Together this implies that that there is a unique c 2 c1 that satises (3)(8). Consider now an increase of c1 in (1)(6) while choosing c2 as c 2 c1 . We shall show that this means that both a2 and a3 obtained from (7) will decrease. Consider rst instead of c 2 c1 a choice of c2 , which keeps a2 unchanged, i.e., the same as for the original c1 . This means a larger c2 than before since c1 is increasing. Consequently, since both c1 and c2 are increasing, we will get a smaller a3 . Because a2 is unchanged and a3 is smaller we will get a smaller c2 from (8). From the rst part of the proof we can conclude that the chosen c2 was too large, and that the a2 corresponding to the new c1 must be smaller than the original one. Similarly, consider a choice of c2 , which keeps a3 unchanged. This means a smaller c2 than before. Consequently, a2 will decrease, and we will get a larger c2 from (8). We can now conclude from the rst part of the proof that the chosen c2 was too small, and that also a3 must decrease. Recall now that b2 a2 c2 a2 a3 a2 a3 is increasing with both a2 and a3 . Therefore, b2 is decreasing with c1 . Since a1 from (7) will increase, we must get a lower c1 as output from (9). Furthermore it is easy to see that if we start with c1 0 we will get c1 > 0 from (9), and if we start with c1 1 we will get c1 < 1 from (9). Furthermore the output c1 is obviously a continuous function of the input c1 . This means that the considered system of equations must have a unique solution c 1 and c c , and completes the proof. 2 1 It is also easy to determine the unique solution. Consider rst the determination of c 2 c1 . We start with lower and upper bounds c 2 c1 0 and cu c 1. Next we consider c c 2 2 1 2 c1 u c2 c1 =2. If the output from (8) is larger than c2 u we set c 2 c1 c2 , and otherwise c2 c1 c2 . This follows from the proof of the proposition above. We continue in this way until convergence. Since the gap between the upper and lower bound is divided by two in each iteration, we need about 10 iterations. When determining c 1 we proceed in a

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u similar way starting with c 1 0 and c1 1. For each value of c1 we need to determine c 2 c1 . We need to consider about 10 values of c1 , which means a total of 10 10 100 values of c2 . In the numerical study (see Section 4), the computation time was more or less negligible. So far we have only considered N 3 warehouses. The case N 2 is a simple special case, however. We obtain c2 0, and b2 a2 . Consequently, we only have to iterate in c1 . Alternatively, we can simply let S3 ! 1 in the model for N 3.

and EILi Ri

Qi 1 l0i 2  2   r0i Ri 1 l0i H Qi 1 r0i   Ri Qi l0i H ; r0i

1

14

where H x

Z
x

Gvdv

3.2. (R, Q) policies Without the lateral transshipments it is well known that in steady state the inventory position of warehouse i is uniform on the integers Ri 1, Ri Qi (assuming integral demand). However, this is no longer the case with lateral transshipments. Consider, for example, warehouse 1. If the inventory position is low it is reasonable to expect a higher probability for stockouts. If the demand is then covered by lateral transshipments the inventory position may continue to be low for a relatively long time. Still we shall, as an approximation, assume that the distributions of the inventory positions are uniform. It is then natural to replace (7) by 1 ai Qi 1  x l0i U dx r0i R i 1    r0i Ri Qi l0i G 1 Qi 1 r0i   Ri 1 l0i G : r0i Z
R i Q i

1 15 x2 11 Ux xux: 2 Note that for Qi 1, (12)(14) simplify to (7), (10) and (11) respectively with Si Ri 1. 4. Numerical results The presented approximate technique has been evaluated in a simulation study. We rst considered two base cases with N 2, respectively N 3 warehouses. Otherwise the assumptions are the same. The warehouses are identical and face Poisson demand with intensity ki 20 per unit of time, i.e., li Vari 20. The lead-times are Li 1. The warehouses apply order-up-to-S policies with identical order-up-to inventory positions Si . Starting with the lowest Si giving a ll rate bi of at least 60% for all warehouses (according to our model), we considered three consecutive values of Si . (Fill rates lower than 60% are hardly of practical interest.) The results with our model are compared to simulation results in Tables 1 and 2. The standard deviations of the simulation results are given in parenthesis. (The simulation results were obtained as the average of 10 independent runs. The length of each run was chosen to get a reasonable standard deviation. A typical run length was 400 time units plus an initial period of 10 time units to reach equilibrium.) Overall our approximate model gives a rather good picture of what happens. The ll rates are especially accurate, while the errors in stocks on hand and backorders are larger. Stocks are overestimated for warehouses receiving lateral transshipments and underestimated for delivering warehouses. It is

12

Similarly (10) and (11) are replaced by  Z Ri Qi  r0i x l0i EILi G dx Qi 1 Ri 1 r0i  2   r0i Ri 1 l0i H Qi 1 r0i   Ri Qi l0i H ; r0i

13

S. Axs ater / European Journal of Operational Research 149 (2003) 438447 Table 1 Numerical results for N 2 warehouses with Poisson demand, ki 20, Li 1, S policy Si 23 24 25 Warehouse no. Fill rate Model 1 2 1 2 1 2 0.95 0.61 0.97 0.71 0.98 0.79 Simulation 0.90 (0.00) 0.61 (0.01) 0.94 (0.00) 0.71 (0.01) 0.97 (0.00) 0.79 (0.01) Stock on hand Model 4.98 2.59 5.66 3.39 6.36 4.32 Simulation 4.35 (0.09) 2.77 (0.06) 5.08 (0.09) 3.64 (0.07) 5.85 (0.10) 4.59 (0.08) Backorders Model 0.30 1.27 0.21 0.85 0.15 0.53 Simulation 0.20 (0.02) 1.00 (0.02) 0.11 (0.01) 0.69 (0.06) 0.06 (0.01) 0.45 (0.05)

443

Standard deviation in parenthesis. Table 2 Numerical results for N 3 warehouses with Poisson demand, ki 20, Li 1, S policy Si 24 Warehouse no. Fill rate Model 1 2 3 1 2 3 1 2 3 1.00 0.95 0.65 1.00 0.97 0.75 1.00 0.99 0.84 Simulation 0.98 (0.00) 0.91 (0.01) 0.67 (0.01) 0.99 (0.00) 0.95 (0.01) 0.76 (0.01) 1.00 (0.00) 0.98 (0.00) 0.84 (0.01) Stock on hand Model 5.90 4.84 2.92 6.50 5.65 3.90 7.14 6.48 5.02 Simulation 5.29 (0.06) 4.42 (0.09) 3.40 (0.08) 6.01 (0.06) 5.30 (0.10) 4.44 (0.10) 6.78 (0.05) 6.21 (0.11) 5.53 (0.11) Backorders Model 0.18 0.36 1.11 0.13 0.24 0.68 0.10 0.15 0.38 Simulation 0.04 (0.01) 0.16 (0.03) 0.80 (0.05) 0.02 (0.01) 0.08 (0.02) 0.54 (0.05) 0.00 (0.00) 0.04 (0.01) 0.35 (0.04)

25

26

Standard deviation in parenthesis.

natural that the errors are smaller for higher values of Si since this means less lateral transshipments. In Tables 3 and 4 we lowered the intensity of the Poisson demand to ki 10. This means that the ratio between standard deviation and mean is larger. The results are similar, but, as expected, somewhat less accurate.

Tables 5 and 6 give the results for another variation of our base cases; the lead-times are doubled to Li 2. This means that also the lateral transshipments during the lead-time are doubled and the errors are again a little larger than in the base cases. In Tables 7 and 8, we replaced the S policies in our base cases with (R, Q) policies with batch

Table 3 Numerical results for N 2 warehouses with Poisson demand, ki 10, Li 1, S policy Si 12 13 14 Warehouse no. Fill rate Model 1 2 1 2 1 2 0.94 0.62 0.97 0.75 0.99 0.85 Simulation 0.88 (0.01) 0.59 (0.01) 0.94 (0.01) 0.72 (0.01) 0.97 (0.01) 0.82 (0.01) Stock on hand Model 3.24 1.89 3.95 2.70 4.67 3.67 Simulation 2.93 (0.06) 1.96 (0.05) 3.70 (0.07) 2.81 (0.06) 4.51 (0.08) 3.77 (0.07) Backorders Model 0.25 0.88 0.16 0.49 0.09 0.25 Simulation 0.18 (0.03) 0.70 (0.05) 0.07 (0.02) 0.43 (0.04) 0.03 (0.01) 0.24 (0.03)

Standard deviation in parenthesis.

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Table 4 Numerical results for N 3 warehouses with Poisson demand, ki 10, Li 1, S policy Si 13 Warehouse no. Fill rate Model 1 2 3 1 2 3 1 2 3 1.00 0.96 0.71 1.00 0.98 0.83 1.00 1.00 0.92 Simulation 0.98 (0.00) 0.90 (0.01) 0.68 (0.01) 0.99 (0.00) 0.95 (0.01) 0.79 (0.01) 1.00 (0.00) 0.98 (0.00) 0.88 (0.01) Stock on hand Model 4.06 3.48 2.45 4.72 4.31 3.48 5.45 5.17 4.62 Simulation 3.78 (0.06) 3.21 (0.07) 2.58 (0.07) 4.52 (0.06) 4.13 (0.07) 3.59 (0.07) 5.31 (0.07) 5.06 (0.08) 4.68 (0.07) Backorders Model 0.14 0.24 0.61 0.09 0.13 0.29 0.05 0.07 0.12 Simulation 0.04 (0.01) 0.15 (0.02) 0.55 (0.03) 0.01 (0.00) 0.06 (0.02) 0.32 (0.02) 0.00 (0.00) 0.02 (0.01) 0.18 (0.02)

14

15

Standard deviation in parenthesis. Table 5 Numerical results for N 2 warehouses with Poisson demand, ki 20, Li 2, S policy Si 45 46 47 Warehouse no. Fill rate Model 1 2 1 2 1 2 0.96 0.64 0.98 0.71 0.98 0.77 Simulation 0.93 (0.01) 0.67 (0.01) 0.95 (0.01) 0.73 (0.01) 0.97 (0.00) 0.78 (0.01) Stock on hand Model 7.98 3.93 8.65 4.78 9.32 5.72 Simulation 6.72 (0.17) 4.46 (0.12) 7.45 (0.18) 5.37 (0.19) 8.22 (0.19) 6.32 (0.07) Backorders Model 0.31 1.61 0.24 1.19 0.19 0.85 Simulation 0.18 (0.03) 1.19 (0.09) 0.10 (0.02) 0.91 (0.08) 0.05 (0.01) 0.68 (0.07)

Standard deviation in parenthesis. Table 6 Numerical results for N 3 warehouses with Poisson demand, ki 20, Li 2, S policy Si 46 Warehouse no. Fill rate Model 1 2 3 1 2 3 1 2 3 1.00 0.95 0.64 1.00 0.97 0.72 1.00 0.98 0.79 Simulation 0.99 (0.00) 0.94 (0.01) 0.71 (0.01) 0.99 (0.00) 0.96 (0.01) 0.77 (0.01) 1.00 (0.00) 0.98 (0.01) 0.82 (0.01) Stock on hand Model 9.02 7.31 3.95 9.58 8.13 4.93 10.17 8.94 6.04 Simulation 7.81 (0.12) 6.63 (0.22) 5.02 (0.15) 8.52 (0.13) 7.50 (0.22) 6.11 (0.17) 9.27 (0.13) 8.35 (0.22) 7.25 (0.19) Backorders Model 0.20 0.43 1.64 0.17 0.32 1.16 0.13 0.24 0.78 Simulation 0.03 (0.02) 0.18 (0.06) 1.04 (0.07) 0.02 (0.01) 0.10 (0.04) 0.79 (0.07) 0.01 (0.01) 0.06 (0.03) 0.59 (0.06)

47

48

Standard deviation in parenthesis.

quantities Qi 10. Compared to the base cases, stocks and backorders are estimated more accurately when a larger fraction of the stocks are due to the batches. However, the ll rates are a little less accurate.

Finally, we used our approximate technique for optimization of S policies for a system with N 2 dierent warehouses. The considered costs include holding and backorder costs as well as transshipment costs. Let, hi : holding cost per unit and time

S. Axs ater / European Journal of Operational Research 149 (2003) 438447 Table 7 Numerical results for N 2 warehouses with Poisson demand, ki 20, Li 1, (R, Q) policy, Qi 10 Ri 18 19 20 Warehouse no. Fill rate Model 1 2 1 2 1 2 0.95 0.62 0.97 0.71 0.98 0.78 Simulation 0.90 (0.00) 0.57 (0.01) 0.93 (0.00) 0.66 (0.01) 0.96 (0.00) 0.74 (0.01) Stock on hand Model 5.68 3.09 6.37 3.89 7.06 4.80 Simulation 5.30 (0.08) 3.02 (0.06) 6.05 (0.07) 3.83 (0.08) 7.15 (0.09) 4.86 (0.07) Backorders Model 0.37 1.40 0.27 0.99 0.20 0.66 Simulation 0.27 (0.02) 1.41 (0.06) 0.16 (0.02) 0.98 (0.05) 0.08 (0.01) 0.68 (0.04)

445

Standard deviation in parenthesis. Table 8 Numerical results for N 3 warehouses with Poisson demand, ki 20, Li 1, (R, Q) policy, Qi 10 Ri 19 Warehouse no. Fill rate Model 1 2 3 1 2 3 1 2 3 0.99 0.94 0.65 1.00 0.97 0.74 1.00 0.98 0.82 Simulation 0.97 (0.00) 0.88 (0.01) 0.60 (0.01) 0.99 (0.00) 0.94 (0.00) 0.71 (0.01) 0.99 (0.00) 0.96 (0.01) 0.78 (0.01) Stock on hand Model 6.63 5.43 3.37 7.24 6.25 4.33 7.87 7.07 5.42 Simulation 6.33 (0.05) 4.98 (0.09) 3.31 (0.06) 7.50 (0.03) 6.39 (0.08) 4.53 (0.08) 8.05 (0.04) 7.19 (0.09) 5.55 (0.10) Backorders Model 0.23 0.45 1.26 0.18 0.31 0.83 0.13 0.21 0.52 Simulation 0.06 (0.01) 0.32 (0.03) 1.27 (0.06) 0.02 (0.01) 0.14 (0.02) 0.81 (0.05) 0.01 (0.00) 0.07 (0.01) 0.58 (0.04)

20

21

Standard deviation in parenthesis.

unit at warehouse i; pi : backorder cost per unit and time unit at warehouse i; w: cost per unit for a lateral transshipment from warehouse 2 to 1. The system costs per unit of time, C, are obtained as: C
2 2 X X hi EILi pi EILi wk1 c1 : i1 i1

16

We studied 12 problems with dierent Poisson demands, backorder costs and transshipment costs. All problems have L1 L2 1, and h1 h2 1. The demand intensities are either k1 10 and k2 20, or k1 20 and k2 10. The backorder costs are either p1 10 and p2 5, or p1 5 and p2 10. The transshipment costs are either w 0, 1, or 2. All combinations of these parameters are considered. The results are presented in Table 9. For the approximate solution obtained by our technique we give both the approximate costs and the sim-

ulated costs for the approximate policy. Each problem was also optimized by simulation. We provide the optimal policy and the corresponding simulated costs. For comparison we also give the optimal policy and the exact costs without any transshipments. The quality of our approximation is best illustrated by the dierence in simulated costs for the approximate policy and the optimal policy obtained by simulation. The average cost increase over all 12 problems is 4.9%. The approximate S1 as well as S1 S2 are always too large. This is mainly because of the relatively large errors in the estimated backorder costs at warehouse 1 (see Tables 1, 3 and 5). As expected the performance of the considered policy declines rapidly when the transshipment cost gets larger and becomes comparable to the backorder costs that are avoided by a transshipment. For p1 5 and w 2, it is in fact better not

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Table 9 Results from optimization of S policies for N 2 warehouses with Poisson demand, Li 1, hi 1 Problem parameters k1 10 10 10 10 10 10 20 20 20 20 20 20 k2 20 20 20 20 20 20 10 10 10 10 10 10 p1 10 10 10 5 5 5 10 10 10 5 5 5 p2 5 5 5 10 10 10 5 5 5 10 10 10 w 0 1 2 0 1 2 0 1 2 0 1 2 Approximate solution S1 13 14 15 11 13 14 24 26 27 21 25 27 S2 25 25 25 28 27 27 15 14 14 18 16 15 Appr. costs 12.31 12.96 13.44 12.72 13.86 14.55 12.83 13.97 14.73 12.68 14.53 15.46 Sim. costs 11.10 (0.08) 12.13 (0.08) 12.95 (0.09) 11.32 (0.09) 13.07 (0.09) 14.02 (0.10) 11.17 (0.08) 12.65 (0.07) 13.59 (0.07) 10.88 (0.08) 13.38 (0.08) 14.65 (0.11) Optimum by simulation S1 9 12 13 6 11 13 19 24 25 14 22 25 S2 28 26 25 31 27 27 19 14 14 23 16 15 Sim. costs 10.25 (0.10) 11.73 (0.07) 12.50 (0.08) 10.27 (0.06) 12.81 (0.09) 13.84 (0.08) 10.47 (0.08) 12.19 (0.08) 13.07 (0.07) 9.77 (0.07) 12.86 (0.11) 14.04 (0.10) No transshipments S1 14 14 14 13 13 13 26 26 26 24 24 24 S2 24 24 24 26 26 26 13 13 13 14 14 14 Costs 12.98 12.98 12.98 13.34 13.34 13.34 13.34 13.34 13.34 12.98 12.98 12.98

Standard deviation in parenthesis.

to allow transshipments. When considering the optimal solutions we note that it is never optimal to pool the inventory completely and use S1 0 and a correspondingly large S2 . Such a solution would give the same ll rate at both warehouses. Still the backorder costs at warehouse 1 would be relatively large, because a demand at warehouse 1 that cannot be satised by a lateral transshipment is backordered at warehouse 1 and will have to wait a full lead-time. 5. Conclusions We have presented a simple and very fast technique for approximate evaluation of unidirectional lateral transshipments in inventory systems. An exact solution of the considered problem would be very time consuming and dicult to implement in practice. Our numerical results illustrate that, although the errors cannot be disregarded, the suggested technique should be of interest in practical applications when the purpose is to get a quick and simple picture of the impact of dierent inventory policies. References
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