Evaluation of two simple extreme transshipment strategies

We consider an organization that has more than one outlet (retailer or regional warehouse) where stock is held to meet customer demands. In such a situation, transshipments can be used to improve customer service and/or reduce the aggregate stock required. Unfortunately, the determination of an optimal transshipment policy (i.e. when to transship and how much) is a complex mathematical problem. However, in earlier research the authors observed that choosing the better of two extreme policies leads to performance that is nearly as good as a more complex analysis that takes account of the future impact of a transshipment on the cost at the location sending the shipment. These extreme policies are (i) never transship and (ii) always transship when there is a shortage at one location and stock available at another. In this paper, for the case of two stocking points, we develop an analytical approach for approximately estimating the total expected costs (carrying, replenishment, transshipments and lost sales) of these two policies. This provides a mechanism for choosing between the two policies for any given set of problem characteristics. The results of a numerical experiment are shown.