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

• Semi-Markov decision problem formulation.
• Benefits of proactive over different reactive transshipment rules.
• Networks with intermediate opportunities of demand pooling.
• The difference between reactive transshipment rules is negligible.

Lateral transshipments are an effective strategy to pool inventories. We present a Semi-Markov decision problem formulation for proactive and reactive transshipments in a multi-location continuous review distribution inventory system with Poisson demand and one-for-one replenishment policy. For a two-location model we state the monotonicity of an optimal policy. In a numerical study, we compare the benefits of proactive and different reactive transshipment rules. The benefits of proactive transshipments are the largest for networks with intermediate opportunities of demand pooling and the difference between alternative reactive transshipment rules is negligible.