Approximate solutions for multi-location inventory systems with transshipments

We consider a multiple retailer distribution system where emergency transshipments are permitted. The objective is to determine the effect of transshipments on ordering policies. For the identical cost situation a solution procedure based on the dynamic programming technique is developed to obtain approximate optimal (s,S) policies for the multi-location inventory systems with centralized ordering. This (s,S) ordering policy is then compared with a simplified policy that assumes free and instantaneous transshipments. The findings are that for a small number of stores and small transshipment costs, relative to the holding and stock-out costs, inventory policies may be obtained from a simplified model using zero transshipment costs but using transshipments as a means to solve emergency situations. If transshipment costs are equal or greater than the holding plus stock-out costs then a model without transshipments can be used. In general using transshipments seem to be a very cost effective way of reducing inventories for situations with a large number of stores where transshipment costs are small relative to the stock-out plus holding costs.