Sharing and Lateral Transshipment of Inventory in a Supply Chain with Expensive Low-Demand Items

Jovan Grahovac () and Amiya Chakravarty ()
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Jovan Grahovac: A. B. Freeman School of Business, Tulane University, New Orleans, Louisiana 70118-5669
Amiya Chakravarty: A. B. Freeman School of Business, Tulane University, New Orleans, Louisiana 70118-5669

Management Science, 2001, vol. 47, issue 4, 579-594

Abstract: The emergence of carriers that deliver items to geographically dispersed destinations quickly and at a reasonable cost, combined with the low cost of sharing information through networked databases, has opened up new opportunities to better manage inventory. We investigate these benefits in the context of a supply chain in which a manufacturer supplies expensive, low-demand items to vertically integrated or autonomous retailers via one central depot. The manufacturer's lead time is assumed to be due to the geographical distance from the market or a combination of low volumes, high variety, and inflexible production processes. We formulate and solve an appropriate mathematical model based on one-for-one inventory policies in which a replenishment order is placed as soon as the customer withdraws an item. We find that sharing and transshipment of items often, but not always, reduces the overall costs of holding, shipping, and waiting for inventory. Unexpectedly, these cost reductions are sometimes achieved through increasing overall inventory levels in the supply chain. Finally, while sharing of inventory typically benefits all the participants in decentralized supply chains, this is not necessarily the case---sharing can hurt the distributor or individual retailers, regardless of their relative power in the supply chain.

Keywords: Multi-Echelon Systems; Transshipment; Approximation in Inventory Models (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (56)

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