Joint initial stocking and transshipment - Asymptotics and bounds

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)273-289
Journal / PublicationProduction and Operations Management
Volume25
Issue number2
Publication statusPublished - 1 Feb 2016
Externally publishedYes

Abstract

A common problem faced by many firms in their supply chains can be abstracted as follows. Periodically, or at the beginning of some selling season, the firm needs to distribute finished goods to a set of stocking locations, which, in turn, supply customer demands. Over the selling season, if and when there is a supply-demand mismatch somewhere, a re-distribution or transshipment will be needed. Hence, there are two decisions involved: the one-time stocking decision at the beginning of the season and the supply/transshipment decision throughout the season. Applying a stochastic dynamic programming formulation to a two-location model with compound Poisson demand processes, we identify the optimal supply/transshipment policy and show that the optimal initial stocking quantities can be obtained via maximizing a concave function whereas the contribution of transshipment is of order square-root-of T. Hence, in the context of high-volume, fast-moving products, the initial stocking quantity decision is a much more important contributor to the overall profit. The bounds also lead to a heuristic policy, which exhibits excellent performance in our numerical study; and we further prove both the bounds and the heuristic policy are asymptotically optimal when T approaches infinity. Extension to multiple locations is also discussed.

Research Area(s)

  • asymptotic optimality, bounds, inventory, stochastic dynamic programming, transshipment

Citation Format(s)

Joint initial stocking and transshipment - Asymptotics and bounds. / Yao, David D.; Zhou, Sean X.; Zhuang, Weifen.

In: Production and Operations Management, Vol. 25, No. 2, 01.02.2016, p. 273-289.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review