Strategic hybrid lateral transshipment for cost-optimized inventory management
| Published date | 11 September 2017 |
| Date | 11 September 2017 |
| Pages | 1632-1649 |
| DOI | https://doi.org/10.1108/IMDS-08-2016-0325 |
| Author | Dilupa Nakandala,Henry Lau,Jingjing Zhang |
| Subject Matter | Information & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems |
Strategic hybrid lateral
transshipment for cost-optimized
inventory management
Dilupa Nakandala and Henry Lau
School of Business, Western Sydney University, Sydney, Australia, and
Jingjing Zhang
Institute for Social and Economic Research, Nanjing Audit University,
Nanjing, China
Abstract
Purpose –Logistics practitioners must continually improve inventory management processes as they daily
respond to the twin drivers of customer satisfaction and cost efficiency. The purpose of this paper is to
investigate the scenario of sourcing goods through lateral transshipments in a periodic-review policy setting,
against a backdrop of cost optimization objectives.
Design/methodology/approach –The authors develop decision rules that make cost-optimized selection
between backordering and combined reactive and proactive lateral transshipment options possible.
This necessarily takes account of the trade-off between purchasing, holding and backorder cost
components. In addition, the authors use simulation studies to illustrate the superior performance of the
proposed decision options.
Findings –According to results of the simulation studies, the proposed two-step decision rule generates the
lower inventory cost than the alternative decisions rules. The outperformance of proposed two-step decision
rule is valid in different scenario.
Practical implications –This study develops the decision rules to assist wholesaler logistics practitioners
to make optimized decisions with regard to whether they should proactively lateral transshipments and if
selected, the optimum size of the extra lateral transshipment.
Originality/value –This study has made a significant contribution to the existing knowledge base as it
develops decision rules for a combined proactive and reactive approach using lateral transhipments to meet
both urgent demand and a part of the demand expected during the supplier lead time in a cost-efficient way.
Keywords Cost optimization, Lateral transshipment, Proactive transshipment, Reactive transshipment,
Wholesaler inventory management
Paper type Research paper
Nomenclature
W
i
the ith wholesaler
S
ij
the jth supplier of wholesaler W
i
p
ij
unit supply price by S
ij
to W
i
which
includes cost of item itself
q
ik
unit lateral transshipment cost for W
i
from W
k
which includes cost of item
itself and transportation cost
b
i
unit backorder cost of W
i
per
time unit
h
i
unit holding cost of W
i
per time unit
t
0
start of the scheduling period, i.e. t¼0
L
ij
lead time of S
ij
Lmax
ij the max lead time of S
ij
, i.e. the
scheduling period
d
i
(0) initial retailer demand at t¼0
appearing at W
i
l
i
(0) initial inventory level of W
i
before
replenishment at t¼0
^
ditðÞ the expected retailer demand at
wholesaler W
i
over the
ttime intervals
^
Dithe expected retailer demand at
wholesaler W
i
over Lmax
ij
c
i
(t)the costs incurred to fulfil the demand
from consumers at time t
cT
itðÞ the costs incurred to fulfil the demand
from consumers at time tin the
presence of lateral transshipment
Industrial Management & Data
Systems
Vol. 117 No. 8, 2017
pp. 1632-1649
© Emerald PublishingLimited
0263-5577
DOI 10.1108/IMDS-08-2016-0325
Received 18 August 2016
Revised 15 December 2016
Accepted 27 December 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
1632
IMDS
117,8
cS
itðÞ the cost incurred to fulfil the demand
from consumers at time tin the
presence of regular supply
xsize of lateral transshipment to fulfil
outstanding demand at t
0
δxsize of lateral transshipment to fulfil
demand during lead time
1. Introduction
Inventory managers face continual increasing pressure to achieve cost optimization, a
situation that has been exacerbated by intensifying competition and increased customer
demand for more competitively priced productsof better quality. Firms must be proactive in
strategically looking for new markets andat the same time retain their existing customers if
they are to survive. Whilemaintaining high stock levels generates high customer satisfaction
through reliability of product supply, firms need to identify the minimum sustainable stock
level in order to obviatethe high inventory cost. When firms find that demandcannot be met
with stock on hand,they might consider sourcing it from another entity in thesame echelon;
such access enables instantaneous delivery but comes at a considerably higher cost
(Axsäter, 2014; Seidscher and Minner, 2013). This study examines the potential for a
cost-effective extension of reactive lateral transshipment combined with extra quantities
(i.e. proactivelateral transshipment)that enables the inventory managersto meet the expected
demand, as an interim strategy until regular periodic supplies are received.
Lateral transshipment is commonly known as sharing or rotating stock in a
multi-location inventory system at the same echelon in the supply chain and has been
widely studied in recent years and been applied in many different inventory systems
(Lee, 1987; Archibald et al., 2009; Paterson et al., 2011; Stanger et al., 2013). The purpose of
lateral transshipment is to reduce some of the costs, such as holding costs, or/and to increase
the customer service level (Archibald et al., 2009). The majority of this extant research has
focused on the objectives of balancing the inventory levels of different locations or meeting
customer demand through free and instantaneous transshipments. Much of this previous
research has considered small transshipment costs relative to holding and stock-out costs;
inventory policies may be obtained from a simplified model based on zero transshipment
costs where transshipments are a means of resolving emergency situations.
The assumption is that low transshipment cost may be reasonable for lateral
transshipments within the same organization where inventory movements are between the
same echelon locations, and the purpose is to proactively distribute stock and reactively
meet the unfulfilled demand that cannot be fulfilled with the stock on hand (Paterson et al.,
2011). In other words, the inventory policy of lateral transshipment has been mainly studied
in the context of multi-locations controlled by a central decision maker, in order to achieve
specific objectives, such as overall inventory cost minimization and/or service level
maximization of the system that consists of multiple entities. Such objectives of overall
optimization of a supply chain system are true for big businesses. However, for small
businesses that are relatively independent, it is more usual to make decisions considering
own costs and resources constraints. In the existing studies, the profits of individual
wholesalers are considered from the perspective of being network depots. In reality, the
independent small business would take strategies to maximize its own profits, instead of
optimizing the network. Such situations have not been explored well in research related to
lateral transshipment decisions. This paper, deviating from these previous studies,
considers the lateral transshipments between wholesalers operated by different businesses
for the purpose of cost-optimized inventory management of the receiving wholesaler.
For wholesalers with a product distribution scope across a large geographic region
(Axsäter, 2003), decision rules are developed to determine the lateral transshipment quantity
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Strategic
hybrid lateral
transshipment
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