This Article Full Text (PDF) e-companion References Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via Google Scholar Google Scholar Articles by Zhao, H. Articles by Deshpande, V. Search for Related Content

Optimal Dynamic Production and Inventory Transshipment Policies for a Two-Location Make-to-Stock System

Krannert School of Management, Purdue University, West Lafayette, Indiana 47907
School of Business, University College Dublin, Belfield, Dublin 4, Ireland
Krannert School of Management, Purdue University, West Lafayette, Indiana 47907
zhaoh{at}purdue.edu
jennifer.ryan{at}ucd.ie
vinayak{at}purdue.edu

Inventory sharing through transshipment has attracted a great deal of attention from researchers and practitioners due to its potential for increasing service levels while simultaneously decreasing stock levels. In this paper, we analyze the optimal production and transshipment policy for a two-location make-to-stock queueing system with exponential production and interarrival times. A key feature of our model is that we allow transshipments to be triggered by both demand arrivals and production completions. Thus, transshipment is used to achieve production flexibility through inventory reallocation, as well as to fill emergency demands. We also consider capacity issues in transshipment by modeling each location as a single-server, make-to-stock queueing system. In this setting, we prove that the optimal production policy for each location belongs to the "hedging point" family of policies, while the optimal demand filling policy belongs to the "state-dependent rationing" family of policies. We analyze the structural properties of the optimal policy and provide conditions under which the optimal policy can be simplified. Given the complex nature of the optimal policy, we develop three easy-to-implement heuristics that work very well for a large range of cost parameters.

Subject classifications: inventory transshipment; inventory/production systems; make-to-stock systems; optimal control.
History: Received February 2006; revision received May 2007; accepted July 2007.