Stock redistribution in two-echelon logistics systems

Consider a two-echelon periodic-review network consisting of a warehouse W and retailers R-1,...,R-n. Between replenishments of the overall system, stocks at certain retailers may become unbalanced. Therefore we allow, at a cost, the possibility of a lateral supply between retailers. This constitutes a 'redistribution', horizontal shipments made one period before the next regular replenishment opportunity. A stochastic inventory model is presented for such a system whose multiple stock-keeping locations have nonidentical costs; this is a major difference between the research reported here and previous work on redistribution. We developed an algorithm for carrying out the redistribution, and prove that the result is near optimal. A combination of analytical and simulation results quantify the benefits (lower costs and decreased safety stock) to our redistribution model. The resulting cost and service are compared to those of the simple allocation model (no lateral transshipments). Our cost-minimisation model is also compared to the complete redistribution model of Jonsson and Silver,(1) who minimised backorders.