The dynamic transshipment problem

We investigate the strategy of transshipments in a dynamic deterministic de mand environment over a finite planning horizon. This is the first time tha t transshipments are examined in a dynamic or deterministic setting. We con sider a system of two locations which replenish their stock from a single s upplier, and where transshipments between the locations are possible. Our m odel includes fixed (possibly joint) and variable replenishment costs, fixe d and variable transshipment costs, as well as holding costs for each locat ion and transshipment costs between locations. The problem is to determine how much to replenish and how much to transship each period; thus this work can be viewed as a synthesis of transshipment problems in a static stochas tic setting and multilocation dynamic deterministic lot sizing problems. We provide interesting structural properties of optimal policies which enhanc e our understanding of the important issues which motivate transshipments a nd allow us to develop an efficient polynomial time algorithm for obtaining the optimal strategy. By exploring the reasons for using transshipments. w e enable practitioners to envision the sources of savings from using this s trategy and therefore motivate them to incorporate it into their replenishm ent strategies. (C) 2001 John Wiley & Sons. Inc.