Dynamic Transshipment in the Digital Age

Abstract

In recent years, e-retailing has become the growth engine for the retailing industry. A large online retailer usually has multiple distribution centers serving different geographical regions. This chapter explores how to handle transshipment among distribution centers in a geographically dispersed network. We investigate transshipment strategies in a continuous review system with dynamic demand. We present a dynamic program that identifies the optimal transshipment rule. However, the dynamic program is time consuming and might be difficult for practitioners to implement. Therefore, we propose three distinct heuristic decision rules for making transshipment decisions. By employing numerical experiments, we analyze simulated results through various combinations of demand rates and delivery costs. We provide comments and suggestions based on the comparative results generated from different decision rules. As a result, we identify a good heuristic rule, which can be conveniently implemented and used in practice to determine effective transshipment policies.