Pooling in multi-location periodic inventory distribution systems George Tagaras * Department of Mechanical Engineering, Aristoteles University of Thessaloniki, 54006 Thessaloniki, Greece Received 17 October 1997; accepted 18 March 1998 Abstract Risk pooling through lateral transshipment in inventory distribution systems is an eective means of improving customer service and reducing total system costs. The objective of this paper is to study the performance of an inventory system with one central warehouse and multiple retail outlets, collaborating in the case of imminent shortage by moving inventory between them. The analysis concentrates on the case of three outlets (stocking locations), which captures most of the characteristics and tradeos of multi-location systems with complete pooling. In addition to determining order-up-to quantities for the stocking locations, the decision maker must also specify the details of the transshipment policy when one or two locations face shortages. Simulation with a wide choice of model parameters leads to some very interesting and practically useful conclusions, including the following: (a) the bene®ts of risk pooling through transshipment are substantial and increase with the number of pooled locations; (b) the type of transshipment policy in case of shortages does not aect signi®cantly the system's performance; and (c) it is preferable to form ``balanced'' pooling groups, consisting of locations that face similar demand. # 1998 Elsevier Science Ltd. All rights reserved. Keywords: Distribution; Inventory control; Safety stock; Simulation 1. Introduction 1.1. Scope Eective management of the supply chain is nowa- days recognized as a key determinant of competitive- ness and success for most manufacturing organizations [3]. Many quantitative models have been constructed to provide decision support for the man- agement of materials in supply chains and an excellent review of these models is given by Lee and Billington [12]. However, since the network of facilities that constitute the entire supply chain is typically too complex to analyze and optimize globally, it is often desirable to concentrate on smaller parts of the system so as to gain a full understanding of its characteristics, performance and tradeos involved. One such part that is attracting growing attention is the local distri- bution network, consisting of multiple retail outlets (stocking locations), which are supplied by a central warehouse or distribution center. The overall performance of the distribution network, whether evaluated in economic terms or in terms of cus- tomer service, can be substantially improved if the retai- lers collaborate in the event of unexpectedly high demand, which may result in shortages in one or more outlets. Collaboration usually takes the form of lateral inventory transshipment from an outlet with a surplus of on-hand inventory to an outlet that faces a stockout. Since the cost of a transshipment is generally lower than both the shortage cost and the cost of an emergency delivery from the central warehouse and the transship- ment time is shorter than the regular replenishment lead time, lateral transshipment simultaneously reduces the Omega, Int. J. Mgmt. Sci. 27 (1999) 39±59 0305-0483/98/$ - see front matter # 1998 Elsevier Science Ltd. All rights reserved. PII: S0305-0483(98)00030-9 PERGAMON * Tel: 30 31 99 60 17; Fax: 30 31 99 60 18; Email: tagaras @ccf.auth.gr.