The impact of transshipments on safety stock requirements.

The focus of this article is to show, how a portfolio effect model can be employed to evaluate the use of transshipments to reduce safety stocks in a company and under what conditions it may be effective to do so. A transshipment occurs when goods are shipped to the customer from a facility other than the primary one. The reason for using transshipments is that, when customer demand is greater than on-hand inventory at a primary stocking facility, inventory from other locations can be used to avoid a stockout. While the primary drawbacks associated with transshipments are increased transportation costs and response times, the chief benefit is increased inventory availability or, conversely, reduced safety stocks. In order to test the applicability of the portfolio effect model to the case of transshipments, a single-echelon logistics system is considered. Representing this exemplary system, a simulation model has been developed having the same five assumptions underlying the portfolio effect model when applied to transshipments.