Transshipment and Inventory Pooling: Supply Chain Management

Supply Chain Management: Transshipment and Inventory Pooling Transshipment and Inventory Pooling Transshipment and inventory pooling are among the most commonly-used inventory distribution strategies. Simply stated, inventory pooling (also referred to as lateral transshipment) is the storage of a single stock of inventory at a common point, with the aim of shipping the same to different retailers in multiple markets, each with its own demand patterns (Swinney, 2011). In other words, it is the pooling together of demands from multiple geographic markets (Swinney, 2011).

A perfect example of an inventory pooling arrangement is illustrated when 5,000 Cadillacs are parked at the GM regional distribution office in Ohio, awaiting shipment to different parts of the state. Transshipment, unlike inventory pooling, takes place at the retail level. It simply can be defined as the "shipment of items between different facilities at the same level in the supply chain to meet some immediate need" (Simchi-Levi, Kaminsky & Simchi-Levi, 2008, p. 18).

In the example above, for instance, once the Cadillacs have reached different retailers within the state, they can be transferred between two or more related retailers to take care of stockouts. Since demand is uncertain, the Cadillacs inventory at one retail facility may run out before that of another; if a customer places an order for the same, the two facilities could make arrangements to have the same transshipped from the other facility to the one with a deficit.

From these explanations, two similarities between the two distribution systems can be deduced: The shipping costs in both cases are reasonable: If the shipping costs (from the central point of distribution to the respective retail facilities) were significant, retail price would be higher, and the more established retailers, who enjoy scale economies, would have some sort of moat over their less-established counterparts, in which case the market would be more of a monopoly; a monopolistic environment does not favor inventory pooling.

In the case of transshipment, the shipping costs have to be reasonable because otherwise, the price will be higher than it otherwise would have been, and the consumer may opt for a cheaper substitute from another competitor. Both are affected by demand and lead time uncertainties: retail facilities base their purchase decisions on their demand predictions for that particular period. The lower the demand predictions, the less the inventory units demanded by retail firms and the lower the levels of inventory pooled by the manufacturer.

For instance, if car dealers in Ohio predict that demand for Cadillacs in a particular purchase cycle will be low, they are likely to purchase less units from the manufacturer, and consequently, GM is likely to pool lower quantities of the same in its regional distribution point. Similarly, transshipments are affected by demand patterns -- a retailer is forced to transship inventory from another retailer because the actual patterns of demand were not as predicted. Caterpillar Inc. And John Deere Inc.

are examples of key companies that encourage transshipment programs among retailers in their distribution chain. According to Zhao and Atkins (2008), transshipment works best in industries with high degrees of retailer differentiation and moderate levels of competition such as oligopolistic markets. Caterpillar Inc. And John Deere operate in the tractor-manufacturing industry, an oligopolistic setting characterized by a handful of large, established companies and highly-differentiated products. A tractor produced by CAT has significantly different features from that produced by Deere and Co., making it relatively difficult for a customer to substitute.

A customer will choose a CAT tractor over a Deere and Co. model because of the specific features; as such, if their preferred model is not available at a particular facility at that point in time, they may have no choice but to wait for the same to be transshipped from another facility, simply because other models from competitors.