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...

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…