Using Information Technology to Facilitate Pooling of Retail Inventories

The availability of an intranet system among retailers of a distributor facilitates retailer-to-retailer trade, which is called virtual inventory pooling. We study a centralized virtual pooling system of retailers, which are replenished periodically by the distributor. Between two replenishments, an item can be transshipped to a stocked-out retailer from another retailer, but it arrives a transshipment time later. During this time, the stocked-out retailer incurs a backorder cost. If the transshipment is not possible, a backorder cost is incurred until the next replenishment. Since the transshipment time is shorter than the time between two replenishments, transshipments can reduce the backorder cost at the stocked-out retailer, while decreasing the holding costs at the other retailer. The transshipment policy is characterized by holdback inventory levels, which are non-decreasing in time. Retailers entirely base their transshipment decisions on optimal hold-back levels and real-time inventory data, which are easily communicated among retailers through an intranet system. In addition, the initial model is altered by charging the holding costs only at the end of a replenishment cycle, which induces more dynamic hold-back levels. Our transshipment policy differs from those in the literature because we allow multiple in-cycle transshipments with positive transshipment times, and backorder costs.