A Monte Carlo simulation approach to the capacitated multilocation transshipment problem

We consider a supply chain, which consists of N retailers and one supplier. The retailers may be coordinated through replenishment strategies and lateral transshipments, that is, movement of a product among the locations at the same echelon level. Transshipment quantities may be limited, however, due to the physical constraints of the transportation media or due to the reluctance of retailers to completely pool their stock with other retailers. We introduce a stochastic approximation algorithm to compute the order-up-to quantities using a sample-path-based optimization procedure. Given an order-up-to S policy, we determine an optimal transshipment policy, using an LP/network flow framework. Such a numerical approach allows us to study systems with arbitrary complexity.