Multi-echelon inventory model with emergency lateral transshipments

In multi-echelon inventory systems, since neighboring retailers are located at shorter distances than the supplier, a retailer may seek stock from them when it is out of stock, that is, emergency lateral transshipments between retailers are commonly practiced to provide improved order fill rate. We develop a continuous review multi-echelon model for consumable products when emergency lateral transshipments between retailers are allowed. Approximations are derived for the expected level of cost and order fill rate of retailers. Simulations conducted to test the validity of the approximate analytical model indicate that it performs very well in the cases where fairly high service levels are required. Numerical examples are also presented to illustrate the effects of emergency lateral transshipments on the performance criteria of inventory systems. The results indicate that emergency lateral transshipments will lead to a significant increase in the retailer order fail rate and this initiative is most suitable for items with a high penalty cost, or where lost sales are likely.