One of the major trends facing organizations today is the demands for ever-higher levels of responsiveness and shorter defined cycle times for deliveries of goods and services. The distribution system for new automobiles has remained unchanged for many years, with more emphasis on supplying customers from stock held at retailers. Despite high stocks, the performance of the supply chain has failed to meet customer expectations in terms of delivering the exact specification desired within an acceptable timescale. To overcome the uncertainties and to manage inventory in a supply chain, in this work emergency lateral transshipments are allowed as alternative actions in order to reduce the cost of shortage and surplus inventory after demands are realized and we present a simple and intuitive model that enables to characterize optimal inventory and transshipment policy for n number of locations with λ products outfit by a single warehouse where stock is held to meet customers’ demands. An analytical approach is urbanized on an Indian automobile manufacturing company for estimating the total expected costs (carrying, transshipments and lost sales) of the two policies i.e. with transshipment and without transshipment and the results have been compared with existing one. This provides a mechanism for choosing between the two policies for any given set of problem characteristics. It has been observed that the notion of lateral transshipments appears to have substantial appeal and the benefits of avoiding retail level shortages outweigh the additional delivery costs resulting from transshipments, customer service may be enhanced significantly, associated inventory cost reduces, without the burden of additional safety stocks.
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