On the benefits of operational flexibility in a distribution network with transshipment

Dennis Z. Yu, Sammi Y. Tang, Julie Niederhoff

Research output: Contribution to journalArticlepeer-review

17 Scopus citations


We consider a centralized distribution network with multiple retailers who receive replenishment inventory to satisfy customer demand of the local markets. The operational flexibility of the network is defined as the opportunity that one retailer's excess inventory can be transferred to satisfy other retailers' unmet customer demand due to stock-outs. A general modeling framework is developed to optimize retailers' order quantities under any possible flexibility level of a stylized two-stage distribution network. We apply the framework to formulate and solve the transshipment problem of a distribution network with three retailers. Six typical flexibility levels are investigated to make the comparison study on the firm's profit performance under three ordering quantity policies: average demand, newsvendor order quantity, and optimal order quantity. We find that the operational flexibility and system optimization are complements to the firm's performance. The ordering policy with newsvendor ordering quantity can perform fairly well with moderate flexibility level when compared with the optimized ordering policy with full flexibility.

Original languageEnglish (US)
Pages (from-to)350-361
Number of pages12
Issue number3
StatePublished - Jun 2011


  • Demand uncertainty
  • Inventory
  • Operational flexibility
  • Transshipment

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research
  • Information Systems and Management


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