Integrated production-transshipment control policy for a two-location unreliable manufacturing system

An important strategy used by two-location firms is lateral transshipment which allows sharing the inventory between the locations to reduce the impact of shortages. Transshipment can particularly be appealing as a policy used between unreliable production facilities as it can reduce the effects of these uncertainties. We study a manufacturing system that allows transshipment between two failure-prone production facilities with different capacities. An integrated production-transshipment control policy is proposed with the aim of minimizing the total cost that comprises holding, backlog and transshipment costs. The structure of the proposed policy is obtained using the stochastic dynamic programming. It consists of a combination of a hedging point policy for production control and a state dependant economic transshipment order quantity. The parameters of the obtained control policy are optimized by adopting a simulation-based optimization approach. The robustness of the results is verified by performing sensitivity analysis. A comparative study that considers our proposed policy with the most relevant policies from the literature that we adapt to our system is conducted and shows that our proposed policy outperforms the others in terms of cost.