6.4.4 Transhipment
We have seen how centralisation of inventory, provided certain conditions are met, reduces the aggregate level of safety stock required at a certain level in the supply chain. But managerial decisions may not allow complete closure of a warehouse or total centralisation for many reasons, including service level and response time to the market demands. One effective alternative in this case is the method of transhipment.
Transhipment is enabled by a good information link between the various facilities and a quick and reliable transportation link. The technique of transhipment can be explained by considering a firm with multiple, geographically dispersed stock keeping facilities (retail outlets or warehouses). These facilities are expected to serve all demands originating within a captive geographic area. A transhipment occurs when a facility satisfies demand from a territory other than its own (Evers 1997). Effective transhipment results in reduced safety stock requirement and fewer stock outs. The net effect is similar to risk pooling.
Transhipment refers to shipments of items between two facilities in the same echelon. This assertion should not be confused as what is important is how the demand is satisfied. If we are considering transhipment at the warehouse level, it would be meaningless to ship the required item to another warehouse and then to reship to the retail unit, unless some sort of consolidation or value adding is carried out at the initial warehouse.
Figure 6.5 Transhipment at the warehouse level. Though W/H 1 is shipping direct to a retailer at market B, the demand of W/H 2 is met by stocks kept in W/H 1.
Similarly, it is possible to make shipments between retail outlets to meet varying demand at different locations. When all retail outlets are owned by the same owner, this strategy can be easily implemented provided the demand patterns faced by the various units support the strategy.
Figure 6.6 Transhipment between retail outlets
The benefits of transhipment are similar to risk pooling. It is possible to reduce the aggregate level of inventory within the echelon. It is quite obvious that an efficient system based on transhipment would require readily available information and an efficient transportation system to keep customer order response time to an acceptable minimum. As in the case of risk pooling, in instances where markets exhibit high degrees of demand variability, the use of transhipment should enable firms to reduce inventory significantly. The main concern here is the increase in transportation costs and this has to be weighed against the gains achievable by transhipment. When one is considering retail outlets owned by different owners, this kind of pooling would require considerable efforts towards integration of information and business processes.
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