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Int. J. Services Technology and Management, Vol. 7, Nos. 5/6, 2006

Lateral transshipment for managing excesses and shortages in a multilocation inventory system: a case study of Timex Watches Ltd. Pradip K. Bhaumik*
International Management Institute B-10, Qutab Institutional Area Tara Crescent, New Delhi 110 016, India Fax: +11 2686 7539 E-mail: pkbhaumik@imi.edu *Corresponding author

Sachin Kataria
Business Systems Group, Timex Watches Limited B-190, Phase-II, NOIDA 201 305, India Fax: +(11)95120 2562670 E-mail: skataria@timex.com
Abstract: This paper describes a large watch manufacturer in India and a proposed system to reduce its cost and simultaneously improve its service level by planning lateral transshipments. Many authors have studied the multilocation inventory situations, under different demand and cost characteristics, and almost all of them have developed push systems developing optimum or good replenishment/transshipment policies. Yet pull systems may offer simpler and more practical joint replenishment/transshipment policies, particularly when practical considerations as faced by real companies are studied. The process map including the inputs and the outputs for the replenishment system is described, as well as the feedback mechanism to revise the system parameters. Keywords: transshipment; multilocation inventory; distribution chain; service level. Reference to this paper should be made as follows: Bhaumik, P.K. and Kataria, S. (2006) Lateral transshipment for managing excesses and shortages in a multilocation inventory system: a case study of Timex Watches Ltd., Int. J. Services Technology and Management, Vol. 7, Nos. 5/6, pp.602614. Biographical notes: Pradip K. Bhaumik is a B.Tech. in Mechanical Engineering from the Indian Institute of Technology, Delhi. He worked as a Trainer-Cum-Consultant with the National Productivity Council, New Delhi for eight years after his graduation. After completing his doctoral programme from the Indian Institute of Management, Ahmedabad he has been teaching at the International Management Institute, New Delhi in the area of Operations Management. He has been a Consultant to many Indian companies including MNCs and also a UNDP Consultant. His research interests include supply chain management, goal programming, game theory, regulation and impact assessment of government programmes and he has published in national and international journals. Copyright 2006 Inderscience Enterprises Ltd.

Lateral transshipment for managing excesses and shortages

Sachin Kataria is a B.Tech. in Computer Science from Rohilkhand University, Uttar Pradesh, India. After completion of his MBA at the International Management Institute, New Delhi (with a specialisation in systems) he has been working with Timex Watches Limited for the last four years as an Associate Consultant Software. This is a revised version of a paper presented at the International Logistics and Supply Chain (ILSC) Conference, 2004, which was held at Brisbane, Australia on 1011 June 2004 and organized by the Queensland University of Technology, Brisbane. The revision has benefited from the comments of two anonymous referees.

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Introduction

Innovative strategies are being used by business organisations in the area of logistics to achieve competitive advantages. Firms have recognised the large potential for service level improvements, as well as cost savings, through greater coordination and better management of their supply chain. In this paper, we describe and analyse a case study where a watch manufacturer coordinated among multilocation inventories through replenishment strategies that explicitly took into consideration transshipments, that is, movement of a product among locations at the same echelon of a supply chain. Lateral transshipment represents one strategy for enhancing customer service while reducing costs in a multilocation inventory system. Organisations typically have many service locations e.g., retail stores spread throughout a wide geographical region to satisfy numerous, dispersed customers. It is possible that at some point in time, one location may have a shortage due to insufficient stock while another has excess stock. Lateral transshipment (also referred to as pooling, cross-filling, stock transfer and redistribution) of products could be used in such situations to satisfy the shortage in one location with the surplus (or excess) from another location. Transshipment problems could be analysed along the following dimensions: Single-period or multiperiod Two-location or multilocation Two echelons or multiechelon Identical cost/demand characteristics at each location or different characteristics Fixed review period systems or constant review systems Push systems or pull systems.

One of the earliest studies on transshipment problems is that of Krishnan and Rao (1965), who used the single-period newsboy problem to develop order-up-to policies. Robinson (1990) extended this to the multiperiod case. In the literature, most authors have analysed transshipment situations involving either two retailers e.g., Robinson (1990), Tagaras and Cohen (1992), Archibald et al. (1997) and Xu et al. (2003) or those with multiple but largely identical suppliers e.g., Krishnan and Rao (1965), Robinson (1990) and

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Dada (1992). Herer et al. (2001) considered multiple retailers with different cost structures and demand parameters. Given an order-up-to S replenishment policy, they used an LP/network flow framework to develop an optimal transshipment policy and used simulation to decide the value of S. Minner et al. (2003) developed decision rules for transshipment, taking into account the fixed and variable transshipment costs as well as information on orders en route to retailers. Rudi et al. (1998) looked at a situation where the locations were not all owned by one firm, nor their inventory orders coordinated by any single agency or explicit mechanism. They found that, in general, joint profits were not maximised at the unique Nash equilibrium and that a coordinated transshipment policy could increase profitability. Some authors, like Karmarkar (1987) and Ballou and Burnetas (2000), assumed that transshipments occurred before demand was realised, whereas most others assumed that transshipments occurred after demand was realised but before it was satisfied. Although cost minimisation and service level maximisation are desirable objectives of both the supplier and the customer, usually one can be achieved by trading it off with the other. The concept of leagility in supply chains, which relates to the capability of supply chains to be lean and agile concurrently, has recently been introduced, and Herer et al. (2002) have established how transshipments can be used to enhance both the agility and leanness of supply chains. Grahovac and Chakravarty (2001) have found that in supply chains of expensive low-demand items, sharing and transshipment of items often, but not always, reduce the overall costs sometimes by increasing overall inventory levels in the supply chain. Axster (2003) developed a decision rule for lateral transshipments among local warehouses facing compound Poisson demand, and studied through simulation its effect when used repeatedly as a heuristic. The periodic review systems could be modelled as newsboy problems using single-period modelling or could be optimised using dynamic programming in the multiperiod context. Only a few studies examined continuous review systems in the context of transshipments, such as Axster (1990), Dada (1992) and Xu et al. (2003). In the literature, most of the studies refer to designing good or optimal push type inventory control policies under different demand and cost patterns. It may be possible to develop effective pull systems, if transshipment quantities can be decided after demand or a good forecast of demand is realised but before it is satisfied. In this paper we present how the distribution chain is managed by a company having a large number of product variants, each with demand having high seasonality as well as high uncertainty. After this Introduction, Section 2 highlights the methodology used for this study. The background of the company viz. Timex Watches Limited is described in Section 3. The distribution chain of watches is elaborated in Section 4, while the Carrying and Forwarding Agent (CFA) stock replenishment system, which also explores transshipment possibilities, is described in Section 5. Section 6 provides an analysis of the case study and presents conclusions.

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605

Methodology

Although many authors have studied multiechelon inventory systems and used lateral transshipment to achieve system-wide optimisation as summarised in the previous section, there is usually a lot of difference between a real system and its mathematical model. Quite often the mathematical model is a highly simplified version of the real system but capturing its essential characteristics. Even then, when the issue is about managing a complex supply chain, it may be that one has to make major modifications while applying the results of theoretical analysis. The major objective of this paper is to study a real supply chain for a specific company and investigate the complexities that go beyond the usual assumptions made in theoretical studies. The choice of the company and the industry is also of importance. The watch industry is known to have a large number of product variants and this is expected to add to the complexities of its supply chain. With a single manufacturing facility and a market spreading the length and breadth of India, and with such a large number of product variants, the supply chain of Timex appeared interesting for a detailed study. It suited us even more because one of the authors is also working at Timex. The proposed system detailed in this paper is the result of an intensive study of the existing supply chain with a view to improving its effectiveness and efficiency, i.e., improve both the service level and the average system inventory. Lateral transshipment was considered effective as well as feasible for taking care of shortages and excesses at the CFA level, as well as the regional office level, provided a comprehensive process could be put in place to explore such possibilities in a systematic manner. The proposed design, as described in this paper, evolved through a series of observations, discussions, critical questioning and analysis of various sub-processes involved in managing the supply chain at Timex. It built on the then existing supply chain but added lateral transshipment and the consequent changes needed in data acquisition, processing and parameter review for later modifications.

Background of the case

A subsidiary of Timex Corporation of USA, Timex Watches Limited is the second largest watch manufacturer in India. It was established in 1992 as a joint venture between the Timex Corporation and Titan Industries Ltd., a Tata group company, which is the largest watch producer in India. Timex Corporation is the third largest watch manufacturer in the world and sells over 13 million watches in more than 32 countries. Initially, both Timex Corporation and Titan held a 29% stake in the Indian joint venture.1 Timex Watches became a subsidiary of Timex Corporation after the breakup with Titan in 1998 (Miller, 1998). Timex has since bought out Tatas stake in the company. But Timex Watches suffered a setback due to the loss of the distribution network that it shared with Titan. Even financially, the company could not end any year making a profit after the financial year 19971998 (Kumarkaushalam, 2003). Timex initially concentrated on the low end of the watch market and the lower segment continues to be the major strength of Timex watches in India. However, while Titan entered the lower segment with its Sonata brand, Timex is repositioning itself as an aspirational brand (Business Line, 2001).

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Although the market size for domestic watches is estimated to be about 30 million watches, the size of the organised Indian watch industry is estimated to be about 11 million watches and has remained stagnant for more than a year. The organised watch market has come under severe pressure due to the increased availability of watches at low price points. Timex is attempting to drive the value chain instead of volumes, and is also trying to exploit the organised retail environment which is developing rapidly in metro cities (Timex Watches Limited, 2003). The company is hopeful of reaching a black bottom line soon with the launching of new product lines, revamping of manufacturing, financial restructuring and strategic shifts (Krishnan, 2003). Any cost savings, without a reduction in customer service level, would be welcome in this journey towards profit.

The distribution Chain

Timex has its manufacturing facility at Noida, which is an industrial township located on the outskirts of Delhi. Watches are assembled here and the logistics function is also performed by the Dispatch Controller located here. This facility is referred to as the Finished Goods Store (FGS) in the context of managing the Timex supply chain. Four Regional Offices (ROs) prepare and execute the marketing plan in their respective regions under the overall supervision of the Marketing Department. The ROs coordinate the physical distribution of watches in their respective regions. They also act as information hubs consolidating information from CFAs downstream, communicating with FGS and vice versa. There are 25 CFAs located in large cities throughout India. The CFAs in turn supply to the retailers spread all over the country. The retailers include 15 company exclusives, 220 direct sales dealers, 100 multibrand outlets and 5000 retail outlets. In addition to the traditional distribution channels, Timex has recently launched the concept of Club Timex under a shop-in-shop concept, wherein Timex kiosks are being located in leading retailing stores (Timex Watches Limited, 2003). The distribution chain from FGS to the CFAs is shown in Figure 1. The CFAs are agents appointed by Timex to provide warehousing and physical distribution services. The rationale of having CFAs, which is a common practice in India, lies in the indirect tax structure of India. In a product like watches, offering variety to the customer to suit his/her exact need is very important. Timex provides 550 to 600 styles of watches and the current product range spans price points ranging from Rs 350 to Rs 5000. The management of the inventory of so many product variants at each of the 25 CFAs at minimum cost and the desired service level is the objective of effective supply chain management at Timex. The production of watches attracts manufacturing duties (central excise) varying from nil to 16% ad-valorem. They are also subject to local sales tax at the first point of sale within a state. Sales tax being a state subject, the rates of local sales tax vary across different states and create many problems for manufacturers selling beyond the borders of the state of manufacture. Sales tax rates vary between 5% and 20%. In case of an interstate sale to the final consumer, a central sales tax of 10% is levied.

Lateral transshipment for managing excesses and shortages

Figure 1 The distribution chain

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FGS

CFA BHU

CFA CAL

CFA DEL

CFA JAI

CFA BLR

CFA COC

CFA AMD

CFA BHL

CFA GAU

CFA PAT

CFA JMU

CFA GOA

CFA MUM

CFA PUN

CFA LUD

CFA LUK

CFA HYD

CFA MDS

RO EAST

RO NORTH

RO SOUTH

RO WEST

In case the sale is made to a dealer in a state different from the state in which the watch is produced, the dealer would pay a 10% percent sales tax and go on to collect local sales tax at the rate applicable to each state when he sells these watches further on. This dealer may pay a concessional central sales tax at 4% by furnishing a central sales tax declaration form C to the selling entity for the purpose. This dealer is next obliged to collect local sales tax at the rate applicable to its state when he sells these watches to the retailers. It is therefore seen that the product is likely to bear an additional burden of central sales tax at 10% (or 4% in case declaration in form C is used) besides the local sales tax. The effect is that the watches are likely to become more expensive in states where they are brought in from other states. To avoid this 4% concessional sales tax, manufacturing companies use either of two options: create a branch office in the destination state or appoint an agent to act on its behalf in that state (these agents are referred to as carrying and forwarding agents or C&F agents, or CFAs for short). The manufacturer is then enabled to transfer its manufactured stocks to its own branch or to its agent for sale. This transfer does not amount to a sale. Therefore, no sales tax is chargeable. The branch or CFA then sells goods within that state and levy local sales tax only. Branch transfers or transfers to the CFAs involve a central sales tax declaration form F and the transfer is made on a consignment basis, meaning thereby that whatever is sold, its sales proceeds will be remitted after the sale and whatever remains unsold will revert physically to the main or principal office.

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The CFA stock replenishment system

The termination of Titans distribution network was a major setback for Timex and the company has been aggressively working towards establishing and strengthening its marketing and distribution network ever since. As part of its ongoing effort towards improving its distribution network, Timex decided to improve the part of the distribution supply chain between the FGS and the CFAs so as to achieve higher service levels and lower costs. Specifically, it was decided to design a system that would enable the Dispatch Controller to monitor and control inter-CFA stock transfers and CFA stock replenishments in a manner that minimises the total shipping costs and also ensures availability of stock. This proposed system is described in the rest of this paper. The CFA replenishment system shall be installed at each of the four regional offices (North, East, West and South) for intraregional transfers, under the responsibility of the respective Regional Manager, and at Timex FGS, under the responsibility of the Dispatch Controller. The system will normally be run weekly; but if a CFA raises a demand in the middle of a week, it may be run again. The CFA replenishment system maintains a current record of variant-wise stock at each CFA, stock in transit, lead times for transport and cost of transport for every CFA-CFA and FGS-CFA route. The system also maintains the shipping costs (or transportation costs) and the transportation time on each route for different couriers and different modes of transport. This is necessary as the choice of courier and mode of shipping for a particular route are dependent on the amount of time the Dispatch Controller deems acceptable. A priority mechanism has also been built into the system to allow a CFA to get priority over others in the event that demand outstrips supply (the priority is set by the Dispatch Controller, who reevaluates the priority on a continual basis to ensure that no CFA is at a permanent disadvantage). The CFA replenishment system is run weekly and is driven by the sales forecasts for the upcoming week for each CFA and each variant. However, in case a CFA raises a demand with the regional office in the middle of a week, it may be run again. When processing the CFA replenishments, initial replenishments are processed only for high-priority CFA demands. Processing then continues with lower priority demands and so on. This allows the controller to direct urgent shipments. At a priority level, the processing is done for only one variant at a time and is repeated for each variant being dispatched. Packing and dispatch takes place only after all variants have been run through the system. The process map is shown in Figure 2, which also lists the inputs and the outputs of the process. Each round of processing involves computing the current shortage/surplus of the variant at every CFA. This is computed as Surplus = Current Stock + Stock in Transit Minimum Stock Sales Forecast. All couriers, modes of transport and associated costs for the routes are identified. Based on the acceptable transit times which are not less than the least transit time for any mode the system determines the optimal mode of transport for each route. If for a route, acceptable transit time = 5 days, air transit time = 2 days and surface transit time = 4 days, then chosen mode = surface. Alternatively, if surface transit time were 6 days, then chosen mode = air.

Lateral transshipment for managing excesses and shortages

Figure 2 The CFA replenishment process map
Inputs Dispatch controller CFA replenishment process

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Outputs

Feedback loop

Inputs:
Lead times for each FGSCFA route. Lead times for each CFACFA route. Acceptable lead times for each FGSCFA route. Acceptable lead times for each CFACFA route. Opening stock of each variant at each CFA and at FGS. Stock in transit for each CFA. Variant-wise sales forecast of each CFA for the current period. Minimum stock of each variant at each individual CFA. Shipping cost/kg (both air and surface, inclusive of minimum costs) of each courier for shipping between every source-destination pair. Priority of each CFA (set by the dispatch controller). Weight of a variant when packed in its individual case.

Outputs:
Dispatch plan detailing the variant, quantity to be shipped source, destination, courier and and mode of shipping. Shortage/surplus report of variants at CFAs over a period of time. Frequency of air/surface shipments (variant/CFA-wise). Cost and lead time reports.

Once the mode of transport has been determined, the choice of courier is made based on a weighted average score for each courier for each route the score being a weighted average of transit time and transportation cost. The weights reflect the relative importance of transit time, as it is critical for shipments to arrive within the time frame prescribed. By assigning weights, one can ensure that a small change in transit time has a greater effect on the score. A route is assigned to the courier with the least score among all others on that route. As an example, on the route FGSJMU, with surface chosen as the mode of transport, there are two couriers available: 1 2 Score for Courier Gati = 10.1 Score for Courier Blue Dart = 11.2

Gati will be assigned the route. After each route has been assigned, the weighted average score of each route is entered into the transshipment model as a cost. The demands and opening stocks (in numbers) of the variant are translated into kilogram terms to compute shipment costs. The system attempts to minimise the total score and thus the total cost by solving a transshipment problem. The output of the system will yield the quantities to be shipped along each route. It will automatically suggest CFACFA shipments if they appear to be time and cost effective.

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At any time, if CFA(X) in a region is experiencing a shortage of Variant A, it immediately informs the regional office (via e-mail, fax, etc.). The controller at the regional office shall enter the required parameters into the CFA replenishment system, which automatically reallocates excess stock of that variant from one or more CFAs within the same region to service this shortage. An instruction shall be sent to these CFAs (via e-mail, fax, etc.) to generate Stock Transfer Memos (STMs) and dispatch the stock to CFA(X) immediately via the mode and courier suggested by the system. If no CFA in that region is carrying excess stock of Variant A or if the total excess stock with CFAs in the region is less than the demand, the regional office raises a request for that variant at Timex FGS (via, e-mail, fax, etc.). FGS (which has a similar system installed) would in turn poll each of the other regional offices and ask for the excess stock status of Variant A. This information is entered into the system and the dispatch plan is generated. The instruction for this transfer is sent to the concerned regional office(s), they forward it to the respective CFA(s), and the process continues as in the previous case. Whenever a CFA generates an STM, a copy is sent to the regional office. Similarly, whenever a CFA receives an STM, a confirmation is sent to the issuing CFA and a copy is sent to the regional office. The CFA replenishment system generates output which is immediately useful as it gives the dispatch plan detailing the variant, quantity to be shipped, source, destination, courier and mode of shipping. It also prepares reports which are useful for revising the system parameters. The shortage/surplus reports of variants at CFAs over a period of time helps to identify CFAs that regularly have shortages/surpluses. The controller may then use the data to revise the minimum stock levels of variants at the CFA. These reports also help to identify CFAs who overestimate or underestimate their sales forecast regularly. It is also expected that the minimum (or safety) stock levels at each CFA would be reduced after transshipments are integrated into the CFA-replenishment system. The variant/CFA-wise reports giving frequencies of air/surface shipments may point to an inefficient sales forecasting system. These also allow the dispatch controller to identify routes with abnormally high frequencies of air shipments. Such routes could then be studied closely and a cheaper means of transport may be suggested. The cost and lead time reports allow the controller to keep track of these parameters and update the cost and transit time figures used in the CFA replenishment system. Such changes may be incorporated on a periodical basis say once a year or whenever major changes take place in the transport industry. The various steps that need to be executed along with their periodicity and sequence are summarised in Table 1. It is clear from the table that the transshipment problem needs to be solved many times for each weekly processing once for every variant at each priority level.

Lateral transshipment for managing excesses and shortages

Table 1 Number 1 2 3 4 5 Activities involved in the CFA replenishment process Periodicity Weekly Weekly Weekly Weekly Weekly High priority High priority High priority High priority High priority High priority High priority High priority Lower priority Variant 1 Variant 1 Variant 1 Variant 1 Variant 1 Variant 1 Variant 2 Priority Variant Description of activities

611

CFAs raise weekly demand for each variant and forward this to RO RO forwards variant-wise demand for each CFA to the dispatch controller Dispatch controller sets priority level to CFAs and variants Dispatch controller runs the CFA Stock Replenishment System (CFASRS) CFASRS plans the replenishment for high priority demands variant-wise first for Variant 1 CFASRS computes current shortage/surplus of variant at every CFA All couriers, modes of transport and costs are identified Determines mode of transport based on acceptable transit time Determines choice of courier based on weighted average score Converts demands and opening stocks (in numbers) into kilograms Solves the corresponding transshipment problem Repeats steps 7 12 for other variants till all variants are covered Repeats steps 5 13 for other priority levels till all priority levels are covered Prepares Dispatch plan for each CFA detailing for each variant quantity to be shipped, source, destination, courier and mode of shipping Any CFA experiencing a shortage of any variant informs the regional office, which runs the CFA stock replenishment system to reallocate excess stock of that variant from one or more CFAs within the same region to service this shortage. If no CFA in that region is carrying excess stock of that variant or if the total excess stock with CFAs in the region is less than the demand, the regional office raises a request for that variant at Timex FGS, which runs the CFA replenishment system to prepare a dispatch plan.

6 7 8 9 10 11 12 13 14

Weekly Weekly Weekly Weekly Weekly Weekly Weekly Weekly Weekly

15

At any time in the middle of the week

16

At any time in the middle of the week

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Table 1 Number 17

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Activities involved in the CFA replenishment process (continued) Periodicity While reviewing the system Priority Variant Description of activities Review minimum stock levels of variants at CFAs that constantly have shortages/surpluses; it is expected that the system-wide minimum stock levels would decrease after transshipments are integrated into the CFA stock replenishment system. Identify CFAs who regularly overestimate or underestimate demand in their forecasts and take corrective action Identify routes with abnormally high frequencies of air shipments to improve the sales forecasting at these CFAs, as well as to explore cheaper means of transport. Monitor cost and lead time reports to update the cost and transit time figures used in the CFA stock replenishment system.

18

While reviewing the system While reviewing the system While reviewing the system

19

20

Conclusion

At Timex Watches, the local inventories are managed by the CFAs, who are separate entities, different from the manufacturing and selling firm (Timex). It is possible that in such cases joint profits may not be maximised if left to individual CFAs and as mentioned by Rudi et al. (1998), a coordinated transshipment policy may increase profitability. At Timex, such coordination is not done centrally but at the level of the Regional Offices (ROs), in a decentralised manner for middle-of-the-week replenishments. Run this way, the CFA replenishment system may yield suboptimal solutions, but this may be a better approach for practical reasons, and after sufficient experience and confidence is gained on using the CFA replenishment system, it may be run centrally at the FGS level and the CFAs and ROs advised about the dispatch plans from FGS. Similarly, it may be possible to integrate the retailers as well, either centrally or locally, at the RO or CFA level, at a future date to derive greater benefits from optimising the multilocation inventory system. The replenishment of CFAs in Timex Watches is designed as a pull system, wherein the pull is exercised not by the actual demand but by the weekly forecast of demand at each CFA. Although the number of CFAs is not very large, the problem is still very complex because of the large number of variants. The performance of the CFA replenishment system is therefore dependent on good variant-wise forecast for each CFA. In fact, the complete supply chain at Timex is a push-pull system, and the finished goods inventory at FGS represents the push-pull frontier. The production plan for watches and the corresponding procurement plan for components and raw materials from suppliers is driven by an MRP, which prepares the production and procurement plan based on forecasts, which are revised every month based on current sales, promotions and discounts, competitive responses, etc.

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613

The transportation cost from FGS to a CFA, as well as the transshipment cost between any two CFAs, is also computed by the system based on the chosen mode of transport. The system therefore tries to minimise the cost subject to satisfying the time constraints in meeting the deliveries. Similarly, the transporter is also chosen by the system on each of the routes based on performance indicators of all the transporters on the dimensions of transit time and cost. The system also has a way of assigning different priorities to different CFAs, and this feature becomes important especially when there is a system-wide shortage in some variants. At Timex, the transshipment problem has been analysed as a single-period, multilocation, two-echelon, fixed review period, pull system with each location having its own demand characteristics. The system developed addresses the excesses/shortages only at the CFA level. If there is a system-wide shortage, it does not attempt any reallocation of the existing stock other than the identified excesses. To be specific, no reallocation is explored in CFAs having no excess/shortage, even though there are other CFAs having shortages. Since the lateral transsshipments are planned at the regional/national level, the CFAs having excess stock and advised stock transfer may delay the release of stock. An adequate reward/punishment system may have to be designed to discourage such tendencies among CFAs. The whole system as described here is based on a critical assumption that the demand forecasts are realistic. If this is not so, and if the availability of lateral transshipment were to result in less careful demand forecasts by the CFAs, the system may actually result in higher costs through higher transshipments. It should be kept in mind that transshipments are costlier than direct supply and are effective only when used as mechanisms to take care of uncertainty in demand. As reported in this paper, Timex has also been facing an unstable business environment while the proposed system was being developed. Shortly after the launch of the proposed system, further implementation was halted and kept in abeyance until the overall financial situation improved. It is interesting to note that simulation with a wide choice of model parameters has led Tagaras (1999) to some interesting and practical, useful conclusions. The benefits of risk pooling through transshipment were found to be substantial and to increase with the number of pooled locations. The type of transshipment policy was not found to affect the systems performance significantly. It was found preferable to form balanced pooling groups consisting of locations having similar demand. The integration of CFAs in the management of a multilocation inventory system, through the CFA replenishment and stock transfer system, therefore has the potential to yield significant benefits.

References
Archibald, T.W., Sassen, S.A.E. and Thomas, L.C. (1997) An optimal policy for a two-depot inventory problem with stock transfer, Management Science, Vol. 43, No. 2, pp.173183. Axster, S. (1990) Modelling emergency lateral transshipments in inventory systems, Management Science, Vol. 36, No. 11, pp.13291338. Axster, S. (2003) A new decision rule for lateral transshipments in inventory systems, Management Science, Vol. 49, No. 9, pp.11681179. Ballou, R.H. and Burnetas, A.N. (2000) Planning virtual inventories, Technical Memorandum No. 42, Department of Operations, Weatherhead School of Management, Case Western Reserve University, Cleveland, OH.

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Note
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