Inventory management of manufacturers with yield uncertainty and lateral transshipment

This article deals with the issue of inventory management of one identical product in a manufacturers' network. Manufacturers use lateral transshipments between each other in response to uncertainties in yield and demand to maximise the total profit. The demand of each manufacturer is considered random as a non-identical continuous probability distribution and their corresponding yield follows some possible scenarios. The objective of our model is to determine the optimal production amount and lateral transshipments in order to maximise the total profit considering the proceeds from sale of goods and salvage of remaining product and the cost of production, lateral transshipments, and shortages. The problem is modelled as a nonlinear constrained programming and the optimal solution is obtained by Karush-Kuhn-Tucker approach. Sensitivity analysis of uncertainty parameters based on a numerical example showed that the utility of using lateral transshipment policy increases with increasing the uncertainty in production yield.