Virtual depot approximation for the transshipment problem

In the transshipment problem a number of retailers facing stochastic demand must place orders before the demand is known, but can transship inventory once the demand is realized. Recently developed simulation-based algorithm [1] provides near-optimal solutions, but can only handle small-to-medium problems. We develop an approximation-based approach where all transshipments are routed through a virtual depot. This allows us to reduce the solution time by orders of magnitude, while maintaining high solution accuracy, making it possible to solve realistic-size problems to optimality.