Effects of Pooling on the Optimization and Service Levels of Two-Location Inventory Systems

The study of inventory distribution systems with two locations and random demand is the subject of this paper. It is shown that under certain conditions a policy of complete pooling between the locations minimizes the expected costs for the system. A solution procedure is proposed for the derivation of the optimal parameters determining the ordering and lateral transshipmentrules. Relationships between the measures of service level before and after pooling are derived, and it is concluded that pooling always improves the service levels at both locations. Minimization of total costs'subject to service level constraints is also studied. Numerical examples serve to illustrate the analytical results.