Cost allocation in continuous-review inventory models

A centralized inventory system serves a number of stores with common ownership, and thus reliable and timely information sharing. Each of them pays a share of the inventory cost, and the reward structure leaves the owners of individual stores rewarded for their individual performance. Appropriate selection of a cost allocation method is important if such a centralized system is to last. In this work the authors propose three necessary criteria-stability (core of a related cooperative game), justifiability (consistency of benefits with costs), and polynomial computability. For a concrete example they demonstrate that common allocation procedures may not meet all three tests, and the authors present a method that meets all three criteria. This kind of cost allocation analysis helps the common management to evaluate the trade-offs in choosing an alloction scheme for the cost of inventory centralization.