An analysis of warehouse and distribution strategies

We consider a case where seven retailers, all belonging to the same organization, order independently from the manufacturer. The organization wants to evaluate the advantage of creating a centralized warehouse facility. However, the investment costs for such a warehouse are considerable and the organization is thus cautious that any cost savings must outweigh the investment cost. The multi-echelon inventory control literature does not indicate when a centralized warehouse is clearly the best option. However, there is evidence that a centralized warehouse may be advantageous for low demand items which are expensive, as opposed to inexpensive fast moving items. Also the costs of the additional warehouse (i.e. capital investment and operating costs) play an important role. Hence, whether or not a warehouse can reduce overall cost depends heavily on the additional cost of the centralized warehouse. In order to keep the investment cost low we consider an alternative to the centralized warehouse, called virtual centralized warehousing. In the latter system no additional investment costs are necessary (i.e. the existing retailers have excess capacity at their current facilities) and the benefits of central warehousing are achieved.