The multi-location inventory centralization problem with first-come, first-served allocation

In this paper the multi-location inventory centralization problem is studied. Each location may be characterized by a unique selling price and unique consequences of stockouts, reflecting its market economic structure. The practice of such scenarios increases as more firms become involved in global (international) operations. The objective is to determine the initial inventory level which will maximize the expected profit when allocation of inventory is immediate to the time when demand is generated (i.e., first-come, first-served). It is shown that in spite of the fact that inventory allocation is contingent upon customers' arrival processes generated in various locations, the problem can be expressed as a single location problem, where the interarrival process need not be considered. Furthermore, managers should not be averse to centralization, by fearing that customers from a less profitable location will ‚cannibalize’ the potential greater profit from other locations.