An example of disbenefits of centralized stocking

This paper deals with a single-period, single-product inventory model. It is a multilocation problem with an opportunity for centralization. In the centralized system, the location’s demands are satisfied from one central warehouse whose orders are processed on a first come, first served basis. The inventory size will be constrained to meet a specific maximum probability of being out of stock at each location. Under these assumptions, Stulman argues that a centralized system requires a lower total starting inventory than the equivalent decentralized one. The authors shall present a counter example showing that, under conditions where an 86% probability of stockouts is the maximum acceptable, a higher total starting inventory may be required by centralizing two locations’ stock-holdings.