Role of inventory and transportation costs in determining the optimal degree of centralization

This paper presents a formal analysis of the inventory centralization decision in a wider perspective. Expressions for various elements of total system cost are developed and their individual and combined effects on centralization are analyzed using an optimization model. The major thrust of the paper is on determining the optimal degree of centralization as a tradeoff between inventory and transportation costs. It considers five scenarios each representing a different role of inventory and transportation in the total supply system. Examples of how each scenario may arise in practice are given and the best degrees of centralization for the scenarios are compared and illustrated with secondary data.