Policies for inventory/distribution systems: The effect of centralization vs. decentralization

This paper concerns a multi-echelon inventory/distribution system considering one warehouse and N retailers. The retailers are replenished from the warehouse. We assume that the demand rate at each retailer is known. The problem consists of determining the optimal reorder policy which minimizes the overall cost, that is, the sum of the holding and replenishment costs. Shortages are not allowed and lead times are negligible. We study two situations: when the retailers make decisions independently and when the retailers are branches of the same firm. Solution methods to determine near-optimal policies in both cases are provided. Computational results on several randomly generated problems are reported.