Discuss the impact of centralized location for inventory versus decentralized lo

Question

Discuss the impact of centralized location for inventory versus decentralized location of inventory, with reference to their impact on flow times and inventory. Make sure to include a discussion of the pros and cons of both approaches.
Complete Computer (CC) is a retailer of computer equipment in Minneapolis with four retail outlets. Currently each outlet manages its ordering independently. Demand at each retail outlet averages 4,000 units per week. Each unit costs $200 and CC has a holding cost of 20%. The fixed cost of each order (administrative + transportation) is $900. Assume 50 weeks in a year.
(a)   Given that each outlet orders independently and gets its own delivery, compute the optimal order size at each outlet.
(i)   CC is thinking of centralizing purchasing (for all four outlets). In this setting, CC will place a single order (for all outlets) with the supplier. The supplier will deliver the order on a common truck to a transit point. Since individual requirements are identical across outlets, the total order is split equally and shipped to the retailers from this transit point. This entire operation has increased the fixed cost of placing an order to $1,800. If CC manages ordering optimally in the new setting, what is expected to happen to the average inventory in the CC system (across all four outlets)?
Give arguments for your answer  

Explanation / Answer

(a) EOQ = sqrt (2RS/H) = sqrt (2*4000*50*900/40) = 3000

(i) If CC manages ordering optimally in the new setting, average inventory in the CC system (across all four outlets) can be expected to decrease

In the decentralized system,

cycle stock per outlet = 3000/2 = 1500.

Total cycle stock = 1500*4 = 6000.

In the centralized system, Demand increases by a factor of 4 over a single outlet.

Fixed costs increase by a factor of 2.

So EOQ will increase by a factor of sqrt (4×2) = sqrt (8) = 2.83.

So cycle stock = 2.83 × (3000/2) = 4245 < 6000.

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