A comparison of inventory management between decentralized and centralized distribution networks with backorder

Abstract

This paper investigates the effect of information sharing on inventory management of two-echelon distribution network, consisting of a distribution center and retailers. Shortages that occur at DC and at retailers are assumed backlogged and lost sales. Performance of a decentralized system, where inventory decisions are made locally, is compared with a centralized system, where echelon inventory position and lead time are used through information sharing. An iterative procedure to determine inventory policy parameters is used in both systems. The purpose is to minimize the total inventory management cost, including costs of ordering, inventory holding, and shortage. A numerical example is provided.