Total costs of centralized and decentralized inventory strategies—including external costs

Abstract

The paper deals with the economic efficiency of decentralized and centralized strategies of distribution goods in terms of both internal efficiency of firms and external costs of logistics processes (first of all external costs of transport). The author developed a model (using an electronic spreadsheet) in order to calculate the economical efficiency in the micro and macro dimensions in order to find the distances on which distribution using one central warehouse is more profitable than decentralized distribution. The results of the simulations show that the strategy of centralized inventories can be in many cases an economically effective strategy although not for deliveries on very long distance. The results confirm that the benefits of centralization are lower inventories, although the simulations do not confirm the applicability of the square root law to calculate the level of inventories. However, they confirm a positive impact on the level of logistic customer service, measured by the availability of stocks. Better service is probably the main benefit of this strategy. In order to investigate the impact of individual parameters on the total costs of logistics processes 1300 simulations were carried out for various cases: The volume of annual sales, fluctuations in demand, the value of distributed goods, the number of warehouses in a decentralized system and the width of the product range, costs of warehousing, and maintaining stocks, and the distance of transport and in deliveries to customers.