Centralization vs Decentralization Essay example

9754 Words Nov 21st, 2012 40 Pages
Centralization versus Decentralization: Risk Pooling, Risk Diversification, and Supply Uncertainty in a One-Warehouse Multiple-Retailer System
Amanda J. Schmitt Lawrence V. Snyder
Dept. of Industrial and Systems Engineering Lehigh University Bethlehem, PA, USA

Zuo-Jun Max Shen
Dept. of Industrial Engineering and Operations Research University of California Berkeley, CA, USA

May 27, 2008
ABSTRACT We investigate optimal system design in a One-Warehouse Multiple-Retailer system in which supply is subject to disruptions. We examine the expected costs and cost variances of the system in both a centralized and a decentralized inventory system. We show that using a decentralized inventory design reduces cost variance through the
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Literature Review
Single-Echelon Models

The two most commonly considered forms of supply uncertainty are supply disruptions (in which supply is halted entirely for a stochastic amount of time) and yield uncertainty (in which the quantity delivered from the supplier is random). The literature on single-echelon systems with both of these types of supply uncertainty is extensive, and we omit an exhaustive review here. The reader is referred to Yano and Lee [29] for a discussion of the literature on single-echelon systems with yield uncertainty. Supply disruptions have been considered in several settings, including the EOQ model [e.g., 4, 18, 22] and newsboy settings [e.g., 10]. Chopra et al. [8] and Schmitt and Snyder [20] consider systems that have both types of supply uncertainty simultaneously. In this paper we will rely on several results for single-echelon base-stock systems with disruptions developed by Schmitt et al. [21] and Tomlin [25]. These papers provide a foundation for our analysis, but our application to the OWMR model provides new insights on the impact of supply disruptions in complex systems. We consider risk-averse objectives for inventory models, a topic which is gaining momentum in the operations literature. Risk-aversion has been considered in newsboy models to mitigate demand uncertainty. For example, Eeckhoudt et al. [11] show that order quantities decrease with increasing risk-aversion. Van Meighem [28]

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