ROLE OF INVENTORY AND TRANSPORTATION COSTS IN DETERMINING THE OPTIMALDEGREE OF CENTRALIZATION

This paper presents a formal analysis of the inventory centralization decision in a wider perspective. Expressions for various elements of t otal system cost are developed and their individual and combined effec ts on centralization are analyzed using an optimization model. The maj or thrust of the paper is on determining the optimal degree of central ization as a tradeoff between inventory and transportation costs. It c onsiders five scenarios each representing a different role of inventor y and transportation in the total supply system. Examples of how each scenario may arise in practice are given and the best degrees of centr alization for the scenarios are compared and illustrated with secondar y data. (C) 1997 Elsevier Science Ltd.