Inventory Cost Effect of Consolidating Several One-Warehouse Multiretailer Systems

Abstract

Consolidation of warehouses is a new trend in global logistics management, and the reduction in order processing and inventory costs is often cited as one of the main motivations. In this note we show that when retailers face constant demand rates and their ordering costs are independent of the warehouse that services them, consolidated systems are rarely suboptimal and always lead to close-to-optimal inventory replenishment costs. In particular, we prove that using two (one) properly selected warehouses, the systemwide inventory replenishment cost is in the worst case at most 2% (14.75%) more than the optimal.