Sizing, pricing and common replenishment in a headquarter-managed centralized distribution center

Abstract

Purpose – Commonly shared logistics services help manufacturing companies to cut down redundant logistics investments while enhance the overall service quality. Such service-sharing mode has been naturally adopted by group companies to form the so-called headquarter-managed centralized distribution center (HQ-CDC). The HQ-CDC manages the common inventories for the group’s subsidiaries and provides shared storage services to the subsidiaries through appropriate sizing, pricing and common replenishment. Apart from seeking a global optimal solution for the whole group, the purpose of this paper is to investigate balanced solutions between the HQ-CDC and the subsidiaries. Design/methodology/approach – Two decision models are formulated. Integrated model where the group company makes all-in-one decision to determine the space allocation, price setting and the material replenishment on behalf of HQ-CDC and subsidiaries. Bilevel programming model where HQ-CDC and subsidiaries make decisions sequentially to draw a balance between their local objectives. From the perspective of result analysis, the integrated model will develop a managerial benchmark which minimizes the group company’s total cost, while the bilevel programming model could be used to measure the interactive effects between local objectives as well as their final effect on the total objective. Findings – Through comparing the numerical results of the two models, two major findings are obtained. First, the HQ-CDC’s profit is noticeably improved in the bilevel programming model as compared to the integrated model. However, the improvement of HQ-CDC’s profit triggers the cost increasing of subsidiaries. Second, the analyses of different sizing and pricing policies reveal that the implementation of the leased space leads to a more flexible space utilization in the HQ-CDC and the reduced group company’s total cost especially in face of large demand and high demand fluctuation. Research limitations/implications – Several classical game-based decision models are to be introduced to examine the more complex relationships between the HQ-CDC and the subsidiaries, such as Nash Game model or Stackelberg Game model, and more complete and meaningful managerial implications may be found through result comparison with the integrated model. The analytical solutions may be developed to achieve more accurate results, but the mathematical models may have to be with easier structure or tighter assumptions. Practical implications – The group company should take a comprehensive consideration on both cost and profit before choosing the decision framework and the coordination strategy. HQ-CDC prefers a more flexible space usage strategy to avoid idle space and to increase the space utilization. The subsidiaries with high demand uncertainties should burden a part of cost to induce the subsidiaries with steady demands to coordinate. Tanshipments should be encouraged in HQ-CDC to reduce the aggregate inventory level as well as to maintain the customer service level. Social implications – The proposed decision frameworks and warehousing policies provide guidance for the managers in group companies to choose the proper policy and for the subsidiaries to better coordinate. Originality/value – This research studies the services sharing on the warehouse sizing, pricing and common replenishment in a HQ-CDC. The interactive decisions between the HQ-CDC and the subsidiaries are formulated in a bilevel programming model and then analyzed under various practical scenarios.