Total Costs of Centralized and Decentralized Inventory Strategies—Including External Costs

Dariusz Milewski

doi:10.3390/su12229346

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.

Highlights

The classic trade-off problem between the costs of transport, storage, and inventory maintenance and lost sales is associated with the choice of a centralization or decentralization strategy of distribution
The aim of this paper is to present possible impact of the implementation of the strategy of centralizated inventory in distribution on the economic efficiency of enterprises and external costs of transport
These costs consist of the costs of logistics processes in distribution and the costs of lost sales, which are not included in traditional accounting

Summary

Introduction

The classic trade-off problem between the costs of transport, storage, and inventory maintenance and lost sales is associated with the choice of a centralization or decentralization strategy of distribution It affects the costs of logistics processes, and the level of logistics services, and the competitiveness of the enterprise. The benefits of this strategy are primarily the reduction of inventories and warehousing costs As deliveries in this strategy have to be made sometimes over longer distances and possibly directly to customers, transportation costs may increase; especially if, after the centralization, goods are delivered in small quantities. There is a lack of knowledge about the efficiency factors of this strategy such as types of goods, demand characteristics, and costs of logistics processes The effects of this strategy may vary, and the reasons for centralizing inventories may vary. With the use the model elaborated by the author, analyses have been conducted, in order to identify impact of different factors of this efficiency, the results of which are presented in the following parts of the paper

Literature Review

Results

Impact of the Distribution Strategy on the Company’s Profitability

The Impact of the Distribution Strategy on the External Costs