Question:

Refer to the example in the Module. Though the average inventory of the centralized distribution system is lowerthan that of the decentralized distribution system, is it possible that thereare disadvantages of a centralized system?

Module Five presented the formulas used in to calculate safety stock, reorder level, and average inventory level, for a generic product with multiple order/production opportunities. In this module, those formulas are used with a detailed example to compare the average inventory level for a centralized distribution system with that for a decentralized distribution system.

In a centralized distribution system, there is a single warehouse distributing products to at least two places; for example, one "central" warehouse distributes products to both Washington, D.C., and Boston. On the other hand, in a decentralized distribution system, there is a warehouse for EACH place; for example, one warehouse distributes for Washington, D.C., and another warehouse distributes for Boston.

Consider the following example for retailers in Washington, D.C., and Boston in a particular supply chain:

Decentralized distribution system:
• There is one warehouse in Washington, D.C., and one warehouse in Boston
• The retail stores in each of the above two places receive products from the warehouse in the respective place
• The two warehouses receive products from a supplier in Atlanta
• Lead time for delivery to each of the warehouses is two weeks
• The desired service level is 97 percent; the Module Five lecture presented the definition of service level

Centralized distribution system:
• There is a single "central" warehouse in New York City
• The retail stores in both Washington, D.C., and Boston products from the central warehouse in New York City
• The central warehouse receives products from the supplier in Atlanta
• Lead time for delivery to the central warehouse is two weeks
• The desired service level is 97 percent