Priority centralization of the one period multi-location inventory system

Abstract

In this paper, we will examine a multi-center one-period inventory system. The usual penalty cost for being out of stock will be replaced by an assurance of service constraint at each location. That is, we will constrain our inventory size to meet a specific maximum probability of being out of stock at each location. The centralized system we shall propose will define a priority rule which will cause us to satisfy the entire demand of high priority locations before we begin satisfying the demands of lower priority locations. This will allow us to find a minimum initial inventory level for the centralized system that will meet all of the assurance of service constraints. We will look at the special case where the variance of the total demand of several locations is non-decreasing in locations included in the total. In this case, we will show the computations required for finding the optimal centralized priority system are minimal. Finally, we will show that such a system is superior to a decentralized system.