Inventory Management and Risk Pooling - Centralized versus decentralized systems

4 important questions on Inventory Management and Risk Pooling - Centralized versus decentralized systems

What is the difference between centralized and decentralized systems when it comes to service level?

When the centralized and decentralized systems have the same total safety stock, the service level provided by the centralized system is higher.

What is the difference between centralized and decentralized systems when it comes to overhead costs?

Overhead costs are typically higher in a decentralized system because there are fewer economies of scale.

What is the difference between centralized and decentralized systems when it comes to customer lead time?

Since warehouses are much closer to the customers in a decentralized system, response time is much shorter.
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What is the difference between centralized and decentralized systems when it comes to transportation costs?

The impact on transportation costs depends on the specifics from the situation. Transportation costs can decrease in decentralized as the distance to the customer is shorter. However, transportation costs of suppliers can increase as there are more facilities.

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