Centralization versus decentralization: Risk pooling, risk diversification, and supply chain disruptions

Amanda J. Schmitt, Siyuan Anthony Sun, Lawrence V. Snyder and Zuo-Jun Max Shen

Omega, 2015, vol. 52, issue C, 201-212

Abstract: We investigate optimal system design in a multi-location system in which supply is subject to disruptions. We examine the expected costs and cost variances of the system in both a centralized and a decentralized inventory system. We show that, when demand is deterministic and supply may be disrupted, using a decentralized inventory design reduces cost variance through the risk diversification effect, and therefore a decentralized inventory system is optimal. This is in contrast to the classical result that when supply is deterministic and demand is stochastic, centralization is optimal due to the risk-pooling effect. When both supply may be disrupted and demand is stochastic, we demonstrate that a risk-averse firm should typically choose a decentralized inventory system design.

Keywords: Inventory control; Risk; Supply chain disruptions (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (35)

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DOI: 10.1016/j.omega.2014.06.002

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