A Model for Assessing the Value of Warehouse Risk-Pooling: Risk-Pooling Over Outside-Supplier Leadtimes

Leroy B. Schwarz
Additional contact information
Leroy B. Schwarz: Krannert Graduate School of Management, Purdue University, West Lafayette, Indiana 47907

Management Science, 1989, vol. 35, issue 7, 828-842

Abstract: This paper constructs and analyzes a multi-location inventory model to examine the value of warehouse risk-pooling in high service-level systems. Specifically, risk-pooling over the outside-supplier leadtime is examined. Two alternative systems of N identical retailers are formulated. In System 1, each retailer operates independently: retailers receive goods directly from an outside supplier after a fixed leadtime (L s + L tr ), where L s is the outside supplier's own (e.g., manufacturing) leadtime and L tr is the transportation/receiving leadtime to the retailers. In System 2, the system order is shipped to a warehouse, arriving after a fixed leadtime (L s + L tw ), where L tw is the transportation/receiving leadtime to the warehouse. Upon receipt of the goods, the warehouse allocates and ships units to the retailers to equalize their inventory positions. The warehouse does not hold inventory. Allocation and reshipment in System 2 requires a fixed leadtime of (L pw + L tr ) time periods, where L pw is the allocation and (re)packaging leadtime at the warehouse. Hence, System 2 pools risk over the outside supplier leadtime, but at the cost of: (1) increased overall leadtime to the retailers; and (2) an `internal' pipeline inventory holding cost. Our analysis asks the question: given equal required service-levels and equal safety stock holding cost (plus pipeline inventory cost for System 2), how large can System 2's extra leadtimes (L tw , L pw ) be? Our analysis concludes that pipeline inventory-holding cost significantly influences the overall value of these breakeven leadtimes. Specifically, when pipeline inventory holding costs can (somehow) be ignored, the corresponding breakeven leadtimes can be quite large. However, if these costs cannot be avoided, then the corresponding breakeven leadtimes are significantly reduced. Managerial interpretations are provided.

Keywords: inventory/production; multi-echelon; leadtime policy; stochastic model (search for similar items in EconPapers)
Date: 1989
References: Add references at CitEc
Citations: View citations in EconPapers (31)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.35.7.828 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:35:y:1989:i:7:p:828-842

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().