Centralized and Decentralized Warehouse Logistics Collaboration, Extended Version

Abstract

We bound the value of collaboration in a decentralized multi-supplier multi-retailer setting, where several suppliers ship to several retailers through a shared warehouse, and outbound trucks from the warehouse contain the products of multiple suppliers.

Academic/Practical relevance: In an emerging trend in the grocery industry, multiple suppliers and retailers share a warehouse to facilitate horizontal collaboration, in order to lower transportation costs and increase delivery frequencies. Thus far, these so-called Mixing and Consolidation Centers are operated in a decentralized manner, with little effort to coordinate shipments from multiple suppliers with shipments to multiple retailers. Facilitating collaboration in this setting would be challenging (both technically, and in terms of the level of trust that would be necessary), so it is useful to understand the potential gains of collaboration.

Methodology: We extend the classic one warehouse multi-retailer analysis of Roundy (1985) to incorporate multiple suppliers and per truck outbound transportation cost from the warehouse, and develop a cost lower bound on centralized operation as benchmark. We then analyze decentralized versions of the system, in which each retailer and each supplier maximizes his or her own utility in a variety of settings, and we analytically bound the ratio of the cost of decentralized to centralized operation, to bound the loss due to decentralization.

Results: We find analytical bounds on the performance of several decentralized policies. The best, a decentralized zero-inventory ordering policy, has a cost ratio when compared to a lower bound on the centralized policy of no more than ³⁄₂ . In computational studies, we find that cost of decentralized policies are even closer to those of centralized policies.

Managerial implications: Easy-to-implement decentralized policies are efficient and effective in this setting, suggesting that centralization (and thus, a potentially complex and expensive coordination effort) is unlikely to result in significant benefits.

Keywords: Supply Chain Management, Inventory Theory and Control, Logistics and Transportation