Impact on inventory costs with consolidation of distribution centers

The cost structure of running a smaller regional distribution centre (DC) can be very different from running a large centralised operations. Moreover, the replenishment lead times, which is an important determinant of inventory cost performance, differ vastly between different DC locations. The effect of demand uncertainty at demand points are also seldom taken into account. This paper uses an analytical modeling approach to address these issues. We study the impact on inventory costs when considering the consolidation strategy. We focus on the common intuition that consolidation reduces total inventory costs due to the risk pooling effects.