Sizing, pricing and common replenishment in a headquarter-managed centralized distribution center
| DOI | https://doi.org/10.1108/IMDS-08-2015-0343 |
| Published date | 11 July 2016 |
| Pages | 1086-1104 |
| Date | 11 July 2016 |
| Author | Ting Zhang,Ting Qu,George Q. Huang,Xin Chen,Zongzhong Wang |
| Subject Matter | Information & knowledge management,Information systems,Data management systems |
Sizing, pricing and common
replenishment in a
headquarter-managed
centralized distribution center
Ting Zhang and Ting Qu
Guangdong CIMS Provincial Key Lab, Guangdong University of Technology,
Guangzhou, China
George Q. Huang
HKU-ZIRI Laboratory for Physical Internet, The University of Hong Kong,
Hong Kong, and
Xin Chen and Zongzhong Wang
Guangdong CIMS Provincial Key Lab, Guangdong University of Technology,
Guangzhou, China
Abstract
Purpose –Commonly shared logistics services help manufacturing companiesto cut down redundant
logistics investments while enhance the overall service quality. Such service-sharing mode has been
naturally adopted by group companies to form the so-called headquarter-managed centralized
distributioncenter (HQ-CDC). The HQ-CDCmanages the common inventoriesfor the group’s subsidiaries
and providesshared storage services tothe subsidiaries through appropriatesizing, pricing and common
replenishment. Apart from seeking a global optimal solution for the whole group, the purpose of this
paper is to investigate balanced solutions between the HQ-CDC and the subsidiaries.
Design/methodology/approach –Two decision models areformulated. Integrated model where the
group companymakes all-in-one decisionto determine the space allocation,price setting and the material
replenishment on behalf of HQ-CDC and subsidiaries. Bilevel programming model where HQ-CDC and
subsidiaries make decisions sequentially to draw a balance between their local objectives. From the
perspective of result analysis, the integrated model will develop a managerial benchmark which
minimizes the group company’s total cost, while the bilevel programming model could be used to
measure the interactive effects betweenlocal objectives as well as their finaleffect on the total objective.
Findings –Through comparing the numerical results of the two models, two major findings are
obtained. First, the HQ-CDC’s profit is noticeably improved in the bilevel programming model as
compared to the integrated model. However, the improvement of HQ-CDC’s profit triggers the cost
increasing of subsidiaries. Second, the analyses of different sizing and pricing policies reveal that the
implementation of the leased space leads to a more flexible space utilization in the HQ-CDC and the
reduced group company’s total cost especially in face of large demand and high demand fluctuation.
Research limitations/implications –Several classical game-based decision models are to be
introduced to examine the more complex relationships between the HQ-CDC and the subsidiaries, such
as Nash Game model or Stackelberg Game model, and more complete and meaningful managerial
implications may be found through result comparison with the integrated model. The analytical
solutions may be developed to achieve more accurate results, but the mathematical models may have to
be with easier structure or tighter assumptions.
Practical implications –The group company should take a comprehensive consideration on both
cost and profit before choosing the decision framework and the coordination strategy. HQ-CDC prefers
a more flexible space usage strategy to avoid idle space and to increase the space utilization. The
subsidiaries with high demand uncertainties should burden a part of cost to induce the subsidiaries
with steady demands to coordinate. Tanshipments should be encouraged in HQ-CDC to reduce the
aggregate inventory level as well as to maintain the customer service level.
Industrial Management & Data
Systems
Vol. 116 No. 6, 2016
pp. 1086-1104
©Emerald Group Publishing Limited
0263-5577
DOI 10.1108/IMDS-08-2015-0343
Received 19 August 2015
Revised 27 November 2015
8 January 2016
Accepted 15 January 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
1086
IMDS
116,6
Social implications –The proposed decision frameworks and warehousing policies provide
guidance for the managers in group companies to choose the proper policy and for the subsidiaries to
better coordinate.
Originality/value –This research studies the services sharing on the warehouse sizing, pricing
and common replenishment in a HQ-CDC. The interactive decisions between the HQ-CDC and
the subsidiaries are formulated in a bilevel programming model and then analyzed under various
practical scenarios.
Keywords Dynamic pricing, Stochastic demand, Centralized distribution centre,
Nonlinear bilevel programming problem, Transhipment
Paper type Research paper
Nomenclature
Indices
iindex for subsidiaries, i¼1,2, ..., m
Decision variables
s
i
reserved space of subsidiary iin
one period
X
i
combined replenishment order size
Parameters
CA total space capacity of the HQ-CDC
p
0
basic price for unit reserved space
p
a
highest price for unit reserved space
p
b
basic price for unit leased space
p
m
highest price for unit leased space/
Marketing price for unit space
(p
0
⩽p
a
⩽p
b
⩽p
m
)
D
i
mean demandper period for subsidiaryi
σ
i
standard deviation of demand
per period for subsidiary i
cv
i
cv
i
¼σ
i
/D
i
coefficient of variation of
demand for subsidiary iin period j
z
i
multiplier of σ
i
(determines the
service level)
cunit procurement cost
hinventory holding cost rate, per dollar
per period
Lreplenishment lead time from suppliers
to the centralized warehouse
Kfixed ordering cost for each
replenishment from suppliers to the
HQ-CDC
kfixed delivery cost for each delivery
from the HQ-CDC to the subsidiaries
1. Introduction
Driven by high expectations and new market pressures, companies begin to realize that
inventories across the entire supply chain can be more efficiently managed through
strengthened cooperation and better coordination (Teo et al., 2001). For example,
Becton-Dickinson, a multinational firm in the medical sector, was reported to centralize
its stock in a single European site in order to reduce its inventory level and the costs of
invested capital (Fabbe-Costes and Colin, 2007). Skjoett-Larsen (2000) reported on two
large companies within the computer industry in Europe that centralized their stocks.
The two companies previously had national warehouses in each country. However, in
1990s, they consolidated their warehouse functions to their centralized distribution
centers (CDC) inDenmark, from which they served the otherNordic countries. Few years
later, one of themwent further to reconfigure itswhole European logistics system.A new
European distribution center was established to serve the pan-European region.
The benefits of adopting services sharing in a CDC are many. First, many value-
added services can be provided at lower cost in a modern CDC. For example, instead of
the small regional centers trading with suppliers relatively independent with each
other, the CDC negotiates and deals with suppliers centrally. This results in a more
simplified transaction process and the relevant costs are noticeably reduced (Feng and
1087
Sizing, pricing
and common
replenishment
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