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Decentralized Inventory System

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Background
The control and maintenance of inventories of physical goods is a problem which is common to every organization. For example, inventories must be maintained in automobile industry, FMCG sector, all manufacturing industries maintain inventories in form of raw material, work in progress inventories or finished product inventories. Value of inventories runs in thousands of crore for various industries like HUL balance sheet of fiscal year 2012-13 reports an inventory of 2.5 thousand crore. The reason for this can be physical impossibility or economical difficulties in having the goods transported in a system precisely when demand occurs. Without inventories shop floor in a manufacturing unit or customers for goods will have to wait …show more content…
Every organization in order to reduce its logistics cost wants to effectively manages its inventories cost which can include ordering cost, inventory carrying cost etc. and to do so effectively they should first solve a fundamental question i.e. whether to have one big centralized warehouse or to have several decentralized warehouses. Problem Identification and problem statement
Cost is an important factor which derives organization in selecting either centralized or decentralized warehouse system. In supply chain, cost comprises of various factors like ordering cost, inventory carrying cost, backorder cost, stock-out cost etc. In this study, a comparison is made for cost based on the mathematical model of inventory system. In this comparison ordering cost, inventory carrying cost and back order cost have been considered with demand being a normal distribution. Research Decision
Transaction processing model is used in the research to calculate the annual cost for inventory for both centralized and decentralized warehouse. For this a transaction processing model represented as <Q, r> is considered where Q represents order quantity and r is reorder point. To reach the ultimate goal of annual cost comparison heuristic approximate treatment of the back orders case is considered which is further discussed in literature review …show more content…
It requires large investment as organizations have to hold inventory at different location in larger lots.

Method Research Design Heuristic Approximate Treatment of the Backorders Case was considered.
A number of assumptions and approximation should be made for the simplification of annual cost calculation. Various assumptions made are: The unit cost C of the item is a constant independent of Q. The backorder cost is π per unit backordered. There is no cost which depend on the length of the time t for which the backorder exists, i.e. πt=0. There is never more than a single order outstanding. The cost of operating the information processing system is independent of Q and r. The reorder point, r (based on the inventory position or net inventory) is positive.
From assumption (5) we can say that one will not wait till backorders are accumulated before placing the order, hence there will be no backorder outstanding at the reorder point. This is shown as below: Now the annual cost has below three components: Annual ordering cost Annual Inventory carrying cost Annual Backorder

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