Question 1: (30 pt) Using the scale of 1 – 6 with 1 corresponding to the most centralized, and 6

the most decentralized system, rate the decentralization level of six network options. Based
on this rating, define the magnitude of safety stock and the risk pool benefits on six options
over the scale of 1 – 6 with 1 corresponding to the most, and 6 the least.
The rank of distributions by centralization and decentralization (Point 1 is the most centralized,
Point 6 is the most decentralized)
 Distributions methods with Manufacturer Storage are the most centralized since the
inventory is stocked only at one place that is at the Manufacture site. Hence,
Manufacturer Storage with Direct Shipping, In-Transit Merge, Pickup have the same rank
1.
 Next, the Distributor Storage method is relatively higher compared to Manufacturer
Storage as the inventory is stocked at both Distributor and Manufacturer storage.
However, Distributor Storage with Package Carrier Delivery is more likely to be centralized
than with Last-Miles Delivery. Last-Miles Delivery requires the distributor warehouse
much closer to the customer. Thus, Distributor Storage with Package Carrier Delivery and
with Last-Miles Delivery are ranked 2 and 3, respectively.
 The most decentralized is Retail Storage with Customer Pickup with rank 4.
The level of safety stock and risk pool benefits are both based on the level of how centralized and
decentralized the distribution is. The more centralized, the more safety inventory can be
reduced, that is, the more benefits from the risk pool can be achieved.
The general rank based on these considerations above is summarized in the table.

Retailer
Manufacturer Manufacturer Manufacturer Distributor
Manufacturer Storage
Storage with Storage with Storage with Storage with
Storage with with
Direct In-Transit Package Carrier Last-Mile
Pickup Customer
Shipping Merge Delivery Delivery
Pickup
Decentralization
1 1 2 3 1 4
level
Magnitude of
4 4 3 2 4 1
safety stock
The risk pool 1
1 2 3 1 4
benefits
Question 2: (70pt) Solve example in Centralized vs. Decentralized network design.
Consider 2 identical retailers, with the same costs and characteristics, facing random demand
for a single product. We compare the two system, the decentralized and centralized one. In the
centralized pooled system, the retailers together operate a joint inventory facility and take
items out of the pooled inventory to meet demand. In the decentralized system, each retailer
individually orders from the manufacturer to meet demand.
We consider a single period of random demand. The probabilistic forecast of demand faced by
each retailer is depicted in the following table. The wholesale price is $80 per unit, the selling
price of $125 per unit, salvage value of $20 per unit, and production cost of $35 per unit. If the
order quantity must be multiples of 1,000 units. What’s each retailer’s best order quantity in a
period in each system? What is retailer’s expected profit? Manufacturer’s profit in each
system?
The Decentralized System
 Expected profit
Q D=8000 D=10000 D=12000 D=14000 D=16000 D=18000 Demand P
of 1 retailer
1000 $ 45,000 $ 45,000 $ 45,000 $ 45,000 $ 45,000 $ 45,000 $ 45,000 8000 0.11
2000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 10000 0.11
3000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 12000 0.28
4000 $ 180,000 $ 180,000 $ 180,000 $ 180,000 $ 180,000 $ 180,000 $ 180,000 14000 0.22
5000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 16000 0.18
6000 $ 270,000 $ 270,000 $ 270,000 $ 270,000 $ 270,000 $ 270,000 $ 270,000 18000 0.1
7000 $ 315,000 $ 315,000 $ 315,000 $ 315,000 $ 315,000 $ 315,000 $ 315,000
8000 $ 360,000 $ 360,000 $ 360,000 $ 360,000 $ 360,000 $ 360,000 $ 360,000 p 125
9000 $ 300,000 $ 405,000 $ 405,000 $ 405,000 $ 405,000 $ 405,000 $ 393,450 v 80
10000 $ 240,000 $ 450,000 $ 450,000 $ 450,000 $ 450,000 $ 450,000 $ 426,900 g 20
11000 $ 180,000 $ 390,000 $ 495,000 $ 495,000 $ 495,000 $ 495,000 $ 448,800 c 35
12000 $ 120,000 $ 330,000 $ 540,000 $ 540,000 $ 540,000 $ 540,000 $ 470,700
13000 $ 60,000 $ 270,000 $ 480,000 $ 585,000 $ 585,000 $ 585,000 $ 463,200
14000 $ - $ 210,000 $ 420,000 $ 630,000 $ 630,000 $ 630,000 $ 455,700
15000 $ (60,000) $ 150,000 $ 360,000 $ 570,000 $ 675,000 $ 675,000 $ 425,100
16000 $ (120,000) $ 90,000 $ 300,000 $ 510,000 $ 720,000 $ 720,000 $ 394,500
17000 $ (180,000) $ 30,000 $ 240,000 $ 450,000 $ 660,000 $ 765,000 $ 345,000
18000 $ (240,000) $ (30,000) $ 180,000 $ 390,000 $ 600,000 $ 810,000 $ 295,500

$500,000

$450,000

$400,000

$350,000

$300,000

$250,000

$200,000

$150,000

$100,000

$50,000

$-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

- The Optimal Order Quantity for each Retailer is 12000, yielding the Maximum Expected
profit of each $470,700 and total Expected profit of both Retailers is $941,400.
- The Expected profit of Manufacturer is:
E(P) = 2*12,000*($125-$35) = $1,080,000

The Centralized System

In case of aggregating two retailers, the total demand has to follow the new distribution with
joint probability.

Retailer 1 Probability Retailer 2 Probability Total demand Joint Probability Demand Probability
8000 0.11 8000 0.11 16000 0.012 16000 0.012
8000 0.11 10000 0.11 18000 0.012 18000 0.024
8000 0.11 12000 0.28 20000 0.031 20000 0.074
8000 0.11 14000 0.22 22000 0.024 22000 0.110
8000 0.11 16000 0.18 24000 0.020 24000 0.166
8000 0.11 18000 0.1 26000 0.011 26000 0.185
10000 0.11 8000 0.11 18000 0.012 28000 0.171
10000 0.11 10000 0.11 20000 0.012 30000 0.135
10000 0.11 12000 0.28 22000 0.031 32000 0.076
10000 0.11 14000 0.22 24000 0.024 34000 0.036
10000 0.11 16000 0.18 26000 0.020 36000 0.010
10000 0.11 18000 0.1 28000 0.011
12000 0.28 8000 0.11 20000 0.031
12000 0.28 10000 0.11 22000 0.031
12000 0.28 12000 0.28 24000 0.078
12000 0.28 14000 0.22 26000 0.062
12000 0.28 16000 0.18 28000 0.050
12000 0.28 18000 0.1 30000 0.028
14000 0.22 8000 0.11 22000 0.024
14000 0.22 10000 0.11 24000 0.024
14000 0.22 12000 0.28 26000 0.062
14000 0.22 14000 0.22 28000 0.048
14000 0.22 16000 0.18 30000 0.040
14000 0.22 18000 0.1 32000 0.022
16000 0.18 8000 0.11 24000 0.020
16000 0.18 10000 0.11 26000 0.020
16000 0.18 12000 0.28 28000 0.050
16000 0.18 14000 0.22 30000 0.040
16000 0.18 16000 0.18 32000 0.032
16000 0.18 18000 0.1 34000 0.018
18000 0.1 8000 0.11 26000 0.011
18000 0.1 10000 0.11 28000 0.011
18000 0.1 12000 0.28 30000 0.028
18000 0.1 14000 0.22 32000 0.022
18000 0.1 16000 0.18 34000 0.018
18000 0.1 18000 0.1 36000 0.010
 0.0121 0.0242 0.0737 0.11 0.1664 0.1848 0.1712 0.1352 0.0764 0.036 0.01 Expected Profit p 125
Q 16000 18000 20000 22000 24000 26000 28000 30000 32000 34000 36000 of Cen.Retailers v 80
1000 $ 45,000 $ 45,000 $ 45,000 $ 45,000 $ 45,000 $ 45,000 $ 45,000 $ 45,000 $ 45,000 $ 45,000 $ 45,000 $ 45,000 g 20
2000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 c 35
3000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000 $ 135,000
4000 $ 180,000 $ 180,000 $ 180,000 $ 180,000 $ 180,000 $ 180,000 $ 180,000 $ 180,000 $ 180,000 $ 180,000 $ 180,000 $ 180,000
5000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000 $ 225,000
6000 $ 270,000 $ 270,000 $ 270,000 $ 270,000 $ 270,000 $ 270,000 $ 270,000 $ 270,000 $ 270,000 $ 270,000 $ 270,000 $ 270,000
7000 $ 315,000 $ 315,000 $ 315,000 $ 315,000 $ 315,000 $ 315,000 $ 315,000 $ 315,000 $ 315,000 $ 315,000 $ 315,000 $ 315,000
8000 $ 360,000 $ 360,000 $ 360,000 $ 360,000 $ 360,000 $ 360,000 $ 360,000 $ 360,000 $ 360,000 $ 360,000 $ 360,000 $ 360,000
9000 $ 405,000 $ 405,000 $ 405,000 $ 405,000 $ 405,000 $ 405,000 $ 405,000 $ 405,000 $ 405,000 $ 405,000 $ 405,000 $ 405,000
10000 $ 450,000 $ 450,000 $ 450,000 $ 450,000 $ 450,000 $ 450,000 $ 450,000 $ 450,000 $ 450,000 $ 450,000 $ 450,000 $ 450,000
11000 $ 495,000 $ 495,000 $ 495,000 $ 495,000 $ 495,000 $ 495,000 $ 495,000 $ 495,000 $ 495,000 $ 495,000 $ 495,000 $ 495,000
12000 $ 540,000 $ 540,000 $ 540,000 $ 540,000 $ 540,000 $ 540,000 $ 540,000 $ 540,000 $ 540,000 $ 540,000 $ 540,000 $ 540,000
13000 $ 585,000 $ 585,000 $ 585,000 $ 585,000 $ 585,000 $ 585,000 $ 585,000 $ 585,000 $ 585,000 $ 585,000 $ 585,000 $ 585,000
14000 $ 630,000 $ 630,000 $ 630,000 $ 630,000 $ 630,000 $ 630,000 $ 630,000 $ 630,000 $ 630,000 $ 630,000 $ 630,000 $ 630,000
15000 $ 675,000 $ 675,000 $ 675,000 $ 675,000 $ 675,000 $ 675,000 $ 675,000 $ 675,000 $ 675,000 $ 675,000 $ 675,000 $ 675,000
16000 $ 720,000 $ 720,000 $ 720,000 $ 720,000 $ 720,000 $ 720,000 $ 720,000 $ 720,000 $ 720,000 $ 720,000 $ 720,000 $ 720,000
17000 $ 660,000 $ 765,000 $ 765,000 $ 765,000 $ 765,000 $ 765,000 $ 765,000 $ 765,000 $ 765,000 $ 765,000 $ 765,000 $ 763,730
18000 $ 600,000 $ 810,000 $ 810,000 $ 810,000 $ 810,000 $ 810,000 $ 810,000 $ 810,000 $ 810,000 $ 810,000 $ 810,000 $ 807,459
19000 $ 540,000 $ 750,000 $ 855,000 $ 855,000 $ 855,000 $ 855,000 $ 855,000 $ 855,000 $ 855,000 $ 855,000 $ 855,000 $ 848,648
20000 $ 480,000 $ 690,000 $ 900,000 $ 900,000 $ 900,000 $ 900,000 $ 900,000 $ 900,000 $ 900,000 $ 900,000 $ 900,000 $ 889,836
21000 $ 420,000 $ 630,000 $ 840,000 $ 945,000 $ 945,000 $ 945,000 $ 945,000 $ 945,000 $ 945,000 $ 945,000 $ 945,000 $ 923,286
22000 $ 360,000 $ 570,000 $ 780,000 $ 990,000 $ 990,000 $ 990,000 $ 990,000 $ 990,000 $ 990,000 $ 990,000 $ 990,000 $ 956,736
23000 $ 300,000 $ 510,000 $ 720,000 $ 930,000 $ 1,035,000 $ 1,035,000 $ 1,035,000 $ 1,035,000 $ 1,035,000 $ 1,035,000 $ 1,035,000 $ 978,636
24000 $ 240,000 $ 450,000 $ 660,000 $ 870,000 $ 1,080,000 $ 1,080,000 $ 1,080,000 $ 1,080,000 $ 1,080,000 $ 1,080,000 $ 1,080,000 $ 1,000,536
25000 $ 180,000 $ 390,000 $ 600,000 $ 810,000 $ 1,020,000 $ 1,125,000 $ 1,125,000 $ 1,125,000 $ 1,125,000 $ 1,125,000 $ 1,125,000 $ 1,004,964
26000 $ 120,000 $ 330,000 $ 540,000 $ 750,000 $ 960,000 $ 1,170,000 $ 1,170,000 $ 1,170,000 $ 1,170,000 $ 1,170,000 $ 1,170,000 $ 1,009,392
27000 $ 60,000 $ 270,000 $ 480,000 $ 690,000 $ 900,000 $ 1,110,000 $ 1,215,000 $ 1,215,000 $ 1,215,000 $ 1,215,000 $ 1,215,000 $ 994,416
28000 $ - $ 210,000 $ 420,000 $ 630,000 $ 840,000 $ 1,050,000 $ 1,260,000 $ 1,260,000 $ 1,260,000 $ 1,260,000 $ 1,260,000 $ 979,440
29000 $ (60,000) $ 150,000 $ 360,000 $ 570,000 $ 780,000 $ 990,000 $ 1,200,000 $ 1,305,000 $ 1,305,000 $ 1,305,000 $ 1,305,000 $ 946,488
30000 $ (120,000) $ 90,000 $ 300,000 $ 510,000 $ 720,000 $ 930,000 $ 1,140,000 $ 1,350,000 $ 1,350,000 $ 1,350,000 $ 1,350,000 $ 913,536
31000 $ (180,000) $ 30,000 $ 240,000 $ 450,000 $ 660,000 $ 870,000 $ 1,080,000 $ 1,290,000 $ 1,395,000 $ 1,395,000 $ 1,395,000 $ 866,388
32000 $ (240,000) $ (30,000) $ 180,000 $ 390,000 $ 600,000 $ 810,000 $ 1,020,000 $ 1,230,000 $ 1,440,000 $ 1,440,000 $ 1,440,000 $ 819,240
33000 $ (300,000) $ (90,000) $ 120,000 $ 330,000 $ 540,000 $ 750,000 $ 960,000 $ 1,170,000 $ 1,380,000 $ 1,485,000 $ 1,485,000 $ 764,070
34000 $ (360,000) $ (150,000) $ 60,000 $ 270,000 $ 480,000 $ 690,000 $ 900,000 $ 1,110,000 $ 1,320,000 $ 1,530,000 $ 1,530,000 $ 708,900
35000 $ (420,000) $ (210,000) $ - $ 210,000 $ 420,000 $ 630,000 $ 840,000 $ 1,050,000 $ 1,260,000 $ 1,470,000 $ 1,575,000 $ 649,950
36000 $ (480,000) $ (270,000) $ (60,000) $ 150,000 $ 360,000 $ 570,000 $ 780,000 $ 990,000 $ 1,200,000 $ 1,410,000 $ 1,620,000 $ 591,000
- The Optimal Order Quantity for new centralized retailer is 26000, yielding the Maximum
Total Expected Profit of $1,009,392.
- The Expected profit of Manufacturer is:
E(P) = 26,000*($125-$35) = $1,170,000