Note—Effects of Centralization on Expected Costs in a Multi-Location Newsboy Problem

Eppen, G. D. (1979). Note—Effects of Centralization on Expected Costs in a Multi-Location Newsboy Problem. Management Science, 25(5), 498-501.

Type

Journal article

Intellectual base

Primary research

Year

1979

Volume

25

Issue

5

Pages

498-501

DOI

10.1287/mnsc.25.5.498

DOI registrant

Institute for Operations Research and the Management Sciences

Link

https://doi.org/10.1287/mnsc.25.5.498

Cited from

economics_finance

Cited by

3 citations across 3 artifacts.

Each citation links to the sentence it supports in the citing article.

Primes

• Risk Pooling
  • Instead of asking "How can I reduce my exposure?" (individual focus), pooling asks "How can we collectively manage the aggregate?" and "What pool structure minimizes per-unit cost or risk?"—the centralization-vs-decentralization framing Eppen (1979) made precise for multi-location inventory.

    This sourceEstablishes the square-root inventory-pooling law: aggregating demand across n locations reduces required safety stock by √n, formalizing the centralization-vs-decentralization trade-off.

    Supported in partVerified against the publisher's abstract

    Eppen's abstract states that expected holding and penalty costs are lower in a centralized than a decentralized multi-location newsboy system, with the saving depending on demand correlation.

    “The expression is used to demonstrate that (i) the expected holding and penalty costs in a decentralized system exceed those in a centralized system; (ii) the magnitude of the saving depends on the correlation of demands”

    Read by an automated reader; not a human review. How support was checked

Mechanisms

• Capacity Pool
  • (The gain is the standard risk-pooling result.

    This sourceIdentifies the gain as a standard risk-pooling result.

• Shared Reserve Pool
  • Its strength is efficiency and immediacy: because shocks to the members are largely independent, a shared reserve covers the same risk as separate reserves at a fraction of the total cost — the risk-pooling effect — and when stress hits, the help is a real unit drawn on the spot, not a claim to be adjudicated later.

    This sourceShows that pooling reserves across locations with imperfectly correlated demands can meet uncertainty at lower expected total cost than separate reserves.

Verification

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