Problem definition: Today’s supply chains use multiple tiers, locations, and shipping speeds to better serve customers. In practice, these supply chains also face a key challenge of the possibility of a disruption (from a variety of sources), which typically limits inventory availability. We, therefore, consider two “modes” of operation: the normal mode, with regular replenishment and an objective of minimizing long-run holding, backlog, and expediting costs, and the disrupted mode, where an unexpected disruption limits the available supply in the network, and we study the problem of whether to centralize or decentralize the limited inventory. Methodology/Results: In the normal mode, we demonstrate the optimality of a base-stock policy in a one warehouse multiple retailer (OWMR) setting with expediting. We establish the optimality of a base-stock policy through a comparison with a lower bound on optimal cost defined by a stochastic program. In the disrupted mode, we provide a simple cost criterion to determine when decentralization is preferred. Further, we collaborate with an industrial partner to validate our policies using data from a nationwide distribution network in the US, demonstrating our methodology’s robustness by accommodating several additional features including non-stationary demand, multiple demand classes, and stochastic lead times. Managerial implications: We provide inventory policies for managing a OWMR network with expediting that are understandable and implementable in practice. The optimality of a base-stock policy in the normal mode reveals that allowing the central warehouse to hold inventory is helpful, especially with the expediting option. Our disrupted-mode analysis demonstrates that centralization may not always be cost effective relative to decentralization during a disruption, and our cost criterion provides a practical rule of thumb for comparing the two strategies. Finally, our industrial partner’s data suggests our policies that optimize the level of inventory centralization can provide significant cost savings in practice
