Storage pricing and allocation in a headquarter-managed centralized distribution center

A headquarter-managed centralized distribution center (HQ-CDC) is considered in this study to serve multiple subsidiaries with stochastic demands. Dedicated space is reserved for each subsidiary for the duration of a time period, with re-allocation permitted at the beginning of each period. The subsidiaries are also allowed to fulfill their storage needs by supplementing their reserved spaces with leased spaces at any time point but with a higher price. The paper compares two pricing policies: the constant pricing where the unit space price remains constant and dynamic pricing where the HQ-CDC is allowed to adjust the space price. A series of numerical studies is conducted. The results show that the group company's total cost is significantly reduced by the implementation of the dynamic pricing policy. The results also reveal that the implementation of the leased space leads to a more flexible space utilization in the HQ-CDC and reduces the group company's total cost especially in face of large demand and high demand fluctuation.