On coordinating warehouse sizing, leasing and inventory policy

Organizations often fulfil their storage needs by supplementing their own warehouse with leased space, a scenario modeled here under the assumption of constant product demand. Closed-form formulae are obtained for the decision variables of interest, namely, the replenishment lot size and the warehouse size, as well as the amount of space to lease. Cost savings due to leasing are shown to have an upper bound of approximately 29% when the optimal warehouse capacity can be installed without restrictions (such as a budgetary constraint). A numerical example further indicates that leasing is significantly more beneficial when the warehouse size is tightly constrained, and that total costs are robust with respect to demand fluctuations.