Incorporating routing and inventory cost in strategic distribution network design model for a chain enterprise

Abstract

In this paper, we consider a strategic distribution network design problem for a chain enterprise, in which the decision maker needs to decide the number and location of the distribution centers (DCs) and system inventory control decisions - such as economic order quantity and safety stock decisions. In the chain enterprise, stores face random customer demand, and each store and DC, respectively, maintains a certain amount of safety stock in order to achieve a certain service level for the customers or the stores it serves. The objective is to minimize the total cost that includes location costs, inventory costs, and distribution costs in the chain enterprise. We show that this problem can be formulated as a nonlinear integer programming model, for which we propose a Lagrangian relaxation based solution algorithm. In a numerical application, we found that the benefits of having an integrated distribution design framework that includes location, inventory, and routing decisions in the same optimization model.