Location-Inventory Problem

Abstract

Traditionally, logistics analysts have divided decision levels into strategic, tactical and operational (Miranda and Garrido 2006). There are also three important decisions within a supply chain: facilities location decisions; inventory management decisions; and distribution decisions (Shen and Qi 2007). For example, in a distribution network, we could mention location of Distribution centers (DCs) as a strategic decision, distribution decisions as a tactical decision and inventory service level as a tactical or operational decision. Often, for modeling purposes, these levels are considered separately. And this may conduce to make non-optimal decisions, since in reality there is interaction between the different levels (Miranda and Garrido 2006). For example, most well-studied location models do not consider inventory costs, and shipment costs are estimated by direct shipping. Although one may argue that tactical inventory replenishment decisions and shipment schemes are not at the strategic level, and we should not consider them in the strategic planning phase, however, failure to take the related inventory and shipment costs into consideration when deciding the locations of facilities can lead to sub-optimality, since strategic location decisions have a big impact on inventory and shipment costs (Shen and Qi 2007). On the other hand firms would like to consider cost and service levels simultaneously. It is good to have many DCs, since this reduces the cost of transporting product to customers (/retailers) and will provide better service. Also, it is good to have few DCs, since this reduces the cost of holding inventory via pooling effects, and reduces the fixed costs associated with operating DCs via economies of scale (Erlebacher and Meller 2000).