Optimal design of low-cost supply chain networks on the benefits of new product formulations

Abstract

Formulated products usually comprise a high amount of low-cost ingredients, e.g., water, which could be removed by concentration, and the resulting concentrated products could generate economic advantages, especially in long-distance transportation. This work examines the economic benefits of new product formulations resulted from a new process and product design technology through the optimal design of low-cost formulated product supply chain networks for different product formulations, including traditional formulations and new formulations via concentration. Based on mixed-integer linear programming techniques, an optimisation-based framework is proposed to determine the optimal locations and capacities of plants, warehouses, and distribution centres, as well as the production and distribution planning decisions, by minimising the unit total cost, including raw material, packaging, conversion, inventory, transportation and depreciation costs. In order to deal with the computational complexity, a tailored hierarchical solution approach is developed, in which facility locations and connections are determined by an aggregated static model, and a reduced dynamic model is then solved to determine the facility capacities and the production amounts, distribution flows, and inventory levels in each time period. A case study of a fast-moving consumer goods supply chain is investigated to demonstrate the economic benefits of new product formulations by implementing and comparing different production and distribution structures. The computational results from scenario and sensitivity analysis show that the manufacturing of final products, using a simple concept based on intermediate concentrated formulations produced at a centralised location, results in large supply chain benefits of an economic nature.