Optimising inventory placement in a two-echelon distribution system with fulfillment-time-dependent demand

Abstract

We study a two-echelon, single-product fulfillment system where a regional fulfillment center (FC) replenishes multiple independent local distribution center (LDC) orders within an internal committed resupply leadtime, and LDCs serve end customers within a committed demand fulfillment time, or committed delivery time. Expected system-wide demand depends on the product's price, the committed delivery time, and the number of LDCs in the system. Our proposed model determines the values of product price, committed resupply time, and committed delivery time that maximise expected system-wide profit per period, while accounting for product holding costs and fixed facility costs. We characterise key properties of optimal solutions that permit an efficient solution for a fixed number of LDCs, and consider the impacts of several proposed demand growth models as the number of LDCs increases. The results of a computational study provide interesting managerial insights on how operational constraints and the scale of the distribution system influence strategic stock placement and distribution system structure.