Robust distribution planning for supplier-managed inventory agreements when demand rates and travel times are stationary

Abstract

Supplier-managed inventory (SMI) is a partnering agreement between a supplier and his customers. Under this SMI agreement, inventory monitoring and ordering responsibilities are entirely transferred to the supplier. Subsequently, the supplier decides both the quantity and timing of his customer deliveries. The inventory routing problem is an underlying optimization model for SMI partnerships to cost-effectively coordinate and manage customer inventories and related replenishments logistics. This paper discusses the case where customer demand rates and travel times are stochastic but stationary, and proposes a version of the inventory routing optimization model that generates optimal robust distribution plans. The approach proposed to obtain and deploy these robust plans combines optimization and Monte Carlo simulation. Optimization is used to determine the robust distribution plan and simulation is used to fine-tune the plan's critical parameters such as replenishment cycle times and safety stock levels. Results of a simplified real-life case implementing the proposed optimization-simulation approach are shown and discussed in detail.