The interaction of location and inventory in designing distribution systems

Abstract

Many companies face the strategic decision of deciding on the number of Distribution Centers (DCs), their location, and which customers they serve. One objective for a company facing this decision is to maintain acceptable service while minimizing the fixed costs of operating the DCs, inventory holding costs at the DCs, and transportation costs between plants and DCs, and DCs and customers. For insight into this problem, we develop an analytical model for a stylized version of it. However, since the general version of the problem is NP-Hard, we also develop heuristic procedures. We solve a variety of example problems to test the performance of these heuristics relative to optimal solutions and a lower bound based on a relaxation of the original problem. Managerial insight based on our computational studies is provided. We also present a small case-study example motivated by our interaction with Frito-Lay, Inc.