Two-stage supply chain design with safety stock placement decisions

Abstract

In this paper, we propose a supply chain design model that integrates facility location with safety stock placement and delivery strategy decisions, to reflect their interdependence and ultimately improve the resulting supply chain design. Safety stock placement decisions are modelled using the guaranteed-service approach. We also consider two customer classes that differ with respect to their delivery time preferences. The resulting non-linear model is formulated as a conic quadratic mixed-integer program that can be solved to optimality. We show that the model can be extended to include demand correlation and stochastic lead times. The computational experiments capture the trade-offs between location and safety stock placement decisions, between demand variability pooling and proximity to retailers, and between lead times and service times. We show that, when the distribution centres have short lead times to the retailers, distribution centres tend to hold safety stocks, and the retailers offer express deliveries. Conversely, when lead times are long, only the retailers hold safety stocks and they do not offer express deliveries.