A continuous approximation approach for the integrated facility-inventory allocation problem

• Published in: European journal of operational research Vol. 222; no. 2; pp. 216 - 228
• Main Authors: Tsao, Yu-Chung, Mangotra, Divya, Lu, Jye-Chyi, Dong, Ming
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 16.10.2012; Elsevier; Elsevier Sequoia S.A
• Subjects: Allocation; Allocations; Applied sciences; Approximation; Distribution centers; Exact sciences and technology; Facility location; Inventories; Inventory; Inventory control; Inventory control, production control. Distribution; Inventory management; Logistics; Mathematical analysis; Mathematical models; Networks; Nonlinear programming; Operational research and scientific management; Operational research. Management science; Optimization algorithms; Position (location); Retailing; Stockpiling; Studies; Supply chain design; United States > US; Facility location; Inventory management; Supply chain design; Allocation; Costs; Retail marketing; Complex system; Resource allocation; Discrete data; Continuous function; Non linear programming; Integrated management; Modeling; Location problem; Optimization; Inventory control; Distribution network; Firm; Logistics
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2012.04.033

► Address an integrated facility location and inventory allocation problem. ► A continuous approximation (CA) model is used to represent the network. ► Nonlinear programming techniques are developed to solve the problems. ► Our methodology is illustrated with the network from a leading US retailer. ► Study the effects of changing parameter values on the optimal solutions. In today’s retail business many companies have a complex distribution network with several national and regional distribution centers. This article studies an integrated facility location and inventory allocation problem for designing a distribution network with multiple distribution centers and retailers. The key decisions are where to locate the regional distribution centers (RDCs), how to assign retail stores to RDCs and what should be the inventory policy at the different locations such that the total network cost is minimized. Due to the complexity of the problem, a continuous approximation (CA) model is used to represent the network. Nonlinear programming techniques are developed to solve the optimization problems. The main contribution of this work lies in developing a new CA modeling technique when the discrete data cannot be modeled by a continuous function and applying this technique to solve an integrated facility location-allocation and inventory-management problem. Our methodology is illustrated with the network from a leading US retailer. Numerical analysis suggests that the total cost is significantly lower in the case of the integrated model as compared with the non-integrated model, where the location-allocation and inventory-management problems are considered separately. This paper also studies the effects of changing parameter values on the optimal solutions and to point out some management implications.