10 1 1 575 4708

Issues in
Transportation, facility distribution

location and inventory issues network design
in distribution network design

471
An investigation
Vaidyanathan Jayaraman
Division of Business Administration, University of Southern
Mississippi, Long Beach, Mississippi, USA
Introduction and background

In this paper we consider the relationship between the management of
inventory, location of facilities and the determination of transportation policy
simultaneously in a distribution network design environment. These areas
interact, for example, when alternatives exist for location of facilities and for
transporting replacement inventory from a manufacturing plant, and each
transportation and location alternative necessitates different parameters for
inventory management. These selections are often made on the basis of cost or
transit time. This paper will analyze the interdependence among the three areas
and propose an integrated model for design of a distribution network that
represents their interdependence. The proposed model can be expected to
provide a more complete tradeoff that exists among the three components,
hence leading to better solutions than those provided by existing mathematical
models.
Mathematical location models are designed to address a number of questions
including: How many facilities should be sited? Where should each facility be
located? How should customer demand be allocated to the facilities? We use the
term facility here in its broadest sense. It is meant to include entities such as
factories, schools, warehouses, retail outlets, hospitals, computer concentrators,
emergency warning sirens, and day-care centers to name but a few that have
been analyzed in the literature. In spatial analysis, proximity is a fundamental
metric, many siting models seek to optimize it. However, rather than optimizing,
decision makers often base decisions on the “satisfactory” rather than the best
possible. The concept of coverage is this type of measure (Batta and Mannur,
1990). Another important characteristic for a facility is its capacity. While
facilities are often assumed to be able to serve all demand assigned to them,
congested systems or those with wide variation in workload may need to
consider capacity constraints that limit the total workload for which a facility
will be responsible. International Journal of Operations
Almost every private and public sector that we can think of has been faced & Production Management,
Vol. 18 No. 5, 1998, pp. 471-494,
with the task of locating facilities. The ability of a firm to produce and market © MCB University Press, 0144-3577
IJOPM its products effectively or to deliver high-quality services is dependent in part
18,5 on the location of the firm’s facilities in relation to other facilities and its
customers. The interested reader is encouraged to refer to (Daskin, 1995) and
(Drezner, 1995) for a comprehensive survey on facility location. Several review
articles (Brandeau and Chiu, 1989; Schilling et al., 1993) have also been
published on the topic. Facility location models for distribution planning have
472 inspired a large body of literature that spans well over two decades (Aikens,
1985). The distribution/location family of problems covers formulations which
range in complexity from simple single commodity linear deterministic models
to multicommodity nonlinear stochastic versions.
Transportation has been recognized for many years as being one of the most
important activities in the physical distribution function. The work of Baumol
and Vinod (1970) is one of the first attempts to determine a shipper choice of
transportation option in a single market and could be viewed as a cost model
that provides the total transportation and inventory cost associated with each
transportation option. Buffa and Reynolds (1977) developed a model to include
a number of transport-related variables. They identified the “failure to consider
explicitly transport cost as a determinant of inventory strategy” as a “major
shortcoming” of inventory models and concluded an existence of a correlation
between purchase quantity and transportation mode decision.
Constable and Whybark (1978) proposed an alternative version of the
inventory-theoretic model that explicitly included both carrying and back-order
cost. The model jointly determined the inventory reorder points, order
quantities, and transportation choices that provide minimum total
transportation and inventory costs. Langley (1980) proposed the inclusion of
transportation cost functions in models that represent the simultaneous
consideration of several types of distribution activity and the dependence of
unit transportation cost on shipment size and concluded that a higher product
value resulted in small optimal shipment size due to inventory carrying cost
effects. Larson (1988) developed a model that simultaneously determined the
optimal transportation choice and shipping quantity through calculation of an
economic transportation quantity. Carter and Ferrin (1995) presented postulates
that compromises by the buyer, seller, and carrier can serve to improve
profitability for all parties.
Determining an optimal policy for an inventory system configuration is a
difficult choice. Too often, the estimation of the costs of carrying inventory in a
distribution system is limited because they are considered to be only a minor
portion of the total distribution costs. However, inventory can represent a
significant proportion of distribution costs. Van Beek (1981) investigated
different strategies for locating inventories in a two-level distribution system
that consisted of a central manufacturing plant, a central distribution center
and four local distribution centers. The objective of the model was to determine
the “best” distribution strategy that minimized the sum of inventory carrying
and ordering cost over all stocking points in the system. Davis and Davidson
(1991) observed a significant difference in cost between order sales and stock
sales manufacturing in finished goods inventory for the auto industry around Issues in
the world and concluded that the opportunity to shrink this inventory holds distribution
immense potential. Rajagopalan and Kumar (1994) analyzed the issue of network design
providing the customer with the option of purchasing from stock or by placing
an order and found that the optimal quantity of stock to be held by the retailer
decreases when the option of placing an order is offered. The basic design
problem in any production and distribution network is to match supply and 473
demand at the output points of the system in the most economical way.
Most of the existing mathematical models have focused on individual
components of the network design like warehouse location. They fail to include
inventory cost as a component of their objective function and have assumed pre-
specified transportation choices. The evaluation of strategic changes to a
distribution system configuration involves the estimation of several costs and
benefit measures, including the impact on the amount of inventory carried in
the total distribution network. Perl and Sirisoponsilp (1989) proposed the only
existing work on the interdependence between location, transportation and
inventory decisions. In their paper, they provide a schematic representation of
the interdependence between facility location, transportation and inventory
decisions.
Strategic distribution center location decisions can include determination
and location of number of warehouses and plants, warehouse and plant
capacity load ratio, assignment of customer demands to open warehouses and
assignment of open warehouses to open plants among others. In this paper, we
will use the term warehouse and distribution center interchangeably. Strategic
transportation decisions include choice of transportation mode (rail, truck, air,
ship) and choice of type of carriage (common, contract, private). Other decisions
can include the size of shipments (or shipment frequency), and assignment of
loads to vehicles. Inventory decisions are concerned with total inventory level in
the system, location of inventories, and levels of cycle stock at various locations.
There is a strong interdependence among all three decisions. An increase in the
number of distribution centers increases total system inventory. The location of
inventories also determines the transportation mode choices, type, and choice
of carrier. A decision to maintain good customer service would require the use
of faster and more reliable transportation mode. A decision to change the
average level of cycle stock held at a facility would lead to a change in shipment
size. Due to recent trends in emerging technologies and competition, companies
are convinced that it is no longer valid to assume that a single unit
transportation cost is sufficient when we analyze among distribution center
locations, or to consider inventory decisions as related only to number and
location of warehouses and independent from transportation decisions.
The model that is presented in this paper builds upon the initial model that
was proposed by Perl and Sirisiponsilp (1980). There are some major differences.
Their model was only a conceptual model. It provided an objective function that
included the trade-off between location, transportation and inventory-related
issues. It did not contain any constraints by way of demand satisfaction of
IJOPM customer outlets and capacity restrictions established by warehouses and
18,5 manufacturing plants. Further it was proposed for a single product and was not
tested numerically. Our discussion in this paper will focus on an integrated
mathematical programming mixed-integer model. The design objective
represents a minimization of the total distribution cost associated with all three
decision components (facility locations, inventory parameters and
474 transportation alternative selection). It also represents multiple transportation
options and explicitly requires that demands of customer outlets for all products
are satisfied by open distribution centers. Our problem, then, is to
simultaneously determine which transportation alternative and inventory
parameters together with the number and location of plants and distribution
centers would lead to the lowest total inventory, transportation and location cost.
The mathematical model (FLITNET)

In this section, we present a mixed integer programming model, FLITNET
(Facility Location, Inventory, Transportation NETwork) that relates the
transportation mode attributes, the location of distribution centers and plants,
and the inventory policy parameters subject to constraints imposed by the
distribution network design.
The FLITNET model’s total costs can be expressed as follows:
Annual Cost = Fixed cost to open and operate a warehouse +
Transportation cost + Delivery cost + In-transit inventory
cost + Plant cycle stock cost + Warehouse cycle stock cost
+ Fixed cost to open and operate a plant
The following notation is used for the FLITNET model:
I – Set of potential plants.
J – Set of potential warehouses.
K – Set of customer demand outlets.
L – Set of products.
R – Set of different transportation modes.
Tijlr – Unit transportation cost for shipping product l between plant i and
warehouse j by transportation mode r.
Fijlr – Shipment frequency of using transportation mode r for product l
from plant i to warehouse j.
djklr – Unit delivery cost for shipping product l between warehouse j and
demand point k using transportation mode r.
Lijlr – Average lead time for shipments of product l from plant i to
CSijlr – Cycle stock cost at plant i associated with shipment of product l to
CCil – Unit carrying cost for product l at plant i. Issues in
CWjl – Unit inventory cost for product l at warehouse j. distribution
Clr – Unit carrying cost for in-transit inventory of product l per unit network design
transit time on transportation mode r.
akl – Demand placed by customer k for product l.
Wj – Capacity of warehouse.
475
Gi – Capacity of plant
Fj – Fixed cost to open and operate a warehouse.
Oi – Fixed cost to open and operate a plant.
Sl – Space occupied by product l.
W – Number of warehouses to open.
P – Number of plants to open.
The decision variables for this model are:
Xijlr – Total quantity of product l shipped from plant i to warehouse j by
transportation mode r.
Yjklr – Total quantity of product l shipped from warehouse j to demand
point k by transportation mode r.
Zj = { 1 if warehouse j is open
0 otherwise.
Pi = { 1 if plant i is open
0 otherwise.
MIN
Z = ∑ Fj Z j + ∑ ∑ ∑ ∑ Tijlr X iljr + ∑ ∑ ∑ ∑ d jklrYjklr +
j i j l r j k l r
∑ ∑ ∑ ∑ Clr Lijlr X ijlr + ∑ ∑ ∑ ∑ 0.5 * ( CC il * X ijlr / Fijlr ) +

i j l r i j l r
∑ ∑ ∑ ∑ 0.5 * (CWjl * X ijlr / Fijlr ) + ∑ Oi Pi

i j l r i
subject to
∑ ∑ Yjklr = a kl for all k and l (1)
j r
∑ ∑ ∑ S lYjklr ≤ Wj Z j for all j (2)

k l r
IJOPM ∑ Z j ≤W (3)
18,5 j
∑ Yjklr ≤ ∑ X ijlr for all l , r , and j (4)

k i
476 ∑ ∑ ∑ S l X ijlr ≤ Gi Pi for all i (5)

j r l
∑ Pi ≤ P (6)
i
X ijlr ,Yjklr ≥ 0 for all i , j , k , l , and r (7)
{ }
Z j , Pi = 0 ,1 for all i and j (8)
The formulation involves minimizing the cost due to locating warehouses and
plants, inventory related costs and transportation costs to transport products
from open plants to open warehouses and cost to deliver the products from
warehouses to customer outlets. Constraint (1) ensures that the demand of
every customer is satisfied. Constraint set (2) represents the capacity restriction
of open warehouse j in terms of handling the demand of customers. Constraint
(3) ensures that we locate at most W warehouses. Constraint set (4) ensures that
all the demand of customer k for product l is balanced by the total units of
product l available at warehouse j which has been transported from open
plants. Constraint (5) represents the capacity restriction of plant k in terms of
the amount of demand it can handle. Constraint set (6) restricts the number of
open plants to not exceed P plants. Constraint set (7) enforce the non-negativity
restriction to be placed on two sets of decision variables (X ijlr , Y jklr ) and
constraint set (8) imposes the binary nature on two other sets of decision
variables (Zj, Pi).
FLITNET model results

The FLITNET model is solved using a 30 node data set that represents
customer zones located in New York state and Massachusetts; this serves as a
sample area to demonstrate the usefulness of the FLITNET model developed in
this study. The location of the 30 customer zones was originally used to solve
emergency facility location-allocation problems in a previous study (Batta and
Mannur, 1990). All other input data for the FLITNET model are provided in the
list below:
• Potential warehouse and plant sites ~ uniform (0.100).
• CON(l, r) ~ uniform (90, 120).
• Fixed costs for opening warehouses ~ uniform (1,000, 2,000).
• Fixed costs for opening plants ~ uniform (2,500, 4,000). Issues in
• Unit carrying costs for products at plants and warehouses ~ uniform distribution
(0.01, 0.20). network design
• Intransit inventory costs ~ uniform (0.001, 0.005).
• Capacity of warehouses ~ uniform (650, 700).
• Capacity of plants ~ uniform (800, 1,200). 477
• Frequency to ship products using different transportation nodes ~
uniform (two days, five days).
• Average lead time to ship product using different transportation nodes ~
uniform (two days, seven days).
A typical example consists of well over 2,250 constraints (equality and
inequality constraints) and 2,100 decision variables (both binary integer
variables and continuous variables). All computational work was performed on
a 486 personal computer. A state-of-the-art modeling package GAMS
(generalized algebraic modeling system) is used to obtain optimal solutions to
the problem. GAMS provides a consistent modeling environment with support
of different mathematical models and solvers (GAMS, 1994).
The potential locations for warehouses and plants were generated from a
uniform distribution between 0 and 100 units. In Tables I through IV we relax
constraints (3) and (6) to equality constraints to vary the number of open plants
and warehouses. This adds more realism to the modeling procedure. These
values are not meant to be restrictive in the problem solution and are used for
illustrative purposes. Further, this system design allows the model to be applied
over a wide range of problems and illustrates the advantages of the FLITNET
modeling approach.
Many problems with the same input structure were solved in order to achieve
a reasonable level of confidence about the performance and validation of the
FLITNET model. The model also considers issues like placement of open plants
and warehouses as well as their capacities. Facility capacities can serve as a
means of smoothing the workload among different facilities involved without
overloading them. The number of products and customer demand for multiple
products are varied randomly using a uniform distribution as follows:
(1) Customer demand:
• Unf(5,100) units;
• Unf(200,100) units.
(2) Number of products:
• two products;
• five products.
Table I provides optimal solutions for the first case when demand is generated
from a uniform distribution between (5, 100) units for two products. For the two
18,5
478
Table I.
IJOPM
products = 2
Optimal solutions to
the FLITNET model
Case 1: demand ~ Unf
(5, 100) and number of
Open plant
transports to
open warehouse
(number of units,
transportation Warehouse
mode) load ratio (%)
Number Number Node Node
of open of open number of open number of open Fixed cost CPU
plants warehouses plant Prod 1 Prod 2 warehouse Prod 1 Prod 2 ratio (%) (sec)
2 2 1 3 (230,1) *** 3 34.1 58.2 19.49 7.96

5 (236,1) 6 34.0 66.0
5 *** 3 (393,2)
5 (459,2)
2 3 1 3 (122,1) *** 3 18.1 40.0 25.91 8.63
5 (226,1) 5 32.5 59.0
10 (118,1) 10 17.6 25.7
5 *** 3 (270,2)
5 (410,2)
10 (172,2)
2 4 1 1 (33,1) 1 (78,2) 1 4.9 11.6 29.68 8.08
3 (122,1) 3 18.1 40.0
5 (226,1) 5 32.5 59.0
10 (85,1) 10 12.7 14.0
5 *** 3 (270,2)
5 (410,2)
10 (94,2)
2 5 1 1 (33,1) 1 (78,2) 1 4.90 11.6 34.82 8.06
3(122,1) 3 18.1 40.0
5 (178,1) 5 25.6 41.2
6 (57,1) 6 8.3 20.3
10 (76,1) 10 11.3 11.6
(Continued)
Open plant
transports to
open warehouse
(number of units,
5 *** 2 (90,2)
3 (214,2)
5 (252,2)
6 (140,2)
10 (78,2)
Notes:
Total amount of demand for each product by assigned customers

Warehouse load ratio =
Total capacity of open warehouse for each product
Fixed cost of open warehouses + plants

Fixed cost ratio =
Total cost of optimal solution
479
distribution
Issues in
network design
Table I.
18,5
480
IJOPM
Table II.
products = 5
FLITNET model
100) and number of

Case 2: demand ~ unf(5,

Open plant transports
to open
warehouse (number Warehouse
of units load ratio
transportation mode) (%)
Node Node Fixed
Number Number number number cost
of open of open of open of open ratio CPU
plants warehouses plant Prod 1 Prod 2 Prod 3 Prod 4 Prod 5 warehouse Prod 1 Prod 2 Prod 3 Prod 4 Prod 5 (%) (sec)
3 4 1 1 (240,1) 1 (333,2) 1 (254,2) 1 (178,2) 1 (85,3) 1 9.00 12.5 9.50 8.70 8.40 9.52 19.01
4 *** 5 (528,2) *** 1 (53,3) 1 (124,1) 4 13.2 17.0 16.0 15.8 17.7
6 (353.2) 4 (170,2) 1 (14,3)
4 (253,3) 5 (81,1) 5 19.8 20.1 16.3 18.2 16.7
5 (326,2) 5 (370,3)
5 (165,3) 6 (457,3) 6 12.9 13.1 15.8 16.0 17.0
6 (430,2)
5 4 (355,1) 4 (457,2) 4 (429,2) *** ***
5 (534,1) 5 (15,2) 5 (438,2)
6 (346,1) 6 (426,2)
3 5 1 1 (157,1) 1 (144,2) 1 (160,2) 1 (148,2) 1 (94,3) 1 5.9 5.4 6.0 5.5 8.2 11.06 18.51
4 (93,2)
4 (294,2) 4 13.2 17.0 16.0 15.8 14.2
4 *** 5 (318,2) *** 4 (170,2) 1 (124,1)
6 (286,2) 4 (253,3) 4 (293,1) 5 19.8 20.1 16.3 18.2 16.7
8 (256,2) 5 (362,2) 4 (89,3)
5 (165,3) 5 (81,1) 6 5.6 10.6 8.4 9.6 9.3
6 (257,2) 5 (370,3)
8 (210,2) 6 (249,3) 8 10.4 9.6 11.0 9.6 11.5
8 (46,3) 8 (307,3)
(Continued)
to open
of units, load ratio
Node Node Fixed
5 4 (355,1) 4 (457,2) 4 (336,2) *** ***

5 (534,1) 5 (225,2) 5 (438,2)
6 (150,1) 6 (226,2)
8 (279,1)
3 6 2 *** 1 (144,2) *** 1 (57,3) *** 1 5.9 5.4 5.5 3.6 4.6 12.16 18.34
2 (80,2) 2 (71,3)
4 (457,2) 4 (253,3) 2 0.8 3.0 3.3 2.7 3.5
5 (463,2) 5(255,2)
6 (286,1) 5 (165,3) 4 13.2 17.0 16.4 17.7 17.7
8 (256,2) 6 (257,2)
8 (210,2) 5 19.0 17.2 13.0 15.6 13.3
8 (46,3)
4 *** *** 1 (22,2) 1 (39,3) 1 (124,1) 6 5.6 10.6 8.4 9.6 9.3
4 (222,2) 2 (93,1)
4 (293,1) 8 10.4 9.6 11.0 9.6 11.5
4 (183,3)
5 (81,1)
5 ((277,3)
6 (249,3)
8 (307,3)
(Continued)
481
distribution
Issues in
network design
Table II.
18,5
482
IJOPM
Table II.
to open
of units, load ratio
Node Node Fixed
5 1 (157,1) *** 1 (126,2) *** ***

2 (22,1) 2 (87,2)
4 (355,1) 4 (441,2)
5 (512,1) 5 (351,2)
6 (150,1) 6 (226,2)
8 (279,1) 8 (294,2)
Notes:


Fixed cost ratio =
Open plant
transports to
open warehouse
(number of units,
2 2 1 3 (654,1) *** 3 30.1 28.0 2.79 8.89

3 3 (3764,1) 3 (4106,2) 5 39.6 40.2
5 (5822,1) 5 (5908,2)
2 3 1 8 (654,1) *** 3 19.8 17.6 2.90 9.16
3 3 (2908,1) 3 (2583,2) 5 31.6 31.5
5 (4641,1) 5 (4626,2) 8 18.3 19.1
8 (2037,1) 8 (2805,2)
2 4 1 1 (908,1) *** 1 6.2 4.5 3.44 8.85
3 3 (2908,1) 1 (662,2) 3 19.8 17.6
5 (4641,1) 5 (4626,2) 5 31.6 31.5
8 (1783,1) 3 (2583,2) 8 12.2 14.6
8 (2143,2)
2 5 1 1 (908,1) *** 1 6.2 4.5 3.99 9.00
3 2 (975,1) 1 (662,2) 2 6.6 7.2
3 (2542,1) 2 (1063,2) 3 17.3 15.4
5 (4032,1) 3 (2255,2) 5 27.4 26.5
8 (1783,1) 5 (3891,2) 8 12.2 14.6
8 (2143,2)
(Continued)
Case 3: demand ~
number of products = 2
unf(200, 300) and
FLITNET model
483
distribution
Issues in
network design
Table III.
18,5
484
IJOPM
Table III.
Open plant
transports to
open warehouse
(number of units,
2 6 1 1 (908,1) *** 1 6.2 4.5 4.59 8.14

3 2 (609,1) 1 (662,2) 2 4.2 5.0
3 (1466.1) 2 (735,2) 3 10.0 9.9
4 (1442,1) 3 (1448,2) 4 9.8 7.7
5 (4032,1) 4 (1135,2) 5 27.4 26.5
8 (1783,1) 5 (3891,2) 8 12.2 14.6
8 (2143,2)
Notes:


Fixed cost ratio =
to open
warehouse (number
of units, Warehouse
transportation load ratio
mode) (%)
Node Node Fixed
3 4 3 4 (3274,1) 4 (3157,2) *** 4 (1630,2) *** 4 22.3 21.5 20.1 18.1 18.0 1.80 19.22
5 (694,1) 5 (3189,2) 5 18.6 21.7 19.8 19.8 20.1
8 (2676,1) 6 (1815,2) 6 12.3 12.4 12.8 14.6 13.7
8(3165,2) 8 18.2 21.6 20.3 18.6 19.8
4 *** *** *** 4 (1030,3) 4 (1792,1)
5 (2025,2) 4 (855,3)
5 (888,3) 5 (880,1)
6 (2148,2) 5 (2076,3)
8 (2297,2) 6 (2018,3)
8 (433,3) 8 (2900,3)
5 5 (2033,1) *** 4 (2947,3) *** ***
6 (1805,1) 5 (2910,2)
6 (1876,2)
8 (2977,2)
3 5 1 1 (609,1) 1 (663,2) 1 (689,2) 1 (751,2) 1 (413,3) 1 4.2 4.5 4.7 5.1 5.4 2.01 19.18
3 (2044,2) 3 (2908,2) 3 (1250,2) 2 7.3 6.6 8.1 6.1 5.0
8 (1665,2) 8 (2288,2) 3 (1410,3) 3 17.2 17.6 16.6 16.3 16.3
(Continued)
Case 4: demand ~
number of products = 5
unf(200, 500) and
FLITNET model
485
distribution
Issues in
network design
Table IV.
18,5
486
IJOPM
Table IV.
to open
warehouse (number
of units, Warehouse
mode) (%)
Node Node Fixed
4 *** 6 (1815,2) *** 5 (1660,2) 1 (378,1) 5 19.1 18.9 17.2 18.8 20.9
8 (837,2) 5 (888,3) 3 (1322,1) 6 9.6 12.4 10.8 11.3 9.7
6 (2513,2) 3(1325,3) 8 14.1 17.1 15.6 13.5 14.4
8 (1546,2) 5 (880,1)
8 (433,3) 5 (2076,3)
6 (2018,3)
8 (2109,3)
5 3 (2857,1) 3 (753,2) 5 (2796,2) *** ***
5 (2846,1) 5 (3549,2) 6 (2029,2)
6 (2103,1)
8 (2067,1)
3 6 1 *** *** 1 (689,2) 1 (447,2) 1 (791,3) 1 4.2 4.5 4.7 5.1 5.4 2.28 19.17
2 (1182,2) 3 (833,1) 2 7.3 6.6 8.1 6.1 5.0
3 (2432,2) 8 (346,1) 3 17.2 17.6 16.6 16.3 16.3
5 (2529,2) 8 (1763,3) 5 19.1 18.9 17.2 18.8 20.9
6 (1590,2) 6 9.6 12.4 10.8 11.3 9.7
8 (2288,2) 8 14.1 17.1 15.6 13.5 14.4
(Continued)
to open
warehouse (number
of units, Warehouse
mode) (%)
Node Node Fixed
2 6 (98,1) 1 (663,2) *** 1 (304,3) 6 (1419,3)

5 (2784,2) 2 (266,2)
6 (1815,2) 2 (630,3)
8 (2502,2) 3 (2109,3)
5 (1878,2)
5 (888,3)
6 (1665,2)
8 (1546,2)
8 (433,3)
3 1 (157,1) *** 1 (126,2) *** ***
2 (22,1) 2 (87,2)
4 (355,1) 4 (441,2)
5 (512,1) 5 (351,2)
6 (150,1) 6 (226,2)
8 (279,1) 8 (294,2)
Notes:

Fixed cost ratio =
487
distribution
Issues in
network design
Table IV.
IJOPM cases (cases 1 and 2) when customer demand was low, warehouse capacity was
18,5 generated randomly on a uniform distribution between (2,600, 2,700) units and
plant capacity was generated on a uniform distribution between (3,000, 4,000)
units. When customer demand was high (cases 3 and 4), warehouse capacity was
generated randomly using a uniform distribution between (14,000, 15,000) units
and plant capacity was generated uniformly between (19,000, 20,000) units.
488 In Table I when the decision is to open two plants and two warehouses, the
optimal solution is to open plants at nodes 1 and 5 and open warehouse at nodes
3 and 5. Open plant 2 transports 230 units of product 1 using transportation
mode 1 to open warehouse 3 while it transports 236 units of product 1 using
transportation mode 1 to open warehouse 5. We also provide the warehouse
load ratio for each product. The warehouse at node 4 operates at 92.3 per cent
of its capacity while the open warehouse at node 5 operates at 100 per cent of its
capacity. This ratio should provide more insights as one could also identify the
service differences for each product from each open warehouse. In Table I, we
also report the fixed cost ratio. Fixed costs to open plants and warehouses are
important components of total cost that is incurred for the FLITNET model.
The fixed cost ratio is found to be 19.49 per cent when the decision is to open
two warehouses and plants. It took less than 8 seconds to obtain an optimal
solution to this problem.
When the decision is to open two plants and three warehouses, the optimal
solution is to open plants 1 and 5 while open warehouses 3, 5 and 10. The
warehouse load ratio for node 6 drops to 32.5 per cent for product 1 and 59 per
cent for product 2 while for node 3 it drops to 18.1 per cent for product 1 and 40
per cent for product 2 to accommodate open warehouse in node 10. The fixed
cost ratio increases to 25.91 per cent. The FLITNET model also chooses the best
transportation alternative to transport products from manufacturing plants to
warehouses. The operations manager can use these results to not only choose
the best location for plants and warehouses, but also pick the best mode for
transporting multiple products from the open plants to open warehouses which
in turn is distributed to customer retail outlets.
The CPU time (the time it takes to obtain an optimal solution: this includes
generation, compilation and execution times) does not change dramatically and
we can obtain optimal solutions well within 9 seconds. Table I highlights the
value of the FLITNET model through provision of warehouse load ratio and the
fixed cost ratios as well as the location of open plants and warehouses.
Table II presents optimal solution to the FLITNET model for the second case
when demand is generated randomly from a uniform distribution between 5
and 100 units for five products.
When the decision is to open three plant and four warehouses, the optimal
solution is to open plants at nodes 1 and 4 while warehouses are open at nodes
1, 4, 5 and 6. The model considers a combination of all three transportation
modes to ship products from plants to warehouses. When the decision is to open
three plants and five warehouses, the model opens plants at nodes 1, 4 and 5
while it opens warehouses at nodes 1, 4, 5, 6 and 8. However, when the decision
is to open three plants and six warehouses, the optimal solution is to open Issues in
plants at nodes 2, 4 and 5 while open warehouses at nodes 1, 2, 4, 5, 6 and 8. The distribution
model closes the plant at node 1 and replaces it with a plant at node 2 while we network design
move from a (three plants/five warehouses) scenario to a (three plants/six
warehouses) scenario.
We present optimal solution to two other cases: Demand ~ Uniform (200,
500) units for two products in Table III and Demand ~ Uniform (200, 500) units 489
for five products in Table IV.
In both cases, it was cheaper to open six warehouses to distribute products.
Total transportation and inventory costs were also at a minimum when the
optimal solution was to operate with six warehouses.
We compare the total costs with number of open warehouses (keeping the
number of plants fixed) in Figure 1 for the FLITNET model.
For all the four cases, opening six warehouses produced the lowest optimal
total cost. While cases 1 and 3 (customer demand for two types of products)
require two plants to be opened, cases 2 and 4 (customer demand for five types
of products) require three plants to be opened.
The evaluation of strategic changes to an integrated distribution system
configuration involves estimation of several cost and benefit measures,
including the impact on the amount of cycle stock that is carried in the network.
The FLITNET model can help in evaluating the impact of cycle stock,
inventory, and transportation cost as we change the number of open
warehouses and plants. Table V provides total cycle stock, inventory and
transportation costs for all four cases of the problem.
Table V confirms the hypothesis that the total cycle stock in the system will
not generally change as the number of warehouses increases, since each
warehouse has a quantity of cycle stock averaging half a cycle’s time supply for
that specific warehouse. Moreover, cycle stock would vary between zero and a
full cycle’s time supply when a shipment is received, and averages half a cycle’s
time supply. This issue of cycle stock inventory is particularly important when
one is considering changes in the distribution configuration. The manager of
distribution network operations must consider issues related to facility
location, transportation and inventory simultaneously before a decision could
be made to decide on an efficient system configuration.
Total inventory and transportation cost as a percentage of total optimal
cost are also provided for all the four cases of the problem. Total inventory
cost remains a constant for each case of the problem when we change the
number of open warehouses. In this problem we considered three modes of
transportation. Constable and Whybark (1978) argue that a “transportation cost
ratio may provide a rational way of determining when organizational separation
of the transportation and inventory decisions can be justified”. Langley (1980)
concludes that while the magnitude of a constant per-unit transportation cost
will have an impact on the total cost of the inventory policy, it will not have any
influence on an order quantity that will minimize the total cost function.
IJOPM Case 1: Total Optimal cost vs.
Number of open warehouses
Case 2: Total Optimal cost vs.
Number of open warehouses
18,5 (Number of open plants = 2) (Number of open plants = 3)
Total optimal cost Total optimal cost

38500 200000
180000
38000 160000
490 140000
37500 120000
100000
37000 80000
60000
36500 40000
20000
36000 0
3 4 5 6 7 3 4 5 6 7
Number of open warehouses Number of open warehouses
Case 3: Total Optimal cost vs. Case 4: Total Optimal cost vs.
(Number of open plants = 2) (Number of open plants = 3)
Total optimal cost Total optimal cost

450000 1050000
400000
1000000
350000
300000 950000
250000
900000
200000
150000 850000
100000
Figure 1. 800000
Total optimal cost 50000
versus number of open 0 750000
warehouses 3 4 5 6 7 4 5 6 7
We take an alternate route to calculate the total transportation cost. In the

integrated model:
Total transportation cost = ∑ ∑ ∑ ∑ ( ACON ( l , r ) * d ij ) * X ijlr
i j l r
where
ACON(l, r): non-negative constant that characterizes transportation mode r
which is used to transport product l (in dollars/unit).
dij: Euclidean distance from plant i to warehouse j.
Total inventory Total transportation
Issues in
Number of Total cost as a cost as a distribution
open cycle stock percentage of percentage of network design
warehouses cost total optimal cost total optimal cost
Case 1
3 34.82 3.27 2.06 491
4 34.25 3.36 1.90
5 33.47 3.27 1.95
6 32.94 3.25 1.88
7 34.99 3.30 1.76
Case 2
3 301.44 21.32 2.79
4 305.22 20.29 2.58
5 327.44 23.01 2.89
6 335.51 24.33 3.24
7 341.14 23.92 3.16
Case 3
3 587.92 5.01 1.66
4 568.23 5.34 1.78
5 556.83 5.57 1.90
6 564.18 5.83 1.90
7 569.97 5.87 1.94
Case 4
4 2,218.22 22.80 2.93 Table V.
5 2,266.51 25.59 3.25 Total cycle stock,
6 2,228.58 26.67 3.25 inventory and
7 2,262.78 27.41 3.26 transportation costs
This cost is proportional to the transportation mode used, the total quantity of
products transported from open plants to warehouses and the distance between
manufacturing plants and warehouses. In Table V, the total transportation cost
as a percentage of total optimal cost is compared to the number of open
warehouses keeping the number of open plants as a constant.
For a fixed number of open plants, when the decision is to increase the
number of open warehouses, there is some added flexibility in distributing the
multiple commodities from the set of open plants to the open warehouses. This
leads to some decrease in the total transportation costs. The operations manager
can perform such sensitivity analysis on the input parameters and make
decisions based on the outcome of the location, inventory and transportation
parameters.
From the decision support system that was created for the model, a
geographical display for one set of results of the FLITNET model is presented
in Figure 2. Demand outlets were generated from a uniform distribution
between (0, 100) units for two products (case 1). The optimal solution was to
open two plants and five warehouses.
Plants are open at points 1 and 4 while warehouses are opened at points 1, 2,
3, 5 and 10. Open plant 1 ships products to open warehouses 1, 3 and 10 while
IJOPM D
D
P D
D D
D D D
18,5 D D
D
D x D
P
D
P D
D D x
x
D
492 D
D P
D
D
D
D D
D
x D x
D D
P D
Key
Warehouse-customer demand outlet link
Figure 2. Plant – Warehouse link
Geographical display of Potential Warehouse location
FLITNET results P Potential plant location
D Customer demand location
plant 4 ships products to open warehouses 2, 3 and 5. The figure also illustrates
the distribution pattern of the products from warehouses to demand outlets.
This figure can provide more intuition to the distribution strategy between
plants and warehouses and warehouses and customer zones.
Managerial implications
The proposed FLITNET model provides a means by which inventory,
transportation and location strategies can be evaluated by a firm. Such joint
examination of inventory, transportation and location strategies could lead to a
more thorough investigation of competitive strategies. For example, the model
could be used to vary the number of open manufacturing plants and
warehouses and evaluate its effect on the transportation modes and the amount
of inventory (in-transit and cycle stock) that needs to be carried by these plants
and warehouses based on their location in the distribution network.
For many purchasing managers, transportation costs are erroneously taken
as fixed, and thereby not a relevant cost for the contract negotiation. This is
probably the case in a regulated transportation environment where similar
carriers in a given mode were required to charge the same price for the same
service. Further, many buyers look at transportation cost as only a small part of
the unit price of an item. However, the results of the integrated model indicate
that firms have to reconsider their transportation, inventory, and location
strategies in the light of changing market conditions. The FLITNET model
could be useful in studying the effect of switching from one strategy (e.g., open
two plants and warehouses) to others (e.g., loading the open warehouses to 95
per cent of their capacity) during a given planning horizon.
It took less than 7 seconds to obtain optimal solutions to all instances of the Issues in
FLITNET model. The evidence of these computational runs strongly suggests distribution
that the mixed integer linear programming formulation of the FLITNET model network design
is easily solvable by commercial software available on personal computers.
Hence, we conclude that the FLITNET formulation is a computationally
tractable model.
493
Conclusion
The design of an integrated distribution network encompasses decisions that
are among the most critical operational and logistical management decisions
that face a firm. Such decisions affect costs, time, and quality of customer
service that should be carefully monitored. Existing analytical models for
distribution network design have focused only on individual components of the
design problem. However, a full understanding of the simultaneous relationship
between facility location, inventory and transportation related issues is critical
for the success of any firm.
This paper presented the FLITNET model for jointly examining the effects
of facility location, transportation modes, and inventory related issues on the
overall objective of minimizing the distribution design costs incurred by a firm.
The integrated model permits a more comprehensive evaluation of the different
trade-off that exists among the three strategic issues and has attempted to
provide insight into the inclusion of realistic transportation, inventory and
location costs in a distribution network design model.
References
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Operational Research, Vol. 22, pp. 263-79.
Batta, R. and Mannur, N. (1990), “Covering-location models for emergency situations that require
multiple response units”, Management Science, Vol. 36, pp. 16-23.
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Brandeau, M. and Chiu, S. (1989), “An overview of representative problems in location research”,
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Buffa, F. and Reynolds, J. (1977), “The inventory-transport model with sensitivity analysis by
indifference curves”, Transportation Journal, Vol. 17, pp. 83-90.
Carter, J. and Ferrin, B. (1995), “The impact of transportation costs on supply chain management”,
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decisions”, Decision Sciences, Vol. 9, pp. 688-99.
Daskin, M. (1995), Network and Discrete Location, John Wiley & Sons, New York, NY.
Davis, S. and Davidson, W. (1991), 2020 Vision, Simon & Schuster, New York, NY.
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York, NY.
GAMS (Generalized Algebraic Modeling Systems) (1994), The Scientific Press.
Langley, C.J. (1980), “The inclusion of transportation costs in inventory models: some
considerations”, Journal of Business Logistics, Vol. 2, pp. 106-25.
IJOPM Larson, P. (1988), “The economic transportation quantity”, Transportation Journal, Vol. 28,
pp. 43-8.
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inventory”, International Journal of Physical Distribution & Materials Management, Vol. 18,
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Van Beek, P. (1981) “Modelling and analysis of a multi-echelon inventory system: a case study”,
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Issues in

Transportation, facility distribution

in distribution network design

Introduction and background

The mathematical model (FLITNET)

∑ ∑ ∑ ∑ Clr Lijlr X ijlr + ∑ ∑ ∑ ∑ 0.5 * ( CC il * X ijlr / Fijlr ) +

∑ ∑ ∑ ∑ 0.5 * (CWjl * X ijlr / Fijlr ) + ∑ Oi Pi

∑ ∑ ∑ S lYjklr ≤ Wj Z j for all j (2)

∑ Yjklr ≤ ∑ X ijlr for all l , r , and j (4)

476 ∑ ∑ ∑ S l X ijlr ≤ Gi Pi for all i (5)

X ijlr ,Yjklr ≥ 0 for all i , j , k , l , and r (7)

FLITNET model results

2 2 1 3 (230,1) *** 3 34.1 58.2 19.49 7.96

Total amount of demand for each product by assigned customers

Fixed cost of open warehouses + plants

100) and number of

Case 2: demand ~ unf(5,

5 4 (355,1) 4 (457,2) 4 (336,2) *** ***

5 1 (157,1) *** 1 (126,2) *** ***

Total amount of demand for each product by assigned customers

Fixed cost of open warehouses + plants

2 2 1 3 (654,1) *** 3 30.1 28.0 2.79 8.89

2 6 1 1 (908,1) *** 1 6.2 4.5 4.59 8.14

Total amount of demand for each product by assigned customers

Fixed cost of open warehouses + plants

2 6 (98,1) 1 (663,2) *** 1 (304,3) 6 (1419,3)

Fixed cost of open warehouses + plants

Total optimal cost Total optimal cost

Total optimal cost Total optimal cost

We take an alternate route to calculate the total transportation cost. In the

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5 4 (355,1) 4 (457,2) 4 (336,2) * *

5 1 (157,1) * 1 (126,2) * ***