Int J Adv Manuf Technol (2011) 57:367–378
DOI 10.1007/s00170-011-3290-x
ORIGINAL ARTICLE
A replenishment policy based on joint optimization
in a downstream pharmaceutical supply chain:
centralized vs. decentralized replenishment
Armand Baboli & Julien Fondrevelle &
Reza Tavakkoli-Moghaddam & Ali Mehrabi
Received: 12 July 2010 / Accepted: 21 March 2011 / Published online: 14 April 2011
# Springer-Verlag London Limited 2011
Abstract This paper considers a number of problems in a
pharmaceutical downstream supply chain under specific
constraints related to pharmaceutical products (e.g., their
expiry date and regulations) and to inventory control (e.g.,
low prices of products, gift products or prices near zero,
shortages prohibited but excess inventory allowed). As
traditional models of inventory control and replenishment
cannot optimize the total cost of the system, it is very
important to consider the transportation cost as well. In this
paper, we take into account some of these constraints and
propose two models for multi-product replenishment
policies, namely centralized and decentralized models. We
seek to identify the best quantity and period of replenish-
ment of products for a joint optimization of inventory and
transportation costs. The proposed models can be applied to
a specific family of products with a stable demand and high
turnover rate, low prices (or gift products for some of
them), and without any shortage. These two models are
compared and the global approach is illustrated by a
numerical example taken from a real-case study.
Keywords Supply chain . Replenishment policy . Inventory
control . Transportation . Pharmaceutical case
A. Baboli (*) : J. Fondrevelle : A. Mehrabi
Université de Lyon, INSA-Lyon, DISP Laboratory,
Lyon, France
e-mail: armand.baboli@insa-lyon.fr
R. Tavakkoli-Moghaddam
Department of Industrial Engineering, College of Engineering,
University of Tehran,
Tehran, Iran
1 Introduction
Any analysis of a company's competitiveness requires that
many factors be taken into consideration simultaneously. In
a context characterized by new forms of competition, in
particular market globalization, companies tend to pay
special attention to replenishment functions, external
logistics, and physical distribution of goods. It is therefore
important to examine the optimization of transportation and
inventory costs together. A significant number of methods
are applied separately to optimize mono-echelon or multi-
echelon inventory, individual or collective replenishment,
deterministic or probabilistic demand, and the like [1].
Additionally, the different types of decision making can be
characterized according to how re-ordering is carried out in
a centralized or decentralized way. In the decentralized
case, each company in the supply chain tries to optimize its
own total cost, independently of the other members of the
same chain (local optimization). In the centralized case, the
partner companies try to find a global optimum for the
whole system.
This paper focuses on a pharmaceutical supply chain and
particularly on its downstream part, close to patients. It
considers specific constraints related to pharmaceutical
products, such as their expiry date, regulations, the price
of products (zero for some of them), and the fact that there
should be no shortages, although excess inventories are
possible. It seems that traditional models of inventory
control and replenishment found in the literature are not
applicable as they are. Moreover, it is important to take
transportation costs into account in the total system cost.
This paper is organized as follows. In Section 2, related
studies are discussed. Section 3 describes the motivations
and advantages of using the proposed policy. Section 4
presents the model and the cost formulation in centralized
368
and decentralized cases. Section 5 illustrates the successive
steps of resolution. Section 6 describes the downstream part
of pharmaceutical supply chains, and Section 7 gives some
quantified results. Finally, Section 8 concludes and suggests
further research.
2 Literature review
The literature review is presented in three parts. First, we
review some recent researches on replenishment models in
a supply chain, based on inventory and transportation
management simultaneously. We then present centralized
and decartelized decisions in re-ordering models. The
majority of these research studies consider a constant or
stationary demand. Finally, in the last part, we review some
studies that examine the uncertainty of certain demand.
Many researchers have considered the transportation cost as
a part of the price or ordering cost, assuming the size of the
shipment to be independent [2–4]. These studies look at
how determined the economic policy of production and
shipment for a single-vendor single-buyer integrated
production-inventory system. The objective is to minimize
the total costs incurred by the vendor and the buyer. In
practical cases, the transportation cost is affected by the
shipment size and vice versa. It is consequently important
to determine the most economic order quantity to minimize
the overall logistic costs. Ghanshan [5] introduced a three-
level supply chain consisting of a number of identical
retailers, one central warehouse, and a number of identical
suppliers. In this model, the objective function consists of
ordering, holding, and transportation costs. Specifically, the
transportation cost is considered as a function of the
quantity to order, while ignoring the vehicle capacity.
Swenseth and Godfrey [6] demonstrated that straightfor-
ward freight rate functions can be incorporated into
inventory replenishment decisions without compromising
the accuracy of the decision and without adding undue
complexity to the decision process. Ertogral et al. [7]
considered a vendor–buyer supply-chain model with the
transportation cost that depends on the shipment size. All-
unit-discount transportation cost structures with and with-
out over-declaration have been considered in their work.
Huang et al. [8] considered a two-level supply chain, in
which products are delivered to many retailers from a
warehouse. Each retailer faces a constant and deterministic
demand. The objective is to determine an optimal stationary
zero inventory ordering policy for both the warehouse and
retailers, in which the average transportation and inventory
cost is minimized. The transportation cost consisting of
fixed and variable costs is linearly proportional to the
amount of quantity ordered. Zhao et al. [9] proposed an
algorithm to find the optimal ordering quantity and
Int J Adv Manuf Technol (2011) 57:367–378
frequency for a supplier–retailer logistic system, in which
fixed and variable transportation costs and the multiple use
of the vehicle cost are considered. Furthermore, Zhao et al.
[10] proposed an algorithm based on a Markov decision
process to formulate both ordering and delivery problems
considering different transportation modes, costs, and
inventory issues. Qu et al. [11] proposed a heuristic
decomposition method to solve the problem of an
inventory-transportation system that minimizes the long-
run total average costs (i.e., major and minor ordering,
holding, backlogging, stopover, and travel). The decompo-
sition algorithm works by using separate calculations for
inventory and routing decisions, and then coordinating
them appropriately. Kutanoglu and Lohiya [12] proposed
and integrated a stochastic base-stock inventory model with
transportation options. They applied this integrated model
to a single-echelon, multi-facility service parts logistics
system with highly sporadic and low demands in order to
obtain the good results.
In short, the main objective of these research studies is to
integrate the transportation cost in inventory replenishment
decisions. Most of them are developed for a mono-product
replenishment case, and to our knowledge there is no
research work on a global policy for joint optimization of
the transportation and inventory cost in multi-product
replenishment. The models presented in this paper are
designed to fill this gap.
The different situations can be also characterized
according to how re-ordering is carried out in a centralized
or decentralized way. In the decentralized case, each
company of the supply chain tries to optimize its own total
cost, independently from the other members of the same
chain (i.e., local optimization). Axsäter [13, 14] considered
a two-echelon distribution inventory system with a central
warehouse and a number of retailers. The system is
controlled by continuous review installation stock (R, Q)
policies with given batch quantities. He developed an
approximate technique to determine the backorder cost of
the warehouse, and let the warehouse choose its reorder
point so that the sum of expected holding and backorder
costs is minimized. Given the resulting warehouse
policy, retailers similarly optimize their costs with
respect to the reorder points. Andersson and Marklund
[15] studied decentralized inventory control in a two-level
distribution system with a central warehouse and N non-
identical retailers. All installations use continuous review
installation stock (R, Q) policies. They presented an
approximate cost-evaluation technique, in which retailers
replace their stochastic lead times by accurate averages.
They also introduced an adjusted cost structure at the
warehouse to decompose the multi-level inventory control
problem into N+1 single-level sub-problems, one problem
per installation.
Int J Adv Manuf Technol (2011) 57:367–378
In the centralized case, partner companies try to find the
global optimum for the whole system [16, 17]. Some
researchers have considered a supply chain as a single firm
(i.e., all sites belong to the same organization), and have
therefore investigated centralized models. Abdul-Jalbar et
al. [18] compared the effect of centralization versus
decentralization on the total system cost. They considered
a two-level supply chain consisting of one warehouse and a
number of retailers. By numerical examples, they showed
that as the number of retailers increases, the number of
instances increases where the decentralized policy is better.
In addition, when there are many retailers, the sensitivity
analysis indicates that under specific conditions of the unit
replenishment and holding costs at the warehouse, the
centralized policy can provide better solutions. Kim et al.
[19] proposed centralized and decentralized adaptive
inventory-control models for a two-level supply-chain
network in order to satisfy a target service level predefined
for each retailer. The control parameters of these models are
designed to adaptively change as a change of customer-
demand patterns. In some two-level supply-chain inventory
systems containing a warehouse and a retailer, a coordina-
tion mechanism is a way to obtain a lower total system
cost. Coordination usually generates savings for the
warehouse and losses for the retailer. In these situations,
researchers have proposed saving–sharing mechanisms to
interest the retailer in accepting the coordination. The
quantity discount policy is a saving–sharing mechanism to
achieve coordination.
Chen and Chen [17] presented a joint replenishment
arrangement with a two-echelon supply chain, with one
supplier or manufacturer and one buyer or retailer facing a
deterministic demand and selling a number of products in
the marketplace. They considered a situation involving a
major setup cost and minor processing cost. The retailer
also has major setup costs due to economies of scale in
transportation and distribution expenses and an item-
specific minor setup cost for each additional item involved
in the order. They also proposed both centralized and
decentralized decision models to determine the best
solution to minimize costs. By using a search algorithm
and numerical illustration, they presented the benefits
generated by such an arrangement.
Viswanathan and Piplani [20] studied a single-vendor,
multi-buyer supply chain. They analyzed the benefit of
coordinating supply-chain inventories through the use of
common replenishment periods. The vendor offers the price
discount to entice the buyers to accept this strategy. Mishra
[21] generalized Viswanathan and Piplani's model [20] to
allow for a selective discount policy that excludes some
buyers in order to minimize the supplier's total cost. Li and
Liu [22] considered a supplier–buyer system with probabi-
listic customer demand and showed that the quantity
369
discount policy is a way to achieve coordination. Further-
more, they proposed a method to divide the profit on the
basis of a joint decision by the buyer and the supplier. The
optimal quantity discount policy is obtained by using this
profit-sharing method. Our presented model is based on this
previous work.
Considering the above-mentioned studies, we classify
the downstream supply chain in two categories. The first
one corresponds to cases in which the warehouse and the
retailers belong to the same organization. In such cases, it is
easier to apply the centralized decision mechanism, which
makes them interesting in a study of the effect of
centralization versus decentralization. However, when the
members of a supply chain do not belong to the same
organization and decentralized decisions have be made, it is
more interesting to study the coordination and saving–
sharing mechanisms in order to get closer to a centralized
decision. In this paper, we focus only on the first category
of the supply chain. The second category can be the subject
of future research.
Finally, there are a number of methods designed to
optimize distribution networks under uncertain demands. In
general, they take into account production, transportation,
and inventory costs. Sayarshad and Tavakkoli-Moghaddam
[23] proposed a model to optimize the fleet size and freight
car allocation under uncertain demands, yard capacity,
unmet demands, and number of loaded and empty railcars
at any given time and location. Kang and Kim [24]
proposed a model to integrate inventory replenishment
and delivery planning in a two-level supply chain in order
to determine order-up-to levels of the supplier and retailer
simultaneously that minimizes the expected long-run
average cost. Pishvaee et al. [25] proposed a model for an
integrated forward/reverse logistics network design under
uncertainty. Pandey [26] developed an algorithm to simul-
taneously determine the order quantities for each stage of
the supply chain. The objective is to minimize the total
work-in-process inventories in the entire supply chain for a
given demand.
By considering these research studies in the case of a
probabilistic demand, it seems more difficult to propose a
global optimization model for a multi-product multi-level
case. Each study has been developed for a specific case
involving specific constraints and assumptions. We take
into account the probabilistic demand and develop the
upgradable models.
3 Motivation and advantages of the proposed policies
The competitive nature of the market forces companies to
reduce their replenishment costs more and more and to
increase their customer satisfaction by reducing reaction
370
time. One of the most important reasons for holding
inventories is to serve the final customer as quickly as
possible. When the demand or lead time has a probabilistic
nature, the safety stock is used for this purpose. High and
low safety stocks (SSs) increase the holding and shortage
costs, respectively. Moreover, in pharmaceutical supply
chains, a high level of the SS can cause a loss of goods due
to their perishable nature.
In multi-echelon inventory systems, one way of decreasing
these costs for suppliers (warehouses) that supply retailers is to
obtain information about the retailer's demand and to centralize
the replenishment decision for all the members of the supply
chain. This kind of decision makes it possible to reduce the
inventory cost (i.e., holding, ordering, and shortage costs) of
supply chains. Another way is a joint optimization of
inventory and transportation costs. In this paper, we propose
two policies to identify the best quantity and period of
replenishment of products in the supply chain. The most
advantageous of these policies are the ones that fully exploit
the capacity of vehicles, so that not only transportation costs
but also CO2 emissions and noise can be reduced.
Finally, we are unable to find much research work on the
optimization of downstream pharmaceutical supply chains,
whereas there is a fair amount of work on the upstream
pharmaceutical supply chain. Due to the specific character-
istics of goods (i.e., perishable products, stochastic, and
extremely sporadic demand, no shortage while allowing for
excess, price of product near zero, etc.) in this chain, on the
one hand, and to a substantial increase of consumption of
pharmaceutical products on the other, it is necessary to
review the existing models and/or to develop new models for
several cases. Whereas, the majority of existing inventory
and transportation models use the price of products to
calculate the total system cost, we also integrate the volume
of products into our cost calculation model. These are the
three main motivations and objectives of this work.
4 New mathematical model
This paper considers a two-level supply chain consisting of
one warehouse (i.e., central pharmacy) and one retailer (i.e.,
hospital pharmacy), in which there are several items to
replenish. We assume that each item has a deterministic
demand with a constant demand rate, which corresponds to
focusing on the items with a stable demand and high
turnover rate. This kind of product accounts for 25% of the
firm's references but more than 70% of its expenses. As this
optimization problem is difficult to solve, the aim of the
presented model is not to find optimal solutions, but rather
to compare the total system cost, based on efficient
heuristic methods, in decentralized and centralized replen-
ishment contexts. In the decentralized case, companies in
Int J Adv Manuf Technol (2011) 57:367–378
the supply chain minimize their costs independently,
whereas in the centralized case they are considered as a
single organization. Unlike most existing models that
determine replenishment quantity only according to inven-
tory cost, in this model the transportation cost from a
warehouse to a retailer is also taken into account.
As far as the holding cost is concerned, for the sake of
clarity we distinguish between two components: one related
to the volume required to store the products (e.g., heating and
rent of the building), and the other corresponding to the
financial investment (e.g., interest rate). Although a unified
model can be used, we prefer to clearly separate these two
terms since this allows us to explicitly consider specific cases
arising in the pharmaceutical supply chain (e.g., products
with near-zero prices but requiring large volumes for storage,
or on the contrary, very small items with high prices).
We assume that there are three different types of vehicle,
and that delivery of each order from a warehouse to a
retailer is made by a single vehicle without splitting up the
order. These three types are called small (S), medium (M),
and large (L) vehicles, in which each vehicle has its own
fixed costs, variable costs, and capacities. The
corresponding transportation scheme is shown in Table 1.
Given the notations used in this scheme, it is assumed that
F2 ¼ F1 þ q1 ðv1  v2 Þ and F3 ¼ F2 þ q2 ðv2  v3 Þ, where
F1 <F2 <F3, v1 >v2 >v3 and q1 <q2 <q3. These equations are
introduced in order to avoid over-declaration. Thus, the
transportation cost varies according to the order quantity
[27]. Introducing three different sizes of vehicles allows us
to choose the most suitable capacity for a given quantity to
transport, and to have a direct shipment between a
warehouse and a retailer.
4.1 Assumptions
The main assumptions of our presented model are as
follows.
& The retailer faces a deterministic demand with a
constant demand rate.
& The demand is confined to a single item.
& Shortage is allowed at neither the retailer nor the
warehouse.
& The warehouse incurs the transportation cost from the
warehouse to the retailer.
Table 1 Transportation scheme
Vehicle type Capacity Fixed cost Variable cost
S (ci =1) q1 F1 v1
M (ci =2) q2 F2 v2
L (ci =3) q3 F3 v3
Int J Adv Manuf Technol (2011) 57:367–378 371

& The transportation time from warehouse to retailer is problem). As a consequence, more than one item may be
constant. transported in each delivery. The objective of the retailer is
& The lead time for an order to arrive at the warehouse is to reduce its ordering cost and benefit from economies of
constant. the scale. However, it is important to compare these
& There is no lot-splitting at the warehouse. benefits to additional holding costs. The aim is to determine
& The warehouse can deliver an order in advance but this the time interval between two successive deliveries and the
incurs a penalty cost. items that should be transported in each of them.
& The penalty cost can be calculated based on the holding As item k should be replenished every Tk in the
cost and the number of early days. individual replenishment case, the batch size is Qrk =
& The replenishment at the warehouse can be calculated Dk.Tk. We assume that Tk is an integer multiple of the time
based on the historical consumption. period. Inventory replenishment is a renewal process with
& For each item k, the warehouse order quantity is a fixed a cycle length T as the lowest common multiple (LCM) of
multiple of the retailer order quantity. all Tk.
We add the assumption that the retailer may place
more than one order per period. As the expected
4.2 Notations
behavior in each cycle is identical, the long-term cost
per time unit is equal to the mean cost for a cycle. We
N Number of items
define variable zkj as follows: zkj =1 if item k is ordered by
Dk Demand rate of item k
the retailer in period j; and 0, otherwise. We introduce Prk
Aw Ordering cost at the warehouse
as a penalty cost for the retailer for item k, and θke as
Ar Ordering cost at the retailer
earliness if item k is ordered in advance compared to the
hwk Holding cost per unit of the volume for item k at the
ordering date in the individual case. In this policy, the
warehouse
objective of the retailer is to order some items in advance
hrk Holding cost per unit of the volume for item k at the
in order to reduce the ordering cost, if this is profitable.
retailer
Consequently, it is necessary to compare the benefits
IR Interest rate
generated by grouping orders with the expenses due to the
PRwk Price of item k at the warehouse
additional holding cost.
PRrk Price of item k at the retailer
According to the above description, the total cost per
Qrk Retailer order quantity for item k
period, TCr, of the retailer for ordering, holding, and
Qwk Warehouse order quantity for item k
penalty costs is computed by:
Crk Retailer cost for item k
Cwk Warehouse cost for item k
TCr Total cost of the retailer per period P
T
aj Ar
X
N  
TCw Total cost of the warehouse per period j¼1 Tk Dk
TCr ðT1 ; T2 ; :::; TN Þ ¼ þ hrk uk
SCk System cost for item k T 2
k¼1
TSC Total system cost
X
N  
Prk Penalty cost at the retailer for item k Tk Dk
þ IR  PRrk
θke Earliness for the eth order compared to the initial 2
k¼1
request for item k !
jke Real date of the eth order for item k X
N
þ Prk =T ð1Þ
ci Type of vehicle i
k¼1
Pwk Penalty cost at the warehouse for item k
βke Earliness for the eth delivery compared to eth order s.t.
for item k 8 X
N
>
>
gke Real date of the eth delivery for item k < aj ¼ 1
> if z kj  1
uk Volume of item k k¼1
ð2Þ
>
>a ¼0 j ¼ 1; 2; :::; T
>
: j
else ;

4.3 Cost formulation

4.3.1 Decentralized multi-item replenishment

Xk
nT
T
In the decentralized policy, the retailer can request more z kj  n ; k ¼ 1; 2; :::; N ; n ¼ 1; 2; :::; ð3Þ
J ¼1
Tk
than one item in each order (i.e., joint replenishment
372 Int J Adv Manuf Technol (2011) 57:367–378

T
The ordering cost of the warehouse, Ow, is computed by:
X
Tk

Prk ¼ ðhrk uk Tk Dk þ IR  PRrk Tk Dk Þ  qke ð4Þ P

M
e¼1 bj Aw
j¼1
Ow ¼ ð8Þ
M
qke ¼ Tk  e  jke ð5Þ

8 X
N
8 >
>
> zkjke ¼ 1 >
< b j ¼ 1 if xkj  1
>
< j 1
X
k¼1
ð9Þ
ð6Þ
ke
jke s:t:
zkj ¼ e  1: >
>b ¼ 0 else ; j ¼ 1; 2; :::; M
>
> >
: j
: j¼1

Equation 1 defines the total cost per period of the retailer
as the sum of the ordering cost, holding cost, and
penalty cost. Note that the holding cost consists of two
terms: a cost related to storage involving the volume of
the items, and a financial cost involving the interest rate.
This model allows us to take into account specificities
of products with a very low price (near 0) by
considering a cost corresponding to the volume. Equa-
tion 2 states that there is one order at period j if and only
where, M is the LCM of all nkTk (i.e., the global cycle for
replenishment at the warehouse). xkj = 1 if item k is
replenished by the warehouse in period j; and 0, otherwise.
We introduce ci as the type of vehicle i and assume that
the warehouse can have several vehicles of each type. The
transportation cost, Trw, from the warehouse to the retailer
is then formulated by:
 
P
T P
V P
N

if at least one item is ordered during this period. Fci yij þ ð aikj Tk Dk uk Þ  vci
j¼1 i¼1 k¼1
Equation 3 ensures that the orders satisfy the demand, Trw ¼ ð10Þ
T
without any shortage: at each period and for each item,
the total ordered quantity should be greater than or equal
to the cumulated demand. This equation is formulated in X
t X
V X
t
multiples of the batch size. Equation 4 enables us to aikj  zkj ð11Þ
compute the penalty cost for each item, as the additional j¼1 i¼1 j¼1
holding cost due to orders made in advance. This holding
cost is similar to the one given in Eq. 1 and is multiplied
by the total earliness (in days), which is the sum of the X
n
if aikj > 0 then yij ¼ 1; else yij ¼ 0 ð12Þ
number of days in advance over all the orders. Equation 5 k¼1
is used to determine the earliness of the eth order. This is
the difference between the ideal ordering date in the
individual case (i.e., a multiple of the individual replen- X
n X
n

ishment period) and the real ordering date, which is if aikj > 0 then qci 1 < aikj  Tk Dk uk  qci ð13Þ
k¼1 k¼1
defined by Eq. 6. The real date of the eth order is such
that an order is made in this period, and e-1 orders have
already been made in the previous periods. where, αikj =1 if item k is delivered by vehicle i at period j;
The warehouse order quantity for each item is an integer and 0, otherwise. yij =1 if the vehicle number i is used in
multiple of the retailer order quantity. In an optimal period j; and 0, otherwise.
solution, the arrival of an order at the warehouse corre- If the warehouse decides to deliver item k earlier
sponds to the delivery of an order to the retailer. Therefore, than the period requested by the retailer, it should pay a
the holding cost of the warehouse, Hw, can be formulated penalty cost, Pwk, based on the retailer's holding cost and
by: the number of early days. This penalty can be formulated
by:

X
N  
ðnk  1ÞTk Dk T
Hw ¼ hwk uk X
Tk

k¼1
2 Pwk ¼ ðhrk uk Tk Dk þ IR  PRrk Tk Dk Þ  bke ð14Þ
X N   e¼1
ðnk  1ÞTk Dk
þ IR  PRrk nk is int:; k ¼ 1; 2; :::; N
k¼1
2
ð7Þ bke ¼ jke  gke ð15Þ
Int J Adv Manuf Technol (2011) 57:367–378 373

8
>
> X
The warehouse tries to find the best replenishment
>
>
V
>
< aikgke ¼ 1 strategy considering the main constraint (i.e., shortages
gke s:t: i¼1 ð16Þ are not allowed by the retailer). The total system cost, TSC,
>
> gX
ke 1 X
V
>
> which is the sum of the total cost for the retailer and the
>
: aikj ¼ e  1 total cost for the warehouse, is computed by:
j¼1 i¼1

Since the retailer is not allowed shortages, the total cost !

X
N
for the warehouse consists of the ordering and holding TSC ¼ TCr þ Hw þ Ow þ Trw þ Pwk =T ð21Þ
costs, as well as transportation and penalty costs if it k¼1
decides to send an order in advance. The total cost for the
warehouse can be formulated by: Equations 18, 19, and 20 are similar to Eqs. 1, 2, and 3
! in the decentralized context, except that there is no order
XN
made in advance by the retailer. That is why equality is
TCw ¼ Hw þ Ow þ Trw þ Pwk =T ð17Þ
k¼1 used in Eq. 20. Equation 21 is used to compute the total
cost per period for the system.
Equations 7, 8, 9, 14, and 15 related to the warehouse are
similar to Eqs. 1, 2, 4, and 5 for the retailer, respectively.
Equation 10 is used to compute the transportation cost per 5 Steps in solving the problem and illustration
period, which is the sum of the fixed costs related to the
vehicles chosen and the variable costs related to the volumes In the decentralized case, the decision process for replen-
carried. Equation 11 ensures that each order is delivered ishment can be broken down into the following four steps,
without delay. The total number of deliveries for each item is followed by a simple example with three different products
greater than or equal to the total number of orders for that item. (i.e., N=3) labeled from 1 to 3:
Equations 12 and 13 enable us to determine the vehicles used
at each period, depending on the volumes to carry and the Step 1 Determination of the latest possible delivery dates
capacity of each type of vehicle. Equation 16 defines the real of the retailer, for each product k independently,
date of the eth delivery, using a similar principle as in Eq. 6 for according to its demand rate Dk: This corresponds
the real date of the eth order. Finally, Eq. 17 computes the total to the optimal solution for the retailer when
cost for the warehouse per period as Eq. 1 for the retailer. product k should be replenished individually,
taking into account the holding cost, hrk, and the
4.3.2 Centralized and multi-item replenishment ordering cost, Ar, when no shortage is allowed.
Since the demand is assumed to be deterministic,
The objective of the centralized policy is to find the best the simple economy order quantity (EOQ) model
replenishment strategy for the whole system based on real can be used to determine the replenishment period,
requests by the retailer. We consider that the retailer transmits T k , and the batch size, Qrk ¼ Tk  Dk . The
its real requests to the warehouse without any local delivery dates (T0 þ n  Tk ) correspond to the
optimization. The total cost at the retailer is computed by: latest delivery dates to avoid shortages, where T0
PT is the starting date and n is an integer. The
aj A r
XN   deterministic context leads to a cyclic strategy,
j¼1 Tk Dk
TCr ðT1 ; T2 ; :::; TN Þ ¼ þ hrk Vk where the cycle length is computed as
T k¼1
2 T ¼ LCMk  ðTk Þ. It is therefore sufficient to
X
N   consider one cycle length to characterize the entire
Tk Dk
þ IR  PRrk ð18Þ replenishment strategy. We can represent the
2
k¼1 situation on an N×T Boolean request matrix RM
s.t. for the retailer: RMkt = 1 if and only if t ¼
8 T0 þ n  Tk (i.e., product k is delivered in an
> X
N
>
>
< aj ¼ 1 if z kj  1
Table 2 Request matrix (RM)
k¼1 ð19Þ
>
> a ¼0 else ; j ¼ 1; 2; :::; T
>
: j k\t 1 2 3 4 5 6 7 8 9 10 11 12

1 0 1 0 1 0 1 0 1 0 1 0 1
Xk
nT
T 2 0 0 1 0 0 1 0 0 1 0 0 1
z kj ¼ n ; k ¼ 1; 2; :::; N ; n ¼ 1; 2; :::; ð20Þ 3 0 0 0 1 0 0 0 1 0 0 0 1
J ¼1
Tk
374
Table 3 Order matrix (OM)
k\t 1 2 3 4 5 6 7 8 9 10 11
1 0 1 0 1 0 1 0 1 0 1 0
2 0 1 0 0 0 1 0 1 0 0 0
3 0 0 0 1 0 0 0 1 0 0 0
individual replenishment situation). For instance,
suppose that T1 =2, T2 =3 and T3 =4 (the time unit
is 1 day). In this case, T ¼ LCMk  ðTk Þ ¼ 12 and
matrix RM is given by Table 2.
Step 2 Definition of the real orders of the retailer: If the
retailer wants to take advantage of the possibility
of collective replenishment, it may be less costly to
order different products simultaneously and thus to
reduce the total ordering cost. If the additional
holding cost, hrk ×Qrk ×θke, due to an early delivery
of a product k is smaller than the ordering cost Ar,
then the total cost of the retailer can be reduced by
simultaneously ordering this product with another
one. As noted above, we assume that the transpor-
tation time between the warehouse and the retailer
is constant and can be considered as zero. We can
make this assumption in our problem as the central
pharmacy represented by the warehouse and the
hospital pharmacy associated with the retailer are
located close to one another (i.e., in the same city).
We can also use an N×T Boolean order matrix,
OM, to indicate the time periods when each
product is ordered. According to the variables
introduced, we have OMkt =zkt.
We can easily show that it is optimal to make an
order only at time t corresponding to a latest
possible delivery (or request) date (i.e.,
t ¼ T0 þ n  Tk ), where n is an integer.
In a typical example considered in this paper,
there is no order at times 1, 5, 7, and 11. It is
necessary to place an order at time 2 to avoid
shortages for product 1. We assume that product 2
can be ordered in advance, if hr2  Qr2 < Ar .
Thus, there is no need to place an order at time
3. Products 1 and 3, 1 and 2, and 1 and 3 should
therefore be ordered at times 4, 6, and 8,
respectively. For the same reason, product 2 is
ordered at time 8, with an earliness of 1 time unit,
in order to avoid an individual order. We can
Table 4 Vehicle types accord-
ing to item volumes Item 1 alone Item 2 alone
M S
Int J Adv Manuf Technol (2011) 57:367–378
similarly determine the real orders at times 9 to 12
12 (Table 3).
Step 3 Choice of the effective delivery dates and the
1 adequate vehicles for transportation: As noted
1 above, we consider that the warehouse can decide
1 to deliver an order earlier than the order date of
the retailer, implying a penalty cost for the
warehouse. In this case, the penalty cost is equal
to the additional holding cost for the retailer. Yet
such a decision may reduce the transportation
cost. It is worth noting that delays in delivery are
forbidden, since shortages are not allowed. In the
example considered in this paper, we assume that
the volume of orders for items 1, 2, and 3 leads to
use of the types of vehicles shown in Table 4.
We also assume that to deliver items 1, 2, and 3 in
the same period, one large vehicle is used for items 1
and 2 and one small vehicle for item 3, due to the
variable transportation cost, T2  D2 u2 >
T3  D3  u3 . Table 5 indicates the planned deliv-
eries and the corresponding types of vehicles.
The sum of the penalty costs of the retailer/
warehouse due to early deliveries and the transpor-
tation cost is computed by:
2  h2  T2  D2 þ 5F3 þ F2 þ 2F1 þ T1
 D1  u1 ð5v3 þ v2 Þ þ T2  D2
 u2 ð4v3 Þ þ T3  D3  u3 ðv3 þ 2v1 Þ ð22Þ
In this case, note that there is no penalty cost for
the warehouse, as the deliveries exactly correspond
to the orders from the retailer.
Step 4 Determination of the orders from the warehouse to
external suppliers: The problem is similar to that
described in step 2. In fact, according to the
effective deliveries planned in the previous step,
the warehouse decides on the dates and the
quantities for its replenishment. As the transporta-
tion cost is incurred by the external suppliers, the
warehouse considers only the holding and the
ordering costs to make its decisions. The differ-
ence between this step and step 2 lies in the
possibility of adapting the order quantity, which
should be an integer multiple of the EOQ model (i.
e., the fixed batch size, Qrk, of the replenishment at
the retailer by the warehouse).
Item 3 alone Items 1, 2, 3 Items 1,2 Items 1,3
S L and S L L
Int J Adv Manuf Technol (2011) 57:367–378 375

Table 5 Vehicle selection and deliveries macies, and care services/units). Among several pharma-
k\t 1 2 3 4 5 6 7 8 9 10 11 12 ceutical products, we study the information and product
flows of the drugs (MED), medical devices (DMS), and
1 0 L 0 L 0 L 0 L 0 M 0 L bandage objects (PANS). We first carry out several
2 0 L 0 0 0 L 0 L 0 0 0 L statistical analyses in order to classify the pharmaceutical
3 0 0 0 L 0 0 0 S 0 0 0 S products, based on their consumption, price, quantity, and
volume [29]. In this paper, we also concentrate on the
products regularly delivered from the central pharmacy to
In the centralized case, steps 1, 3, and 4 are hospital pharmacies and care services (Fig. 1).
similar and step 2 no longer holds. The vehicle Based on our study carried out at the Croix-Rousse
choice and delivery dates are directly determined Hospital in Lyon, France, we find that hospital pharmacies
from the initial requests (OM=RM). A possible order medical devices mainly from suppliers, of which
result of our example is the allocation illustrated in there are more than 100 throughout Europe, and order
Table 6. drugs and bandages mainly from the central pharmacy.
The sum of the retailer's and the warehouse's Retailers supply hospital pharmacies with specific and
penalty costs (due to early deliveries) and trans- occasional orders of drugs [27, 29]. The main objective of
portation costs is computed by: the central pharmacy is to group together several orders
from hospital pharmacies in order to take advantage of
h1  T1  D1 þ h2  T2  D2 þ 6F3 þ F1 economies of scale and to reduce the lead time for hospital
þ T1  D1  u1 ð6v3 Þ þ T2  D2 pharmacies. Since central and hospital pharmacies belong
to the same organization, it is cost-effective to find a global
 u2 ð4v3 Þ þ T3  D3  u3 ð2v3 þ v1 Þ ð23Þ solution for the whole system. In this paper, we develop
two models to calculate the total system cost. We take into
account the holding, ordering, and penalty costs in a case of
Hence, the cost reduction induced by the
advanced replenishment at central and hospital pharmacies,
centralized strategy, which is positive under our
and of transportation costs. Shortages are allowed at neither
assumptions, is computed by:
the hospital pharmacy nor the central pharmacy, whereas
h2  T2  D2  h1  T1  D1 þ F2 þ F1 excess inventory is allowed.

 F3 þ T1  D1  u1 ðv2  v3 Þ þ T3
7 Experimental results
 D3  u3 ðv1  v3 Þ ð24Þ

To observe and evaluate the total cost of the system in both

decentralized and centralized cases, the cost formulation
presented in the previous sections is programmed and
experimented in the MATLAB environment. Considering
6 Pharmaceutical downstream supply chains

Pharmaceutical supply chains are made up of manufacturers Care

of pharmaceutical products, suppliers of these products, Service
central pharmacies supplying several hospitals, hospital Hospital
pharmacies, and care services/units. Due to the complexity Pharmacy
and diversity of the relations between members of this Care
Central Service
chain [28], we mainly concentrate on its downstream part
Pharmacy
(i.e., suppliers, retailers, central pharmacy, hospital phar-

External
Table 6 Vehicle selection and deliveries in a centralization case Suppliers Care
Service
k\t 1 2 3 4 5 6 7 8 9 10 11 12 Hospital
Pharmacy
1 0 L 0 L 0 L 0 L L 0 0 L Care
2 0 L 0 0 0 L 0 0 L 0 0 L Service
3 0 0 0 L 0 0 0 L 0 0 0 S
Fig. 1 Pharmaceutical downstream supply chain
376 Int J Adv Manuf Technol (2011) 57:367–378

Table 7 Instances in the case study corresponding to seven products selected randomly from
N: number of types of products 7 the real data. Table 8 shows the results of these experi-
V: number of types of vehicles 4 ments. As shown in this table, the following scenarios are
Ar: ordering cost of the retailer 1
considered.
Aw: ordering cost of the warehouse 2 & Base scenario: This case is the most frequent in reality.
hrk: holding cost of the retailer/m3 2 The price of a product varies from 0 Euros (i.e., product
hwk: holding cost of the warehouse/m3 1 offer) to 200 Euros. The customer demand varies from
Dk: end customer demand 1 to 10 pack one to five packs, depending to the product reference,
uk: volume of the products 0.06 to 0.65 m3 and each pack contains one or several of the same
Fi: fixed costs for vehicles [169, 179, 196, 600] product. Customers have to order at least one pack or a
vi: variable costs for vehicles [5, 3.75, 2.5, 1.2] multiple thereof. We consider the volume of the pack or
qi: vehicle capacities [8, 14, 20, 60] the carton in general. The results show that the central-
Tk: replenishment period 2 to 8 isation of decisions allows for a reduction of the total
Capital asset (interest rate) 12% per year cost. We observe that the cost for the retailer remains
the same while there is a 28% saving in the total costs at
the warehouse and 24% saving in the total costs of the
system. This saving can be explained on the one hand
the large number of products and different consumption by the best organisation of transport and on the other
rates, we first classify the products into several families hand by better inventory management, particularly by
[29]. As stated above, many products may have a storage of products at the warehouse with lower holding
probabilistic demand in downstream pharmaceutical supply costs.
chains; however, in this paper we focus on the family with & Change in the number of packs: In this case, we vary
the high consumption rate that we regard as constant and the number of packs ordered by the retailer. The results
deterministic demand. Table 7 presents an instance show that there is a bigger saving when the number of

Table 8 Retailer, warehouse, and total system costs in the centralized and decentralized cases

Total cost at the Total cost at the Total cost of the

retailer warehouse system

Mean STD Mean STD Mean STD

Ar =1, Aw =2, D=1 to 5 pack, price=0 to 200, Cost per period Decentralize 16.80 7.36 120.44 24.62 137.24 28.50
volume=0.06 (40×40×40) to Centralized 16.80 7.36 87.27 22.56 104.08 28.27
0.34 (70×70×70) m3
Saving 0.00 0.28 0.24
Ar =1, Aw =2, D=1 to 2 pack, price=0 to 200, Cost per period Decentralize 8.47 3.31 106.81 21.37 115.28 22.37
volume=0.06 (40×40×40) to Centralized 8.48 3.30 62.72 16.02 71.20 18.47
0.34 (70×70×70) m3
Saving 0.00 0.41 0.38
Ar =1, Aw =2, D=1 to 10 pack, price=0 to 200, Cost per period Decentralize 30.59 14.06 151.66 39.69 182.25 50.82
volume=0.06 (40×40×40) to Centralized 30.60 14.06 126.65 38.49 157.24 50.47
0.34 (70×70×70) m3
Saving 0.00 0.16 0.14
Ar =1, Aw =2, D=1 to 5 pack, price=0 to 100, Cost per period Decentralize 15.75 6.92 120.00 25.85 135.75 29.69
volume=0.06 (40×40×40) to Centralized 15.75 6.92 84.42 22.73 100.18 28.34
0.34 (70×70×70) m3
Saving 0.00 0.30 0.26
Ar =1, Aw =2, D=1 to 5 pack, price=0 to 1,000, Cost per period Decentralize 21.46 9.21 126.53 27.26 147.99 33.13
volume=0.06 (40×40×40) to Centralized 21.46 9.21 102.56 31.45 124.02 38.24
0.34 (70×70×70) m3
Saving 0.00 0.19 0.16
Ar =1, Aw =2, D=1 to 5 pack, price=0 to 200, Cost per period Decentralize 11.84 5.06 112.35 22.96 124.19 24.88
volume=0.06 (40×40×40) to Centralized 11.84 5.06 74.07 19.46 85.91 23.26
0.216 (60×60×60) m3
Saving 0.00 0.34 0.31
Ar =1, Aw =2, D=1 to 5 pack, price=0 to 200, Cost per period Decentralize 27.96 14.02 147.87 43.54 175.83 55.34
volume=0.06 (40×40×40) to Centralized 27.96 14.02 119.84 40.47 147.80 53.19
0.65 (85×85×85) m3
Saving 0.00 0.19 0.16
Int J Adv Manuf Technol (2011) 57:367–378
ordered packs is small and a lower saving when the
number of ordered packs is greater than that of the base
scenario.
& Change in product price (PRwk): The results show that
the cost saving when the product prices are reduced is
not very large, and that it is necessary to have a
substantial modification in product prices to obtain a
better cost saving. This weak sensitivity can be
explained by the fact that for the inventory cost
calculation, we take into account both the price of
products and the number of packs.
& Change in volume (uk): The results of this case show a
better cost saving when the volume of the pack is lower
than the base scenario. This can be explained by a better
optimization and exploitation of the vehicle's capacity.
8 Conclusions
This paper has presented a problem of replenishment in the
downstream part of a pharmaceutical supply chain. We have
focused our study on products with strong consumption/
rotation by considering the demand for these products as
approximately constant. Two replenishment policies and two
models of the total system cost have been introduced, namely
the centralized and decentralized cases. It is worth noting that
the centralized model can be applied in the case where both
warehouse and retailer belong to the same organization. In a
case involving external suppliers, other models (such as
coordination by contract) are more appropriate. An example
has been used to illustrate each model. The comparison of the
results obtained by two models on the same problem has
shown the contribution of our work. The numerical experi-
ments in three situations have illustrated the application of the
proposed model and the gain or loss from each supply-chain
component in the centralized and decentralized cases. Ongoing
and further research includes the development of other
optimization algorithms to provide efficient solutions for large
problems. The performance of such algorithms can be assessed
through extensive computational experiments. Furthermore,
our proposed model can be refined by considering orders by
several retailers (e.g., hospital pharmacies) to the same
warehouse (e.g., central pharmacy), which can lead to
discounts by external suppliers (e.g., divergent supply chain).
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