Supply Chain Network Design With Coordinated Inventory Control

Transportation Research Part E 145 (2021) 102168
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Transportation Research Part E

journal homepage: www.elsevier.com/locate/tre
Supply chain network design with coordinated inventory control

Agus Darmawan a, *, Hartanto Wong b, Anders Thorstenson b
a
Dept. of Mechanical and Industrial Engineering, Universitas Gadjah Mada, Indonesia
b
CORAL - Cluster for Operations Research, Analytics, and Logistics, Dept. of Economics and Business Economics, Aarhus University, Denmark
A R T I C L E I N F O A B S T R A C T
Keywords: In this paper, we present models and solution methods for supply chain network design that not
Fill rate only integrate the location-transportation and inventory problems, but also consider the imple
Inventory control mentation of coordinated inventory control in the network. We compare two different strategies
Heuristics
differentiated by whether or not coordinated inventory control is implemented. Due to the
Stochastic models
Supply chain network design
complexity of the optimization problems, we develop heuristic methods to solve the problems
Coordination generated by the two strategies. The numerical results show the benefits of considering coordi
nated inventory control by reducing the inventory as well as the total costs in the supply chain
network. The structure of the network can also be affected by the coordinated inventory control.
The effects are most pronounced when the inventory holding cost rate is high.
1. Introduction
An effective and responsive supply chain network design (SCND) is a vital component of high performance characterized by high
efficiency and adequate customer service level. As organizations dynamically change their operations and engage in global sourcing,
coupled with shorter product life cycles, today’s executives are forced to revisit and redesign their distribution networks more
frequently than ever. Companies such as BMW (Fleischmann et al., 2006), 3 M (Hagerty, 2012) and PepsiCo (Rice and Rowell, 2016)
have reported significant cost savings and improved operations by redesigning their supply chain networks.
Basic theoretical approaches for SCND have been available for a long time. The literature on the topic is extensive and sophisticated
software packages are also available (e.g. AIMMS, LLamasoft, Logility, and JDA). The main issue is to deal with the tradeoffs between
service levels and the costs of transportation, storage, and inventory. However, today’s companies are faced with a more complex,
more competitive, and more unpredictable business world. A recent study based on an online survey conducted by Supply Chain
Insights (2017) reports that out of the respondents whose companies already have a network design process in place, only 19% would
rate it as “very effective”, which gives an indication that there is motivation for enhancing existing SCND models and tools. Another
recent business survey conducted by AIMMS (Quintanilla, 2019), finds that “none of the respondents shared data across multiple appli
cations to manage inventory, network design, and S&OP in an integrated way”. Providing models and tools that show the values of data
sharing and coordination may inspire companies to try to capture such values.
The motivation for including inventory deployment in SCND is the mutual dependence between design decisions such as warehouse
locations and capacities, and inventory decisions concerning where to deploy inventories along the supply chain and at what levels.
There are several studies in the literature that deal with inventory deployment in SCND (see e.g., Farahani et al., 2015 for a
* Corresponding author at: Dept. of Mechanical and Industrial Engineering, Universitas Gadjah Mada, Jl. Grafika No 2, 55281 Yogyakarta,
Indonesia.
E-mail address: agusd@ugm.ac.id (A. Darmawan).
https://doi.org/10.1016/j.tre.2020.102168
Received 28 August 2018; Received in revised form 28 August 2020; Accepted 11 November 2020
Available online 16 December 2020
1366-5545/© 2020 Published by Elsevier Ltd.
A. Darmawan et al. Transportation Research Part E 145 (2021) 102168
Table 1
Review summary of literature on SCND with inventory considerations.
Papers Echelons Inventory Demand Service Coordinated Method and notes
Location level Inventory
Nozick and Turnquist 2 WH Poisson distribution Stockout No Linear approximation for safety
(1998) rate stock
Nozick and Turnquist 3 Plant + WH Poisson distribution Stockout No Iterative procedure
(2001) rate
Daskin et al. (2002) 2 WH Normal distribution CSL No Lagrangian relaxation
Shen et al. (2003) 2 WH Normal distribution CSL No Column generation method
Miranda and Garrido 2 WH Normal distribution CSL No Lagrangian relaxation
(2004)
Teo and Shu (2004) 3 WH + RT Deterministic – – Column generation method
Croxton and Zinn 3 WH Normal distribution CSL No Mixed integer programming
(2005) o Multiple products
o Multiple suppliers
Shu et al. (2005) 2 WH Normal distribution CSL No Column generation method
Romeijn et al. (2007) 2 WH + RT Normal distribution CSL Yes Column generation method;
Coordination in order quantities
Sourirajan et al. 2 WH Normal distribution CSL No Lagrangian relaxation
(2007) o Lead-time based queuing
Farahani and 3 WH + RT Deterministic – – Genetic algorithm
Elahipanah o Multiple products
(2008) o Multiple periods
Multiobjective
Üster et al. (2008) 3 WH + RT Deterministic – – Heuristic algorithm
Sourirajan et al. 2 WH Normal distribution CSL No Genetic algorithm
(2009)
Miranda and Garrido 2 WH Normal distribution CSL No Heuristic algorithm
(2009)
Lin et al. (2009) 4 WH + RT Deterministic – – Hybrid evolutionary algorithm
Javid and Azad 2 WH Normal distribution CSL No Tabu search and Simulated
(2010) annealing
Park et al. (2010) 3 WH Normal distribution CSL No Tabu search and Lagrangian
relaxation
Yao et al. (2010) 3 WH Normal distribution CSL No Heuristic algorithm
o Multiple plants
o Multiple products
Reza Nasiri et al. 3 WH Normal distribution CSL No Sub-gradient search and
(2010) Lagrangian relaxation
o Multiple products
Liao et al. (2011) 3 WH Normal distribution CSL No Genetic algorithm
o Multiple products
o Multiobjective
Tsao et al. (2012) 3 WH + RT Poisson distribution CSL No Continuous approximation
Tancrez et al. (2012) 3 Plant + WH Deterministic – – Heuristics
+ RT
Keskin and Üster 3 WH + RT Deterministic – – Simulated annealingMultiple
(2012) suppliers
Kang and Kim (2012) 2 WH + RT Normal distribution CSL No Lagrangian relaxation
Atamtürk et al. 2 WH Normal distribution CSL No Conic quadratic mixed integer
(2012) programming
Silva and Gao (2013) 2 WH Deterministic – – Greedy randomized adaptive
search procedure
Shahabi et al. (2013) 4 WH Normal distribution CSL No Conic integer programming
Kumar and Tiwari 3 WH + RT Normal distribution CSL No Lagrangian relaxation
Askin et al. (2014) 3 WH + RT Normal distribution CSL No Genetic algorithm
Multiple products
Nasiri et al. (2014) 3 WH + RT Normal distribution CSL No Genetic algorithm and Lagrangian
relaxation
Multiple products
Zhang and Xu (2014) 3 RT Probability Distribution – No Heuristics
(Exponential, Uniform and Multiple suppliers
Normal dist)
Diabat et al. (2015) 3 WH + RT Deterministic – – Lagrangian relaxation-based
heuristic
(continued on next page)
2
Table 1 (continued )
Papers Echelons Inventory Demand Service Coordinated Method and notes
Location level Inventory
Manatkar et al. 2 WH + RT Normal distribution CSL No Particle swarm optimization,

(2016) Genetic algorithm
o Multiple products
o Uncapacitated WH
Taxakis and 5 Plant + RT Deterministic – – Genetic algorithm
Papadopoulos o Multiple suppliers
Fleischmann 2016 1 RT Normal and Gamma Fill rate No
distribution
Diabat et al. (2017) 3 WH Poisson distribution – No Simulated annealing and direct
search method
Puga and Tancrez 2 WH + RT Normal distribution CSL No Heuristics
(2017)
Puga et al. (2019) 2 WH + RT Normal distribution Service Yes Conic quadratic mixed-integer
time programming
This paper 2 WH + RT Normal distribution Fill Rate Yes Genetic algorithm; Fill rate
approximation
*WH: warehouse, RT: retailer, CSL: cycle service level.
comprehensive review). However, our literature review suggests that most of the existing studies, despite the explicit consideration of
inventory, do not pay attention to the possible adoption of coordinated inventory control in the supply chain. This is clearly indicated
by, for example, a common assumption used in those studies that all stages in the supply chain should maintain the same and relatively
high service levels. It is true that companies often report high inventory service levels for their stores, warehouses and distribution
centers as a sign of excellence in performance. However, it is questionable whether these relatively high service levels at all stages
represent appropriate targets for an efficiently operated supply chain. According to the standard SCM paradigm, the overall objective
of the supply chain should be to deliver a sufficiently high end customer service at minimum cost. Hence, end customer service at the
most downstream part of the supply chain is the primary constraint and therefore a key performance indicator (see e.g., Hausman,
2005). Applying a coordinated inventory control often results in service measures at the upstream stage that are lower than the service
levels provided for end customers at the downstream stage. Hence, such coordination can reduce the total inventory held in the supply
chain without jeopardizing end customer service. Thus, we foresee potential cost savings that can be generated from coordinated
inventory control in SCND. Integrating SCND and coordinated inventory control is also in alignment with collaboration and infor
mation sharing initiatives such as VMI (Vendor Managed Inventory), CPFR (Collaborative Planning, Forecasting and Replenishment),
and CR (Consumer Response), which have become widely implemented in practice.
This paper advances the existing literature on SCND in the following ways. Firstly, we extend the literature on inventory
deployment in SCND by considering coordination of reorder points, i.e., safety stocks, in the supply chain with the aim to minimize the
total cost, while assuring that the end customer service level is above a prespecified target. More specifically, we consider a network
consisting of multiple warehouses and retailers that all use continuous review (R, nQ) policies for their inventory controls. In addition,
our model uses a fill rate as the performance indicator for end customer service, whereas most of the existing studies use a cycle service
level. This is motivated by our observation that the use of fill rate is widespread in practice, as well as the conclusion in the standard
literature that the fill rate is a more appropriate measure for inventory performance. Secondly, since embedding coordinated inventory
control in SCND with fill rate as the end customer service measure makes the optimization problem more complex and difficult to
solve, we develop heuristics to solve the problem. From these advancements, we are able to assess the extent to which the consid
eration of coordinated inventory control in SCND generates benefits for the supply chain, and how these benefits are influenced by
various design parameters. The model and solution method presented in this paper is intended to be used as a building block for the
development of decision support tools that address the challenges in the integration of coordinated inventory control and SCND.
The rest of the paper is organized as follows. Section 2 presents our survey of the relevant literature. In Section 3, we formulate the
SCND problem with coordinated inventory control. As for comparison, we also present the SCND problem formulation with non-
coordinated inventory control. Section 4 presents the heuristics for solving the optimization problems. Section 5 presents the setup
and results of the numerical study. In Section 6, we summarise the main findings of the paper and give some directions for future
research.
2. Literature review
The literature on SCND is extensive, and the topic of SCND has been the subject of several recent review papers (e.g., Melo et al.,
2009; Farahani et al., 2015; and Govindan et al., 2017). Most relevant to our paper is the literature on SCND that includes inventory
deployment. In general, the papers that consider inventory deployment in SCND can be categorized based on a number of factors such
as the number of echelons where inventory decisions need to be made, demand characteristics (deterministic or stochastic), and so
lution techniques. We summarize the existing studies that examine inventory deployment in SCND in details in Table 1.
We now discuss the most relevant papers that can be categorized into four groups. In the first group, there are several papers on
3
SCND that consider inventories in single echelon settings, including e.g., Nozick and Turnquist (1998), Daskin et al. (2002), Shen et al.
(2003), Shu et al. (2005), Miranda and Garrido (2004, 2009), Croxton and Zinn (2005), Sourirajan et al. (2007, 2009), Javid and Azad
(2010), Park et al. (2010), Yao et al. (2010), Reza Nasiri et al. (2010), Liao et al. (2011), Shahabi et al. (2013), Fleischmann (2016), and
Diabat et al. (2017). All these papers consider stochastic demand, and their primary focus is on examining the benefit of risk pooling as
a result of consolidating inventories from multiple locations into a single location. Our paper is different from this stream of research,
as we consider a two-echelon SCND problem with explicit consideration of inventory coordination in the whole network.
Allowing only for single echelon inventory may not realistically represent the situation in practice. In particular, this is true when
also considering the retailers that actually face the demand directly from end customers. This has motivated some studies to consider
inventory decisions in two or more echelons. Several papers in the second group, including Teo and Shu (2004), Farahani and Ela
hipanah (2008), Üster et al. (2008), Lin et al. (2009), Keskin and Üster (2012), Tancrez et al. (2012), Diabat et al. (2015), and Taxakis
and Papadopoulos (2016), consider inventory at more than one echelon, but ignore the uncertainty of demand at retailers. These
papers focus on the development of efficient solution approaches that can solve the network design problem in a reasonable amount of
time. Similar to ours, they consider the trade-off between inventory cost, shipment cost, and facility location cost. However, as they
consider deterministic demand, the costs for holding safety stocks and the service levels are absent in those papers, while they are
important factors in our paper.
More closely related to our study are papers in the third group considering a multi-echelon inventory system with demand un
certainty in SCND. The focus of these papers is on the development of approximation methods for the safety stock level in the network.
Nozick & Turnquist (2001) consider a two-echelon inventory system with stock-out penalties, and a continuous one-for-one replen
ishment policy. They show that, for a given stockout probability, the safety stock held in the distribution centers can be accurately
approximated as a linear function of the number of DCs. Kang and Kim (2012) consider a two-echelon SCND where demand at each
retailer follows a normal distribution and develop a heuristic algorithm based on Lagrangian relaxation for solving a non-linear mixed
integer programming problem. Atamtürk et al. (2012) study a two-echelon SCND problem for different cases such as capacitated
facilities, correlated demands and multicommodities, and they formulate the problems as conic quadratic mixed-integer programs
(CQMIPs). Puga and Tancrez (2017) study a two-echelon location–inventory problem for the design of supply chain networks with
uncertain demand and present a heuristic algorithm based on a linear approximation. Kumar and Tiwari (2013), Askin et al. (2014),
Nasiri et al. (2014), and Manatkar et al. (2016) present multi-product location-distribution planning problems with inventory con
siderations at both warehouses and retailers. While the above mentioned studies consider two-echelon inventory systems, Tsao et al.
(2012) propose a new continuous approximation modelling technique for a three-echelon supply chain where demand at each retailer
follows a Poisson distribution. All the studies in this group share a common feature, namely that inventory decisions at the different
echelons are made separately without coordination. This is reflected in their use of the same pre-specified high service levels across all
echelons. As the consequence of maintaining unnecessarily high service levels, our hypothesis is that the resulting network design may
be sub-optimal due to excessive stock allocations at the upper echelons (i.e. warehouses). This has motivated us to develop a model for
SCND that addresses the impact of inventory control coordination between echelons (in particular, warehouses and retailers).
There are very few papers in the fourth and last group which contains papers that consider multi-echelon inventory coordination
and stochastic demand in SCND. Romeijn et al. (2007) present a framework for the two-echelon SCND problem that incorporates
inventory costs. Different from most papers discussed above where order quantities at the different echelons are determined inde
pendently, e.g. using the EOQ formula, they consider coordination in the determination of order quantities, i.e. replenishment in
tervals, at the retailers and at the supplying warehouses. They extend the deterministic model of Roundy (1985) by incorporating
demand uncertainties. Except for their focus on coordination of order quantities, there are three main differences between their model
and ours. Firstly, like most of the other papers, they do not consider coordination in determining safety stocks at the two echelons,
which is reflected in the same and exogenously set target service levels at the two echelons. Secondly, although they consider a
multi-echelon inventory problem, lead times for the retailers in their model are assumed to be exogenously given. In that sense, the
interdependence between retailers in the lower echelon and warehouses in the upper echelon is neglected. By contrast, when
determining lead times for the retailers, we capture this interdependence in our model by taking into account the possible delays
experienced by retailers due to stockouts at the warehouses in addition to the fixed transportation times. Lastly, while they use cycle
service level, we use fill rate as the service measure.
A recent paper by Puga et al. (2019) presents a model that integrates SCND with safety stock allocation in a two-echelon supply
chain. However, the safety stock allocation problem in their model is based on the guaranteed-service approach, where service times
quoted from distribution centers (warehouses) or retailers are used as the service measures (see, e.g. Simpson, 1958; Graves and
Willems, 2000). They consider two strategies in relation to safety stock allocation, i.e. whether safety stocks are held at the retailers
only or at both the distribution centers and retailers. They exploit the characteristic of the guaranteed-service approach that allow for
considering either full or empty safety stock inventories for two-stage supply chains so that they can use binary variables that directly
determine whether one strategy or the other is used. Our model is different from theirs in two respects. Firstly, while they use service
time, we use fill rate as the service measure. Motivated by its wide adoption in practice, as well as its dominance in the literature, we
opt to use a fill rate as the service measure in this paper. Secondly, while we also consider two-echelon supply chains, we focus on the
inventory system where all inventory locations are controlled using reorder point policies with fixed batch quantities, which are also
commonly applied in practice. To the best of our knowledge, our paper is the first to consider SCND, where fill rate is used as the service
performance measure, and where all inventory locations are controlled using coordinated reorder points and fixed batch quantities.
Our paper is also related to the literature on coordinated inventory control, especially the studies that consider a divergent multi-
echelon setting with stochastic demand. This setting is commonly seen in SCND, where goods are distributed from a central warehouse
to a number of local warehouses and/or retailers. For overviews, see, for example, Zipkin (2000), van Houtum (2006), Axsäter and
4
Marklund (2008), Marklund and Rosling (2012), and Axsäter (2015). In this paper, we consider a continuous review setting, where all
locations in the network use (R, nQ) policies. For this setting, some authors, e.g. Axsäter (1993, 1998), Chen and Zheng (1997), and
Forsberg (1997) present exact cost analysis under Poisson demand. A major limitation of these studies is that they cannot deal with the
computational complexity found in real-life systems. Several papers develop approximation techniques to reduce the required
computational effort. One of the techniques that is commonly used is based on a decomposition approach. That is, under centralised
control (e.g., a VMI arrangement), a system of one-warehouse and n retailers is decomposed into n + 1 single echelon problems, and an
induced backorder cost is used at the central warehouse to represent the expected cost incurred by the retailers due to shortages at the
central warehouse (Andersson et al., 1998; Andersson and Marklund, 2000; Axsäter, 2003, 2005; Berling and Marklund, 2006, 2014).
In particular, Berling and Marklund (2014) present a method for determining near-optimal reorder points that is simple enough to be
implemented in practice with reasonable computation time and good solution quality. In this paper, we adopt their method, including
the assumption of normally distributed end customer demand, for solving the coordinated inventory problem as part of the integrated
SCND problem.
Obviously, the problem that integrates SCND with cooordinated inventory control under the inventory setting adopted in this paper
is more difficult to solve than the problem without such coordination. This is mainly due to the necessity of determining the appro
priate fill rate levels at the distribution centers (warehouses) rather than setting these levels exogenously. Therefore, this integrated
approach to SCND needs special consideration and to be modelled with care. The resulting problem also needs a solution method to
show the benefits of integrated SCND. By providing insights on these two aspects, this paper contributes to the SCND literature (see
Table 1).
3. Problem description and model formulation
3.1. Problem description
The SCND problem we consider is the following. There is a supply chain network for a single product consisting of a single supplier
(plant), multiple warehouses, and multiple retailers. Demand at each retailer is assumed to be normally distributed with given mean
and variance. The retailers are supplied by the warehouses, and each warehouse has a finite capacity. We assume single sourcing for
the retailers in our model, i.e., a retailer is supplied by only one warehouse in the network. All the warehouses are supplied by the
single plant that is assumed to have an unlimited capacity. Thus, even though we have a three-echelon network, we deal with a two-
echelon network from the inventory perspective. However, unlike the standard two-echelon inventory system that considers only one
warehouse, there may be multiple warehouses available in our network. All the stocking points, i.e. warehouses and retailers, use
continuous review (R, nQ) policies for their inventory control (see, e.g. Axsäter 2015). Demand at each warehouse is satisfied on a First-
Come-First-Served (FCFS) basis, and we assume complete backordering of unsatisfied demand at all stocking points in the case of stock
outs. The transportation times from the warehouses to the retailers are assumed to be constant, but the lead times are stochastic due to
possible shortages at the warehouses. The transportation times from the plant to the warehouses are also assumed to be constant.
The SCND problem involves the following decisions: (a) Which warehouses should be made available? (b) Which retailers should be
supplied by each warehouse? and (c) What inventory control policy variable values should be used by each stocking point? For future
reference, we term decisions (a) and (b) as the location-transportation problem and decision (c) as the inventory problem. The
objective is to minimise the system-wide costs per time unit while attaining the target fill rates for the end-customer demand.
3.2. Model formulation
Notation for the mathematical model of the proposed SCND problem is as follows:
Indices and sets:

i ∈ I ={1, …, nw} for potential warehouse locations
nw Maximum number of potential warehouse locations
j ∈ J ={1,…, nr} for retailers
nr Number of retailers
Parameters:
Awi Ordering cost at warehouse i
Arj Ordering cost at retailer j
bwi Induced backorder cost per unit and time unit at warehouse i
brj Induced backorder cost per unit and time unit at retailer j
Capi Capacity at warehouse i
F0i Fixed transportation cost per delivery from supplier to warehouse i
Fij Fixed transportation cost per delivery from warehouse i to retailer j
g0i Variable cost of transportation per unit sent from supplier to warehouse i
gij Variable cost of transportation per unit sent from warehouse i to retailer j
hwi Holding cost per unit and time unit at warehouse i
hrj Holding cost per unit and time unit at retailer j
L0i Transportation time from supplier to warehouse i
(continued on next page)
5
(continued )
Lij Transportation time from warehouse i to retailer j
Mi Accrued fixed cost per time unit of opening warehouse i
Vi Variable cost per unit of operating warehouse i
μrj Expected demand per time unit at retailer j
σrj Standard deviation of demand per time unit at retailer j
FillRatewmin
i The target fill rate at warehouse i (in the non-coordinated SCND problem)
FillRatermin
j The target fill rate at retailer j
Decision variables:
Qwi Replenishment order quantity at warehouse i
Qrj Replenishment order quantity at retailer j
Rwi Reorder point at warehouse i
Rrj Reorder point at retailer j
μwi Expected demand per time unit at warehouse i
μij Expected demand per time unit at retailer j supplied by warehouse i
Xi 1 if warehouse i is opened; 0 otherwise
Yij 1 if retailer j is supplied by warehouse i; 0 otherwise
Other (consequential) variables:

ILwi Inventory level at warehouse i
ILrj Inventory level at retailer j
ILwi + Number of units in stock at warehouse i
ILrj + Number of units in stock at retailer j
FillRatewi Fill rate achieved at warehouse i
FillRaterj Fill rate achieved at retailer j
μwDi (Li ) Expected lead-time demand at warehouse i
μrD L Expected lead-time demand at retailer j
j ( j)
σwi Standard deviation of demand per time unit at warehouse i
σwDi (Li ) Standard deviation of lead-time demand at warehouse i
σrD L Standard deviation of lead-time demand at retailer j
j ( j)
As the main objective of our study is to assess the impact of implementing a coordinated inventory control in SCND, we compare two
main strategies differentiated by whether or not coordinated inventory control is implemented. When implementing coordinated
inventory control, we determine the near-optimal inventory control policy variable values providing the lowest possible cost while
ensuring that (only) the target fill rates for the end-customer demand (at retailers) are achieved. In contrast, without coordinated
inventory control, all the warehouses set the same target fill rates as the retailers and determine their own inventory control policy
variable values accordingly. As noted in Sections 1 and 2, this is the strategy typically applied in most of the related literature, as well
as in practice.
We use the term ‘near optimal’ for two reasons. Firstly, in our coordination approach, we focus on determining the reorder point
levels at the two echelons subject to a set of target fill rates provided to end customers. A fully coordinated inventory control may also
include coordination in determining the order quantities at the two echelons. In our model, for a given network structure, the order
quantities at the retailers and the warehouses are determined using the standard EOQ formula. This approach for determining order
quantities is widely adopted in the literature on inventory deployment in SCND. Hence, in this respect, we comply with the literature.
Most of the literature on multi-echelon inventory systems with the (R, Q) policy assumes that the order quantities are just given (see, e.
g., Axsäter et al. 2013). Secondly, we use the term ‘near-optimal’ because we solve the problem using a heuristic approach.
3.2.1. Strategy 1: SCND with coordinated inventory control (CIC)

The problem of SCND with coordinated inventory control can be formulated as:
( )
∑ nr ( ) μr nw ( )
nw
w
( ) w ∑
w μi r j
∑ w
w μi w
( w+( w w) )
min TC = X i M i + V i μ i + F0i + g0i Q i + F ij + gij Qj Yij + A i + h i E IL i R i , Qi
Xi ,Yij ,μw
i
,μij ,Qw
i
,Rw
i
,Qrj ,Rrj
i=1
Qwi j=1
Qrj i=1
Qwi
( )
∑ nr
μrj ( ( ))
+ Arj r + hrj E ILrj + Rwi , Rrj , Qrj (1)
j=1
Q j
Subject to:
( )
FillRaterj = 1 − P ILrj ≤ 0 ≥ FillRatermin
j ∀j ∈ J (2)
μij = μrj Yij ∀j ∈ J (3)
∑
nw
Yij = 1 ∀j ∈ J (4)
i=1
6
∑
nr
μwi = μij ∀i ∈ I (5)
j=1
μwi ≤ Xi Capi ∀i ∈ I (6)
Xi binary ∀i ∈ I (7)
μij ≥ 0 ∀i ∈ I, j ∈ J; Qwi > 0; Rwi ≥ 0 ∀i ∈ I; Qrj > 0; Rrj ≥ 0 ∀j ∈ J (8)
Yij binary ∀i ∈ I, j ∈ J (9)
where E(⋅) is an expected value. Note that the expected demand per time unit at warehouse i, μwi , and the expected demand per time
unit at retailer j supplied by warehouse i, μij , represent decision variables in our model and determine the amount of units a particular
warehouse supplies to which retailer(s). The objective function in (1) specifies the average total costs per time unit. It can be
decomposed into the total costs of the location-transportation and inventory problems, respectively, with the two being inter-related.
The first sum consists of the accrued fixed and variable costs for opening and operating warehouses, as well as fixed and variable
transportation costs from the supplier to warehouses, and from warehouses to retailers. The fixed transportation costs are influenced
by the number of deliveries, which is dependent on the average demand and the order quantities. We adopt the formulation where the
transportation cost per delivery consists of the fixed and variable costs (see e.g. Kang and Kim 2012). The second and third sums
represent the total inventory costs for the warehouses and retailers, respectively, consisting of the ordering and holding costs. The
holding cost is a linear function of the expected number of units in stock, which is dependent on the reorder point and order quantity.
For the retailers, it is also dependent on the reorder point of the supplying warehouse. The interdependence between the location-
transportation and inventory problems is derived from the decisions that simultaneously affect transportation and lead times, order
quantities, and warehouse stock pooling effects.
Constraint set (2) represents the target fill rate at all the retailers that must be satisfied. Constraint sets (3) and (4) represent the
average demand at each retailer that can be satisfied by only one warehouse. Constraint set (5) represents the average demand supplied
by each warehouse. The average demand satisfied by each warehouse is limited by the warehouse capacity constraint set (6).
Constraint set (7) represents the binary decision variables associated with whether or not a warehouse is opened. Constraint set (8)
makes sure that the average flow of units from a warehouse to a retailer and the reorder points are non-negative, and that the order
quantities are positive. The last set of constraints in (9) refer to the binary decision variable associated with whether retailer j is
supplied by warehouse i. Further specifications of the order quantities, reorder points, fill rates, expected number of units in stock at
the warehouses and retailers, and their inter-relations are presented below.
The optimization problem formulated above is complex, not only because of the interdependence of the location-transportation and
inventory problems and the non-linearities, but is also due to the fact that coordinated inventory control requires us to determine the
fill rate levels at the warehouses rather than just use exogenous target levels. In our solution method (heuristic) that will be presented
in further detail in Section 4, we adopt an integrated approach, i.e., we solve the location-transportation and inventory problems
simultaneously, with the aim to obtain a good, i.e. near-optimal solution. The main principle is that we direct a search over the solution
space, defined as the set of all possible network structures that represent solution candidates for the location-transportation problem,
and for each solution candidate, we solve the inventory problem. The evaluation of each solution candidate is based on the total cost of
the integrated problem as defined in (1). Before proceeding to the description of the solution method, we present further elaborations
on the inventory problem.
Order Quantities
The main inventory control issue in our model is to allocate safety stock. Therefore, to simplify, we assume that the order quantities
at each warehouse and each retailer are determined based on the deterministic economic order quantity (EOQ) formula so that
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
√ ( r ) √̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
( )
√2 Aj + Fij μrj 2 Awi + F0i μwi
√
Qrj = ∀j ∈ J; Q w
= ∀i ∈ I (10)
hrj i
hwi
Thus, we follow a common approach adopted in the inventory literature by pre-determining the order quantities using a deter
ministic model and then derive the reorder points using a stochastic demand model. Using a deterministic EOQ-type model in a
stochastic environment may increase the total inventory costs. However, previous studies (e.g. Zheng, 1992; Axsäter, 1996) have
shown that the effect is small as long as the reorder points are optimized accordingly. Different from the standard EOQ formula that
usually considers a single fixed ordering cost, we follow Kang and Kim (2012) and Askin et al. (2014) to include both the (adminis
trative) ordering costs and the fixed transportation costs in (10).
Inventory holding costs
The expression of inventory holding costs at the warehouses in (1) can be expanded as follows (see Appendix 1 for a more detailed
7
Retailer 1
Warehouse 1
Retailer 2
Supplier
Retailer 3
Warehouse i
Retailer j
Warehouse * Retailer
*The warehouse within the dotted line in the figure above
1. Calculate induced backorder cost, bi

w Qrj , r
j , r
j , h rj , b rj
2. Calculate lead-time demand 4. Calculate lead-time demand

-Considering warehouse delay
w w
D i Li ; D i Li
r
; r
Dj Lj Dj Lj
r
5. Calculate reorder point, Rj
w
3. Calculate reorder point & delay, Ri ; E(Delayi )
Fig. 1. The coordinated inventory solution for warehouses and retailers.
derivation):
( ) ∫0
( ( )) ( ( )) ( ( ))
hwi E ILwi + Rwi , Qwi = hwi E ILwi Rwi , Qwi + hwi E ILwi − Rwi , Qwi = hwi Rwi + Qwi /2 − μwDi (Li ) + hwi F(x)dx
− ∞
[ ( ) ( )]
( ) (σwDi (Li ) )2 Rwi − μwDi (Li ) Rwi + Qwi − μwDi (Li )
= hwi Rwi + Qwi /2 − μwDi (Li ) + hwi H − H (11)
Qwi σwDi (Li ) σ wDi (Li )
∫∞
where F(x) denotes the distribution function of the inventory level in steady state, H(x) = x G(v)dv and the loss function G(x) =
∫∞
x (v − x)φ(v)dv.
Similarly, the inventory holding costs at the retailers can be rewritten as:
⎡ ⎛ r ⎞ ⎛ r ⎞⎤
( ( )) ( ) (σ rD L )2 Rj − μrD L Rj + Qrj − μrD L
j( j) j( j) j( j)
r r+ w r r
hj E ILj Ri , Rj , Qj r r r r r
= hj Rj + Qj /2 − μD (L ) + hj ⎣H ⎝ ⎠ − H ⎝ ⎠⎦ (12)
j j Qrj σ rD L σ rD L
j( j) j( j)
Expressions (11) and (12) establish the dependence of the holding costs on reorder points, order quantities, lead times, and demand
variances (or standard deviations). Note that the retailer’s inventory level depends on the warehouse’s inventory control policy via the
lead time.
Reorder point at the warehouses and retailers
We now explain how the inventory coordination is implemented in our model. Information sharing between the warehouses and
retailers is the underpinning of coordinated inventory control. The reorder points at the warehouses and retailers are interdependent,
which is not captured in the non-coordinated inventory approach. If the warehouse fill-rate targets are set exogenously, this
8
interdependence is suppressed.
We use the so-called induced backorder cost approach to determine the reorder points for the warehouses, as suggested in Berling
and Marklund (2014, 2017). Determining the near-optimal backorder costs and the associated fill rates at the different warehouses, is
the essence of inventory coordination in this procedure. The induced backorder cost at a warehouse represents the cost associated with
the inability of the warehouse to deliver the units requested, and serves as a means for coordination between the warehouse and the
retailers it supplies. In Fig. 1, also specified in Appendix 2, we show that there are five steps in the implementation of the coordinated
inventory control. In Step 1, we determine the near-optimal induced backorder cost at each warehouse. The retailers’ backorder costs
used for the calculation are derived from the corresponding target fill rates. For given order quantities, the relationship between fill
rate and backorder cost takes the form, backorder cost = fillrate*holding cost/(1 − fillrate) (see e.g., Axsäter, 2015).
Step 2 calculates the lead-time demand at the warehouses. In calculating the lead-time demand at each warehouse, we take into
account the fact that the warehouse receives a stream of Qrj demands from retailers. Most other studies considering inventory in SCND
simplify the problem by assuming that the warehouse and retailers receive precisely the same stream of demand, which may lead to
inaccurate results. To calculate the true distribution of the lead-time demand at the warehouse, we would need successive convolutions
of the distributions of the warehouse demand emanating from each retailer (see e.g. Andersson et al. 1998). However, these calcu
lations are demanding, which motivates us to use an approximation method presented in Berling and Marklund (2014). We refer to
Appendix 2, Eqs. (A2.2-A2.5) for the approximate calculation in our model of the appropriate lead-time demand at the warehouse.
In Step 3, for given values of induced backorder cost and lead-time demand calculated in Steps 1 and 2, we calculate the reorder
point and expected delay at each warehouse. Then, we adjust the lead time at the retailers by adding the expected delay at the
warehouse, as in the METRIC approach (Axsäter, 2015). To simplify the procedure, we exclude the variability of delay at the ware
house. In their experiment, Berling and Marklund (2014) found that the adjustment for the lead-time variability has only a small
impact on the obtained fill rate. Steps 4 and 5 of the procedure are the steps for finding the lead-time demand and reorder points at the
retailers.
The decisions on the reorder point at each of the retailers should ensure that the target fill rates specified in (2) are satisfied. The fill
( )
rate at retailer j can be written as FillRaterj = 1 − P ILrj ≤ 0 , where P(.) is a probability. This fill-rate specification is based on the fact,
that for normally distributed demand the fill rate is equal to the ready rate (Axsäter, 2015). The ready rate is defined as the probability
that an item observed at a random point in time has a positive net inventory. Thus, the reorder point at a retailer can be determined as
{ }
r rmin
Rr* r
j = min Rj : 1 − P(ILj ≤ 0) ≥ FillRatej (see Appendix 2 for details).
3.2.2. Strategy 2: SCND with non-coordinated inventory control (NCIC)

As a benchmark, we also present the problem of SCND without coordinated inventory control. The problem formulated in (1) to
(12) remains valid for the problem without coordinated inventory control. The main difference is that there is now also a fill rate
constraint at each of the warehouses in addition to the fill rate constraint at the retailers.
( )
FillRatewi = 1 − P ILwi ≤ 0 ≥ FillRatewmin
i ∀i ∈ I (13)
Without coordinated inventory control, it is a common practice that the target fill rate at the warehouses is set as high as the target
fill rate at the retailers. All reorder points are then determined directly from these exogenously given target fill rates as
{ }
Rr* r r
j = min Rj : (1 − P(ILj ≤ 0) ≥ FillRatej
rmin
∀j ∈ J (14)
{ w }
Rw* w wmin
i = min Ri : (1 − P(ILi ≤ 0) ≥ FillRatei ∀i ∈ I (15)
4. Solution methods
We develop and evaluate several heuristic methods for solving the problems in both the NCIC and CIC strategies. Firstly, we develop
a genetic algorithm (GA) based heuristic for solving the problems in the two strategies. We also use an optimization software package
(What’sBest®15.0.1.2. from LINDO System Inc.) as an alternative option to solve the problem in the NCIC strategy. The best of the
solutions obtained with these two approaches is then chosen for comparison with the solution for the corresponding problem instance
in the CIC strategy. Using two solution approaches for the problem without coordinated inventory control enhances the quality of the
comparisons, leading to a more robust evaluation of the cost savings that can be generated from implementing the inventory coor
dination. Due to the complexity imposed by the calculation of the induced backorder costs, it is not possible to use the optimization
software package to directly solve the problem in the CIC strategy. Recall that to implement the coordinated inventory control, we
need to determine near optimal induced backorder costs at the warehouses, and this is solved numerically by running multiple it
erations of the five-step procedure described in Appendix 2.
9
=10 1 =100
=150
15
0 2 80
20
2 10 12
150 3 50
20
Fig. 2. A network example.
Warehouse Retailer Warehouse Retailer

1 2 1 2 3 1 2 1 2 3
s 1 2 3 4 5 s 1 2 3 4 5
V(s) 4 2 5 3 1 V(s) 4 2 0 3 1
U11 =100
U11 =min (100,150) =100
1 0
1 0=100- U11 50-U13 =0 10
150- U11=50 10
1
1 15
15 2 80
2 80 0
0 20
20 12 U =50=min (50,50)
2 10
2 10 12 13
150 20 3
150 20 3 0=50- U13
50
Step 1 Step 2
1 =100
Cap1=150
1
2 =80
0
2
Cap2=150 3
=50
Final step
Fig. 3. Priority-based encoding.
Finally, we also test a method for solving the problem in the CIC strategy using a two-step approach. Different from the GA heuristic
wherein we integrate the coordinated inventory control approach in the network design problem, in this two-step approach we first
solve the problem according to the NCIC strategy, and choose the solution from either the GA heuristic or What’sBest solver that gives
the lowest cost. By fixing the network configuration obtained in this solution, we continue with the second step in which we implement
the induced backorder cost approach to improve the inventory control parameter values. By comparing these two approaches that both
consider coordinated inventory control, we can assess the benefit of integrating the coordinated inventory control approach directly
into the network design problem.
10
4.1. Genetic algorithm
GA is a well-known meta-heuristic technique for solving optimization problems with large search spaces. The algorithm uses a
mechanism that is an analogy of natural selection by introducing concepts like population, selection, crossover and mutation
(Chaudhry and Luo, 2005; Fahimnia et al., 2012; Wari and Zhu, 2016). Using GA, we can adopt an integrated approach, i.e., we can
solve the location-transportation and inventory problems simultaneously. The main idea is that the algorithm explores a number of
possible solutions over the solution space, defined as the set of all possible network structures that represent solution candidates for the
location-transportation problem, and for each solution candidate, we solve the inventory problem. The evaluation for each solution
candidate is made based on the total cost specified in (1), which is the sum of the costs for the location-transportation and inventory
problems. The difference in the methods used for solving the integrated problems with and without coordinated inventory control
stems from the way in which the inventory problem is solved.
We use the priority-based encoding approach (Gen et al., 2006) for generating a network flow structure that represents a possible
solution to the location-transportation problem. Several previous studies (e.g., Lotfi and Tavakkoli-Moghaddam, 2013; Tari and
Hashemi, 2016) have shown successful applications of the priority-based encoding approach in solving balancing and sequencing,
container loading, and transportation problems.
We combine three ways in selecting parent chromosomes (Gen and Cheng, 2008; Pandey et al., 2014). Firstly, we choose the best
solution in the previous generation. Secondly, we select a specified number of chromosomes based on the fitness value. Finally, as a
way to prevent premature convergence, we generate several new chromosomes. Furthermore, we implement the one-cut point
crossover in the algorithm for generating new offspring (Lotfi and Tavakkoli-Moghaddam, 2013; Tari and Hashemi, 2016). To avoid
the same priority after crossover, we extend the one-cut point crossover by applying a weight mapping crossover (e.g. Gen et al., 2006;
Lotfi and Tavakkoli-Moghaddam, 2013; Tari and Hashemi, 2016). At one-cut point crossover, we choose a random-cut point for a pair
of parent chromosomes to generate the offspring. We then use the left segment from the cut point of one parent and remap the right
segment based on the weight of the other parent’s right segment.
To maintain diversity in the population, we need to perform mutations. There are a number of mutation operators such as swap
mutation, inversion mutation, and insertion mutation, and we use swap mutation (Tari and Hashemi, 2016) in our algorithm. With this
mutation, we select two elements at random and swap the positions of these two elements. In what follows, we present a more detailed
explanation of the priority-based encoding approach, and continue with a summary of the implementation of our algorithm.
Priority-based encoding
We use a simple network (see Fig. 2) to illustrate how the priority-based encoding works. The figure shows a network with one
plant, two warehouses, and three retailers, as well as the information regarding demand at each retailer, capacity at each warehouse
and variable transportation costs between the warehouses and retailers. In this example, we assume that the fixed transportation costs
are equal everywhere in the network.
In Fig. 3, we give an example to illustrate the priority-based encoding mechanism. In this example, Retailer 1 has the highest
priority value. Since it is cheapest to supply Retailer 1 from Warehouse 1, we allocate a flow of 100 units ( = min(150; 100)) from
Warehouse 1 to Retailer 1 so that demand at Retailer 1 is satisfied. Next, we look at the second highest priority value, which is at
Warehouse 1. Since it is cheapest to distribute units from Warehouse 1 to Retailer 3, we allocate a flow of 50 units ( = min(50; 50)) from
Warehouse 1 to Retailer 3. We continue this procedure until (expected) demand at all the retailers is fulfilled. In Appendix 3, we
present a more generic and detailed description of this approach.
Description of the GA heuristic used in this paper
Using a directed random search procedure, the GA heuristic attempts to find a near-optimal solution in multi-dimensional search
spaces. In our case, we attempt to find a near-optimal solution for the integrated SCND problem, for both the problems with and
without coordinated inventory control. In our implementation, the algorithm evaluates multiple chromosomes at each generation,
where a chromosome Z ∈ Z represents a possible network solution candidate that corresponds to a set of priority values, i.e.
Z (V(1), V(2) ⋅ ⋅ ⋅ V(nw + nr ) ), and Z is the set of all possible network structures. The chromosomes are generated using the priority-
based encoding approach as explained previously. For each chromosome, we solve the inventory optimization problem, i.e., determine
the order quantities at all stocking points and calculate the reorder points given the order quantities. At this point, we can calculate the
objective function value (expected total cost per time unit) of each chromosome as specified in (1). We refer to Appendix 4 for the
complete algorithmic specification of our GA implementation.
4.2. Solving the problem in the NCIC strategy with an optimization software
As stated earlier, we also use What’sBest Solver from LINDO Systems Inc. to solve the problem in the NCIC strategy, which can be
formulated as a non-linear integer programming problem. To implement the optimization model in the software, we make an
approximation by relaxing the original problem. It is not straightforward to perform the calculation of an integral of the loss function
11
while running the solver. Therefore, the expected inventory holding cost in (11) is approximated by its first set of terms only, i.e., we
exclude the second set of terms that corresponds to the expected backorder level. Note however, that for the solutions obtained by the
solver, we then calculate the expected backorder level externally and include the associated inventory holding costs in the final total
cost. Hence, all comparisons are made based on the same total cost function. As we will show later in the numerical study section, this
approximation does not appear to be risky, as evidenced by the insignificant level of expected backorders in the NCIC strategy. For the
problems without coordinated inventory control, this is reasonable since the target fill rate at the warehouses is set as high as the
relatively high target fill rate at the retailers. Therefore, the expected backorder levels become relatively low.
4.3. Solving the problem in the CIC strategy with a two-step approach
To be able to evaluate further the benefit of integrating the coordinated inventory control approach directly into the network design
problem, we also solve the problem in the CIC strategy using a simplified heuristic approach. This approach consists of two steps. In the
first step, we choose the best of the solutions obtained with the two approaches used for solving the problem in the NCIC strategy. We
then use the resulting network design and inventory control parameters obtained in this solution as a starting point for the second step
where we implement the induced backorder approach and refine the inventory control parameter values as detailed in Appendix 2.
This approach has an advantage over the other heuristic based on GA as it may be less demanding computationally. However, as the
approach uses the same network design as in the NCIC strategy, it has the drawback of not being able to consider the potential
interdependence of network design structure and inventory coordination. Thus, the integrated GA heuristic offers potential savings in
those instances for which it results in a different network structure compared to the solution with the NCIC strategy.
5. Numerical study
In this numerical study, our focus is to investigate the effect of considering coordinated inventory control in SCND. We compare the
expected total costs and solutions of the two strategies: with coordinated inventory control (CIC) and without, i.e. with non-
coordinated inventory control (NCIC). As the baseline in our comparisons, we use the best results for the NCIC strategy obtained
with the two solution approaches (GA and What’Best solver). We then compare these results with the results obtained from the two-
step and integrated (GA) approaches for solving the problem in the CIC strategy.
The network we consider consists of one supplier and 10 potential warehouses. We generate 384 problem instances that represent
the full factorial design with two levels of the following experimental factors: number of retailers, ordering cost, unit holding cost,
target fill rate, standard deviation of demand, transportation time, and transportation cost, and three levels of warehouse capacity.
Table 2
Values for the experimental factors.
Experimental factor Level Values
Number of retailers Low 30

High 150
Ordering cost (A) Low U(5, 10)
High U(40, 80)
Holding cost (h) per unit-day Low Retailer: U(0.3, 0.4)
Warehouse: U(0.2, 0.3)
High Retailer: U(0.6, 0.8)
Warehouse: U(0.4, 0.6)
Target fill rate (FillRatermin
j ) Low 95%
High 98%
√̅̅̅̅̅
Standard deviation of demand (σ) Low μrj
√̅̅̅̅̅̅̅
High 8μrj
Transportation time (L) in days Low U(1, 2)
High U(2, 4)
∑nr
Warehouse Low r
j=1 μj
Capacity (Cap): 3 ⋅
nw
Accrued fixed cost (M) per day: U(1000, 1400)Variable cost (V) per unit: 0.2
∑nr r
Medium j=1 μj
nw
Accrued fixed cost (M) per day: U(2000, 2800)
Variable cost (V) per unit: 0.4
∑nr r
High j=1 μj
nw
Accrued fixed cost (M) per day: U(3000, 4200)
Variable cost (V) per unit: 0.6
Transportation cost Low Fixed cost (F) per delivery: U(40, 50)
Variable cost (g) per unit per day: 2
High Fixed cost (F) per delivery: U(200, 250)
Variable cost (g) per unit per day: 5
12
Note that we also differentiate between the accrued fixed and variable costs for opening and operating a warehouse, which depends on
the warehouse capacity, i.e. low (high) warehouse capacity has low (high) fixed and variable costs. The same applies to the trans
portation costs, i.e. we distinguish between low and high fixed and variable costs.
We examine a relatively small network with 30 retailers and a larger network with 150 retailers. We use the uniform distribution U
(100,160) to generate each retailer’s average daily demand, μrj . As shown in Table 2, we also use uniform distributions for generating
the values of ordering and holding costs, transportation time, fixed warehouse costs, and fixed transportation costs. Once generated,
the values are fixed and used throughout the whole experiment. Table 2 summarizes the values for the experimental factors. (All the
detailed data used in this study are available from the corresponding author upon request).
To illustrate the order of magnitude of these costs, if a 25% annual holding cost rate is assumed for the holding cost at the retailers
(ranging from 0.3 to 0.8 per unit-day; see Table 2), it corresponds to a product value of ca. 400–1200 per unit. Two elements form the
fixed ‘ordering’ cost per delivery in determining the EOQ, namely the (administrative) ordering costs ranging from 5 to 80, and the
fixed transportation costs from 40 to 250. In addition to the fixed cost, there is also the variable transportation cost, which has two
levels, namely 2 and 5 per unit per time unit. We assume that the transportation cost is proportional to both time and distance, i.e., we
multiply this variable transportation cost with the transportation lead time to determine the variable transportation cost per product
unit for a certain delivery.
To reflect a realistic setting, we set the holding cost at the warehouses smaller than at the retailers. We consider two levels for the
target fill rate at the retailers. The high target fill rates (95% and 98%) reflect the importance of high service level provision we observe
today. The warehouse capacity is also an important experimental factor. There are three levels for the warehouse capacity, represented
as a multiple of the ratio of the total demand at the retailers to the number of potential warehouses. The multiplication factors used are
3, 5 and 7, respectively. Following the warehouse capacities, there are also three levels for the fixed cost of using a warehouse ranging
from 1000 to 4200 per day (or 3,600,000 to 1,512,000 per year). Some preliminary experiments carried out reveal that the magnitude
of the fixed cost of opening a warehouse prevents extreme solutions with either an unrealistically small or large number of warehouses
in the network. Our choice of the parameter values discussed above should ensure that we cover a sufficiently wide range of relevant
settings in assessing the benefits of inventory coordination in SCND.
Computational Results
For the NCIC strategy, the performances of the two solution approaches appear quite comparable. The average total cost difference
between GA and What’sBest solutions is 0.24% in favour of GA for the 30-retailer case. In this case, there are 127 instances where GA
performs better and 65 instances where What’sBest solver is superior. Our approximation by disregarding the backorder level in the
objective function when running What’sBest solver is quite good. The average holding cost to compensate for the backorder level,
which is calculated ex post for the final evaluation, represents only 0.11% of the total cost. In accordance with the good average
performance of GA compared to What’sBest for the 30-retailer case, we tested the use of What’sBest only in a sample of 20 instances for
the 150-retailer case. The average total cost difference between the two approaches in this sample is 0.97% in favour of GA, which
supports our choice of primarily using GA for the larger network.
Although we cannot guarantee optimality using either of the two solution approaches, the use of the best solution of the two
Fig. 4. The convergence of GA heuristic (an example of cost evolution).
Table 3
A summary of the computational performance of the GA heuristic.
Total computation time Time to reach the final convergence solution (seconds) Total cost reduction from the initial solution
(seconds)
NCIC, 30 retailers 662.27 321.88 9.28%

NCIC, 150 retailers 2293. 17 595.94 14.38%
CIC, 30 retailers 765.48 443.20 10.52%
CIC, 150 retailers 2656.14 940.57 12.44%
13
A. Darmawan et al.
Table 4
Average cost reduction and number of warehouses with non-coordinated inventory control (NCIC) versus coordinated inventory control (CIC).
Factors Level NCIC Cost reduction (in %)
Total cost Inventory Transportation Opening warehouse Number of warehouses
CIC (two-step) CIC (integrated-GA) CIC CIC CIC CIC NCIC CIC
Min Avg Max Min Avg Max (two-step) (integrated-GA) (integrated-GA) (integrated-GA) (integrated-GA)
Ordering cost Low Baseline 0.07 1.48 6.62 0.16 2.93 9.79 5.34 11.69 0.23 0.40 4.12 4.08
High 0.01 1.77 5.41 0.13 3.47 8.44 6.48 14.16 0.10 − 0.11 4.06 4.05
Holding cost Low 0.07 1.34 4.95 0.13 2.63 7.69 5.50 11.92 0.13 0.03 4.11 4.09
High 0.01 1.91 6.62 0.76 3.77 9.79 6.33 13.92 0.20 0.48 4.07 4.04
Fill rate Low 0.08 1.55 5.72 0.76 3.05 9.31 5.82 12.84 0.16 0.38 4.06 4.04
High 0.01 1.70 6.62 0.13 3.35 9.79 6.00 13.01 0.18 0.13 4.13 4.09
14
Std. dev. of demand Low 0.01 1.53 5.41 0.13 3.02 8.44 4.38 9.70 0.10 0.02 4.08 4.05
High 0.07 1.72 6.62 0.16 3.38 9.79 7.44 16.15 0.23 0.50 4.10 4.07
Transportation time Low 0.03 1.51 5.41 0.16 2.94 8.44 5.74 12.47 0.18 0.40 4.02 3.97
High 0.01 1.74 6.62 0.13 3.46 9.79 6.08 13.38 0.15 0.11 4.17 4.15
Warehouse capacity Low 0.01 1.91 6.62 0.16 3.76 9.79 6.63 14.46 − 0.09 0.96 5.17 5.13
Medium 0.07 1.59 5.72 0.13 3.14 9.31 6.00 13.20 0.29 0.38 4.27 4.24
High 0.07 1.37 3.41 0.16 2.70 6.60 5.11 11.12 0.12 0.05 2.85 2.82
Transportation cost Low 0.11 2.00 6.62 0.23 3.92 9.79 5.67 12.55 0.17 0.36 4.04 4.01
High 0.92 1.25 3.41 2.00 2.48 6.60 6.16 13.30 0.16 0.16 4.14 4.11
Number of retailers Low (n = 30) 0.01 1.51 6.62 0.13 2.97 9.79 4.16 9.40 0.26 0.39 3.10 3.06
High (n = 150) 0.08 1.74 3.93 1.22 3.43 7.61 7.66 16.45 0.05 0.17 5.08 5.07

Overall average 0.09 1.62 5.67 0.39 3.20 8.87 5.91 12.92 0.15 0.28 4.09 4.06
Note: negative value (-) means CIC cost is higher than NCIC cost
independent solution approaches and the fact that their results are very close, provide reassurance about the magnitude of cost savings
that can be obtained when considering coordinated inventory control. The average computation times of our solution methods for
solving the problems with 30 (150) retailers are 451.60 (3480.34) seconds, 662.27 (2293.17) seconds, and 765.48 (2656.14) seconds,
for NCIC (What’sBest solver), NCIC (GA), and CIC (Integrated-GA), respectively. As for CIC (two-step), the average additional
computation times (to the NCIC solution times) to complete the induced backorder algorithm are 1.30 s for 30 retailers and 2.73 s for
150 retailers. Thus, for the large problem size there are still computational challenges to overcome. The experiments were run on a
computer with the following technical specifications: Intel(R) Core(TM) i5-5200U CPU, 8.00 GB (RAM), 64bit, Windows10. The CIC
strategy requires more time than the NCIC strategy due to the additional calculations required for coordinating inventory decisions
between the warehouses and retailers.
Fig. 4 illustrates the convergence of the GA heuristic for one selected problem instance where all the factors are at the low level. A
similar convergence characteristic is also observed in the other instances. In Table 3, we summarize the computational performances of
the GA heuristic which include the average computation times, the averages of the time required to reach the first of the last 150
generations in which no further solution improvement is obtained, and the averages of the percentage of total cost reduction from the
initial solution to the final solution.
Costs comparison results
Table 4 shows the minimum, average, and maximum percentages of cost savings due to the implementation of coordinated in
ventory control for the two solution approaches implementing the CIC strategy. It also specifies the average inventory, transportation,
and fixed warehouse cost reductions, as well as the average number of warehouses for the NCIC and CIC (Integrated-GA) strategies.
Note that for the two-step approach, since there is no difference in network design compared to the NCIC strategy, only the inventory
cost savings are relevant. In this table, for each level of the experimental factors, the value in each cell, except for the warehouse
capacity, represents the minimum, average, or maximum results over 192 (i.e. 384/2) problem instances. The results for each level of
warehouse capacity are calculated from 128 (384/3) problem instances. Note that the minimum and maximum percentages for each
factor level refer to specific single problem instances.
The overall averages of total cost reduction are 1.62% and 3.20% for the two-step approach and the integrated approach,
respectively. In all instances, the integrated approach outperforms the two-step approach. The average reductions in inventory cost are
5.91% (two-step approach) and 12.92% (integrated approach). The average reduction in transportation and fixed warehouse costs
obtained by the integrated approach appears to be less important. In a few cases, as shown by the negative values, coordinated in
ventory control may even result in higher transportation and warehouse costs. While the average reduction in the total cost is not high,
for some instances the reduction can be up to nearly 10%. Thus, the adoption of coordinated inventory control in SCND may generate
Solution with the NCIC strategy
Savings Solution with the CIC strategy

90
80
70
Cost (Thousands)
60
50
40
30
20
10
0
a b a b a b a b a b a b a b
4 5 6 7 8 9 10
a. NCIC Number of warehouses
b. CIC
Opening WH Transportation Inventory

Fig. 5. An example with more warehouses opened in the coordinated inventory control strategy (CIC) than in the non-coordinated inventory control
strategy (NCIC).
15
significant benefits, especially for supply chains characterized by relatively low warehouse capacity and low transportation costs, and/
or by relatively high inventory holding costs. It should also be noted that the level of the relative total cost reduction is influenced by
the fact that some costs are unavoidable. The system cannot be operated completely without warehouses and transportation of
products.
The contribution of the total inventory cost reduction to the total cost savings is quite significant, and the total inventory cost is
directly dependent on the inventory holding cost rate. Thus, it is worth noting that the benefit of considering coordinated inventory
control may become negligible in settings characterized by very low holding cost rates relative to the other costs. We illustrate this in
Table A.1 (see Appendix 5) where we redo the experiment with a selected set of 30 problem instances using lower holding cost rates
generated from U(0.08, 0.09) for retailers and U(0.06, 0.07) for warehouses. The selected set consists of instances in which we pre
viously found the largest, as well as smallest, cost savings. As expected, the cost savings decrease when compared to the previous
experimental results. In the same vein, however, one should also expect that cost savings would be more significant than what we
report in this paper for products that have relatively higher inventory holding cost rates.
The size of the network (represented by the number of retailers) appears to have an impact. The average total cost saving obtained
in the larger network is higher than that in the smaller network, though the difference is not large. However, there is a significant
difference when comparing the inventory cost savings. The (relative) inventory cost reduction indeed becomes more pronounced when
we deal with the larger number of retailers. The more significant inventory cost reduction observed in the larger problem instances can
be attributed to the stronger pooling effects at the warehouses, which is also reflected by an average of about five warehouses serving
150 retailers in contrast to an average of three warehouses serving 30 retailers. Pooling effects in the larger network are observed in
both the NCIC and CIC strategies, but it is the combination of pooling effect and lower fill rates at the warehouses (due to improved
coordination) that contributes to the higher inventory cost savings of the CIC strategy in the larger network. Low and high standard
deviation of demand has similar effects on the inventory holding cost savings as has the low and high number of retailers. The reasons
are also the same, namely pooling and coordination of safety stocks.
The warehouse capacity has the following effect. The average total cost saving is largest when the warehouse capacity is at the
lowest level and gets smaller for the medium and high levels. Lowering the warehouse capacity tends to increase the number of
warehouses, and hence decreases the total transportation costs. With relatively small differences in the number of warehouses between
the two strategies, we would see a more pronounced relative effect of the inventory cost savings, especially if the transportation costs
are low.
The percentage of total cost reduction seems to be negatively affected by the transportation cost as the percentage of total cost
reduction becomes lower when the transportation cost is higher. Even though we still see cost reduction as a result of using the co
ordinated inventory control, increasing the transportation cost results in higher total cost so that the relative cost saving tends to
become smaller.
Table 4 also presents the number of warehouses for the NCIC and CIC strategies. On average, the NCIC strategy uses more
warehouses than the CIC strategy, but the average differences are very small. However, caution should be used when interpreting the
effect of implementing coordinated inventory control, as the use of coordinated inventory control does not always result in fewer
warehouses. There are some cases where the number of warehouses in the CIC strategy is larger than in the NCIC strategy. As an
example, in Fig. 5, we plot all the possible number of warehouses and the corresponding total costs for the problem instance with 30
retailers, high ordering cost, low holding cost, high target fill rate, low standard deviation of demand, low transportation time, low
warehouse capacity, and high transportation cost.
Table 5
Comparison of network designs between NCIC and CIC.
# =Number of Number of instances where # of warehouses
#WH for NCIC > #WH for CIC #WH for NCIC < #WH for CIC #WH for NCIC = #WH for CIC
Different location Same Location
Different flows Same flows
#Retailers = 30 12 3 28 51 98
#Retailers = 150 1 0 1 43 147
Table 6
Number of instances which result in different network designs for NCIC and CIC.
Level Factors
Ordering Holding Fill Std. dev. of Transportation Warehouse Transportation

cost cost rate demand time capacity cost
#Retailers = 30 Low 46 37 42 46 41 46 54
Medium – – – – – 39 –
High 48 57 52 48 53 9 40
#Retailers = 150 Low 23 19 18 21 15 23 29
Medium – – – – – 17 –
High 22 26 27 24 30 5 16
16
Fig. 6. An example to illustrate the network design difference between the non-coordinated inventory control strategy (NCIC) and the coordinated
inventory control strategy (CIC) for a particular problem instance.
It can be seen that the best solutions for the NCIC and CIC strategies are to open four and five warehouses, respectively. The
explanation for this counter-intuitive observation is that the CIC strategy allows for exploring the possibility to reduce the trans
portation cost by opening more warehouses, and together with the reduction in the inventory cost, to compensate the higher cost for
opening and operating more warehouses.
It is very important to highlight our finding that although most of the instances in the numerical experiment result in the same
number of warehouses for the NCIC and CIC strategies, the resulting network designs may still be different for those two strategies. In
Table 5, we summarize the number of cases for which the network designs of the two strategies are different or the same. For the
network with 30 retailers there are 94 (out of 192) problem instances where coordinated inventory control makes a difference in the
resulting network designs. For the large network with 150 retailers, the difference in the network design is observed in 45 instances,
most of which are different only in the designated flows from the warehouses to the retailers.
As shown in Table 4, the integrated approach, despite its relatively longer computation times, provides an average of further
savings of 1.58 percentage points in total costs and 7.01 percentage points in inventory costs compared to the two-step approach. Thus,
from an overall perspective, adopting the integrated approach would be especially useful for firms operating in a very tight profit
margin environment in which every saving matters. Those problem instances where coordinated inventory control has an impact on
the resulting network design also characterize when there is value in using the integrated approach implemented in the GA heuristic to
solve the problem in the CIC strategy, as opposed to using the simpler two-step approach. In Table 6, we present a more detailed
breakdown of all the instances in which coordinated inventory control has an effect on the resulting network designs, differentiated by
the levels of the experimental factors. While there is no indication that the effect is strongly caused by a specific level of the exper
imental factors, there is a tendency that the effect appears to be particularly strong when the holding cost rate and target fill rate are
higher, and when the warehouse capacity and transportation cost are low. Such a tendency is consistent for both the cases with small
and large number of retailers, and in line with the conditions under which considering coordinated inventory control in SCND gen
erates higher total cost savings.
Fig. 6 shows an example of different network designs for the two strategies in the case with 30 retailers, high ordering cost, high
holding cost, high fill-rate target, high standard deviation of demand, low transportation time, high warehouse capacity, and low
17
transportation cost. Comparing panels (a) and (b) in this figure demonstrates the difference in the resulting network design of the two
strategies. These structural differences represent an important effect that coordinated inventory control might have on supply chain
network design.
In the cases where the two strategies have the same number of warehouses, the best locations found may be different for the
following reasons. In the cases where the main trade-off is between inventory costs and transportation costs, compared to the baseline
(NCIC) strategy, the implementation of coordinated inventory control may motivate the choice of different locations that will
maximize the benefits of inventory coordination, i.e. the difference between the reduction of the total inventory costs and the increase
of the transportation costs. A similar explanation can be used for the network designs that are only differentiated by the flows from the
warehouses to the retailers. Changing the location of the warehouses and/or the flow to the retailers will have an impact on the lead-
time demand and the induced backorder costs at the warehouses, leading to the change in the chosen reorder points.
To show the important effect of coordinated inventory control, we also recorded the fill rates obtained at the warehouses in the
resulting solutions. The average warehouse fill-rate values range from 30% to 50%, which is significantly lower than the target fill rates
at the retailers (95% and 98%). This result confirms the claim in Axsäter (2015) regarding appropriate fill rates at upper echelons in
supply chains.
6. Conclusions
In this study, we have developed models and solution methods for supply chain network design (SCND) that not only integrate the
location-transportation and inventory problems, but also consider coordinated inventory control with fill rates in the network. Service
to end customers represented by the target fill rate at the retailers serves as the primary service constraint for the supply chain network.
In a coordinated network, this implies that the warehouses should not necessarily use the same target fill rate as the retailers. By
contrast, the existing literature on SCND imposes the same (unnecessarily) high service levels at all stocking points in the supply chain.
Previous models for SCND are also characterised by their use of more simplistic, but less relevant, service level measures.
We compare two different strategies differentiated by whether or not coordinated inventory control is implemented. Due to the
complexity of the optimization problem, we develop a heuristic method based on a Genetic Algorithm to solve the optimization
problems. For the problem without coordinated inventory control, we benchmark the solution obtained by the heuristic based on GA
with the solution obtained by the optimization software package What’sBest. The differences of the results obtained by the two ap
proaches are negligible. For the problem with coordinated inventory control, we compare an integrated approach implemented in GA
with a simpler two-step approach. The results show that while its computation time is longer, the integrated approach is superior in the
sense that it may generate further savings in total costs and inventory costs compared to the two-step approach.
Our numerical study reveals several interesting findings. First, our results reinforce and substantiate the claims made in the existing
literature on the importance of coordination for cost reductions. In particular, we demonstrate the benefits of considering coordinated
inventory control in designing the network. The coordinated inventory control reduces the inventory cost significantly, especially at
the warehouses. The inclusion of coordinated inventory control in network design results in an average total cost saving of over 3% and
of nearly 10% in specific cases. The cost reductions are dominated by the inventory cost reduction, which on average can be up to
almost 13%. Our numerical results for the larger problem instances with 150 retailers show consistency with the smaller problems with
30 retailers in terms of the percentage of the total cost reduction achieved by implementing coordinated inventory control. However,
the results indicate a more significant inventory cost reduction for the larger problems compared to the smaller problems. Cost savings
of such magnitudes are significant, especially for firms that operate in very competitive business environments with narrow profit
margins. Our results give impetus to the idea of network (re-) design that emphasizes integration and coordination.
On average, the network design with coordinated inventory control results in (slightly) fewer warehouses than the non-coordinated
approach. This may not sound surprising, as supply chains benefit from the reduction of costs for opening and operating warehouses, as
well as from the greater risk pooling effect, resulting from fewer warehouses. However, this is not always the case when looking further
into individual instances. In some instances, the network with coordinated inventory control may also result in more warehouses in
comparison to the non-coordinated inventory control. The simultaneous optimization in the network design with coordinated in
ventory control offers the possibility of compensating the increase of costs for opening and operating warehouses by the reduction of
transportation and inventory costs. More importantly, we show that even if the number of warehouses is the same, considering in
ventory coordination may still have an impact on the best network design. For the smaller network with 30 retailers, the structural
effects can be observed in almost 50% of all the problem instances. The effects become less pronounced in the larger network with 150
retailers. The finding that inventory coordination also has an impact on the structural design of the network strengthens the motivation
for using an integrated approach in SCND.
Obviously, there is a cost associated with computation time for the implementation of the strategy that accommodates inventory
coordination in SCND. Hence, the magnitude of the cost savings should justify the adoption of the strategy. Our results indicate
stronger preference for the inventory coordination strategy in supply chains characterized by relatively low warehouse capacity and
18
transportation costs, and by relatively high inventory holding costs. In the case with less strong preference for the strategy, i.e., when
transportation costs and warehouse capacity are relatively high, and when holding costs are low, as a compromise, one could consider
using a simpler method such as the two-step approach also suggested in the paper.
Some of the assumptions used in this paper suggest directions for extending the research. First, we only consider a single product in
this study, while supply chains typically need to carry and deal with multiple products. Further research that addresses SCND with
coordinated inventory control in the case of multiple products could represent an interesting research avenue. In such an extension, the
possible application of joint replenishments of multiple products is an important issue to consider. Moreover, in accordance with the
literature on multi-echelon inventory control for stochastic demand, we have focused on obtaining inventory coordination by
alignment of the reorder points (fill rates) across echelons. Investigating the significance of obtaining further benefits by also coor
dinating the order quantities across stages is left for future research. Another possible extension is to study the impact of risks in SCND
with coordinated inventory control. Our study has shown that applying coordinated inventory control in network design reduces the
inventory at the warehouses significantly. The robustness of the resulting network design is challenged when considering unexpected
disruptions in the supply chain. Finally, even though the solution method presented in this paper is helpful in providing useful insights
into the importance of implementing coordinated inventory control in SCND, it has limitations in two respects. First, so far there is no
absolute reference that can be used for evaluating the performance of the heuristic. Finding a method for establishing lower bounds of
the total cost would be very useful. Second, the computation times for solving large problems are still too long, especially if one
considers developing a decision support tool. Therefore, designing a more efficient approximation and/or heuristic would represent a
relevant research issue.
Appendix 1. The derivation of the expected inventory level at the warehouse
Let φ(x) and ϕ(x) represent the density and distribution function of demand. Recall that we consider normally distributed demand.
The normal loss function G(x) is obtained as
∫∞
G(x) = (v − x)φ(v)dv = φ(x) − x(1 − ϕ(x))
x
where
∫ x ∫ x
1 x2 1 v2
φ(x) = √̅̅̅̅̅e− 2 ϕ(x) = φ(v)dv = √̅̅̅̅̅ e− 2 dv
2π − ∞ − ∞ 2π
Moreover,
G’ (x) = ϕ(x) − 1; G(∞) = 0

∫ ∞
1 [( 2 ) ]
H(x) = G(v)dv = x + 1 (1 − ϕ(x) ) − xφ(x) ; H ’ (x) = − G(x)
x 2
The continuous inventory position is assumed follow uniform distribution on the interval [R, R + Q]. Let F(x) denotes the dis
tribution function of the inventory level (IL) at warehouse in steady state and u is the inventory position at time t (Axsäter, 2015).
i [ ( )] i [ ( )]
Rw +Qw Rw +Qw
i ∫ ∫
i
1 u − x − μwDi (Li ) 1 u − x − μwDi (Li )
F(x) = P(IL ≤ x) = 1− ϕ du = − G’ du
Qwi σwDi (Li ) Qwi σwDi (Li )
Rw
i
Rw
i
i [ ( )] ( )
Rw +Qw
∫ ∫ ∫
σ wDi (Li ) ∫ Rwi +Qwi
i
0 0
1 ’
u − x − μwDi (Li ) u − μwDi (Li )
F(x)dx = w
− G dudx = G du
− ∞ − ∞ Qi σ wDi (Li ) Qi Rwi σwDi (Li )
Rw
i
[ ( w ) ( w )]
(σwDi (Li ) )2 Ri − μwDi (Li ) Ri + Qwi − μwDi (Li )
= H − H
Qwi w
σ Di (Li ) w
σ Di (Li )
Appendix 2. The coordinated inventory control
With coordinated inventory control, we take into account the mutual interdependence between warehouse and retailers in the
process of finding the appropriate reorder point for given batch quantities (Axsäter, 2003; Berling and Marklund, 2006, 2014). There
19
are five steps:
1. Induced backorder cost at warehouse i

∑nr r’
j=1 μij bj
bwi = ∑nr (A2.1)
j=1 ij μ
Where
100Qrj brj gb = max(− 1.2, − 2(brj /hrj )− 0.25

)
r k(
100Q r r
b 100 σ , )
μij Lij hrj
br’j = hrj g(
j j
, )( √̅̅̅̅̅)
j
G = min(0.015, 0.005(brj /hrj )0.2 )
μij Lij hrj μij Lij ( ) { }
( ) { ( } 100Qrj brj 100Qrj kb
100Qrj gb
)
100Qrj brj k , r = max 1, min(ka ( ) , K)
g , = min ga , ,G μij Lij hj μij Lij
μij Lij hrj μij Lij
ka = max(0.7, min(0.9, 0.6(brj /hrj )0.075 )
brj √̅̅̅̅̅̅̅̅̅̅̅
ga = min(0.015 r , max(0.65/ brj /hrj , 0.05)) kb = min(0.2, 0.4(brj /hrj )− 0.35
hj )
0.15
K = max(1.3, min(2, 2.5(brj /hrj )− )
The induced backorder cost at warehouse i, bwi , in (A2.1) represents the cost associated with the warehouse’s inability to deliver units
to the retailers as requested. It is estimated as a weighted average of the different induced backorder costs at the retailers served by this
warehouse (br’j ). The closed form estimates for ga , gb , ka , ka , and K are presented in Berling and Marklund (2006), and derived based on
linear regression approximations.
2. Lead-time demand at warehouse i

∑
nr
μwDi (Li ) = μij Li (A2.2)
j=1
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
√∑ ∞ ( )2
√ nr ∑
σ w
Di (Li ) =√ μwDi (Li ) − nQrj fj (nQrj ) (A2.3)
j=1 n=0
( )
fj nQrj = γj (n) − γ j (n − 1) (A2.4)
where the probability of retailer j orders at most n times during Li is

⎛ ⎛ ⎞ ⎛ ⎛ ⎞ ⎛ ⎞⎞
1 ⎜ (n + 1)Q r
− μ L √̅̅̅̅̅̅̅̅
̅ (n + 1)Q r
− μ L nQ r
− μ L (
⎜ j ij i ⎟ ⎜ ⎜ j ij i ⎟ ⎜ j ij i ⎟ ⎟
γj (n) = r Yij ⎝Qrj ϕ⎝ √̅̅̅̅̅̅̅̅
̅ ⎠ + σ 2ij Li ⎝φ⎝ √̅̅̅̅̅̅̅̅
̅ ⎠ − φ⎝ √̅̅̅̅̅̅̅̅̅ ⎠ ⎠ + nQrj
Qj 2
σ L 2
σ L 2
σ L
ij i ij i ij i
⎛ ⎛ ⎞ ⎛ ⎞⎞⎞
) r r
⎜ ⎜(n + 1)Qj − μij Li ⎟ ⎜nQj − μij Li ⎟ ⎟ ⎟
− μij Li ⎝ϕ⎝ √̅̅̅̅̅̅̅̅̅ ⎠ − ϕ⎝ √̅̅̅̅̅̅̅̅̅ ⎠ ⎠ ⎠ (A2.5)
σ2ij Li σ 2ij Li
3. Reorder point and the expected delay at warehouse i

{ }
( )
Rwi = argmin Ci Rwi
[ ( w ) ( w )]
( ) ( ) μwi μwi ( ) (σ wDi (Li ) )2 Ri − μwDi (Li ) Ri + Qwi − μwDi (Li )
Ci Rwi = F0i + g0i Qwi + Awi + hwi w w w w w
Ri + Qi /2 − μDi (Li ) + (hi + bi ) H − H
Qwi Qwi Qwi σwDi (Li ) σwDi (Li )
The minimizing Rwi is found by solving

( ) [ ( w ) ( w )]
∂Ci Rwi w w w
σ wDi (Li ) Ri + Qwi − μwDi (Li ) Ri − μwDi (Li )
= h i + (hi + bi ) G − G =0
∂Rwi Qwi σ wDi (Li ) σ wDi (Li )
( w ) ( w )
Ri − μwDi (Li ) Ri + Qwi − μwDi (Li ) hwi Qwi
G w
− G w
= ;
σ Di (Li ) σ Di (Li ) hwi w w
+ bi σ Di (Li )
( )
Rw +Qw − μw
G
i i
≈ 0 for big Qwi (which is typical at the warehouse level)
Di (Li )
σw
Di (Li )
20
( w )
Ri − μwDi (Li ) hwi Qwi
G w
= (A2.6)
σ Di (Li ) hwi w w
+ bi σDi (Li )
The expected delay because of backorders at warehouse i is given by

[ ( ) ( )]
σDi (Li ) 2 Rw
i
− μw Rw
i
+Qw
i
− μw
Di (Li ) Di (Li )
Qw
H σw − H σw
E(ILwi )− i Di (Li ) Di (Li )
E(Delayi ) = w
= (A2.7)
i μ μwi
4. Lead-time demand at retailer j
Transportation time first adjusted by considering the expected delay because of backorders at the supplying warehouse j
L’ij = Lij + E(Delayi ) (A2.8)
Hence,
∑
nw
μrDj (Lj ) = μij L’ij (A2.9)
i=1
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
∑ nw
σrDj (Lj ) = σ 2ij L’ij (A2.10)
i=1
5. Reorder point at retailer j

{ ( ) }
Rrj = min Rrj : FillRaterj = 1 − P ILrj ≤ 0 ≥ FillRatermin
j
Where
⎡ ⎛ r ⎞ ⎛ r ⎞⎤
( ) σ rDj (Lj ) Rj − μrD L
j( j)
Rj + Qrj − μrD L
j( j)
r
P ILj ≤ 0 = ⎣ G⎝ ⎠ − G⎝ ⎠⎦ (A2.11)
Qrj σ rD L σ rD L
j( j) j( j)
Appendix 3. Priority-based encoding
Input: μrj : mean demand at retailer j j = 1, 2, …, J

Capi : capacity at warehouse i i = 1, 2, …, I
gij : transportation cost from warehouse i to retailer j
V(s): priority value s = 1, 2, …, I + J
Output: μij : mean demand at retailer j supplied by warehouse i
Step 1: μij ← 0,∀i, j
Step 2: s ← arg max{V(s)}; select a node
Step 3: if s ≤ I, then i ← s; select a warehouse
= 0, Capi ≥ μrj , I < s ≤ I + J}; select a retailer with the lowest transportation cost
j ← arg min{Pij |V(s) ∕
else j ← s; select a retailer
= 0, Capi ≥ μrj , s ≤ I}; select a warehouse with the lowest transportation cost
i ← arg min{Pij |V(s) ∕
( )
Step 4: μij ← max 0, μrj
Update available capacity at warehouse and unfilled demand at retailer
Capi = Capi − μij ; μrj = μrj − μij
Step 5: Update priority (V(s))
If μrj = 0 then V(I + j) = 0
If Capi = 0 then V(i) = 0
Step 6: If V(I + j) = 0, ∀j then there is no unfilled demand;
else go to Step 2.
21
Appendix 4. The algorithmic specification of GA
We define Z ∈ Z as a possible network solution candidate that corresponds to a set of priority values, i.e., Z (V(1), V(2) ⋅ ⋅ ⋅
V(nw + nr ) ) where Z is the set of all possible network structures. We generate priorities V(s) for the warehouses and retailers
randomly, where V(s) is a unique integer value from 1 to nw + nr . The parameters and variables for GA in this study are as follows:
N Population size
n Index for chromosome (n = 1,…,N)

G Total number of generations
g Index for generation (g = 1,…,G)
CrossRate Crossover rate
MutRate Mutation rate
FV The fitness value
Zbest The best network structure so far
TC(Z) Objective function value when using network structure Z, as specified in (1)
TCbest The best (lowest) objective function value so far
TChighest The highest objective function value in each generation
The necessary steps of our GA are the following.
Step 1: Choose an initial generation that consists of N chromosomes: Z(1) , Z(2) , ⋯, Z(N) . Set = 0; use priority-based encoding in Ap
pendix 3 (Section 4.1) for generating N chromosomes. A chromosome represents a feasible solution to the location-
transportation problem.
Step 2: For each chromosome, calculate objective functionTC(Z(n) ), (n = 1, 2, ⋯, N).
− For a given network structure, determine the reorder point and order quantity at each facility Rrj , Rwi , Qrj , Qwi ; to determine
reorder points, use the five steps in Appendix 2 (also shown in Fig. 1) for coordinated inventory control and conditions (14)
and (15) for non-coordinated inventory control.
− Calculate the holding costs at warehouses and retailers defined in (11) and (12)
− Calculate the total cost of the network defined in (1).
Step 3: Find the highest and the best objective function value
TChighest = max{TC(Z(n) ) }; find the highest total cost for this generation
TCbestg = min{TC(Z(n) ) }; find the lowest total cost for this generation
If TCbestg < TCbest then TCbest = TCbestg ; Zbest = Z(n) ; compare with the previous best solution
Step 4: If g = G then select Zbest and TCbest ; otherwise go to Step 5.; check if the stopping criterion is met (G is the total number of
generations intended).
Step 5: Calculate the fitness value for each chromosome FV (n) = TChighest − TC(Z(n) ); The population is sorted by ascending fitness
values; the fitness value represents how good a solution is.
Step 7: Selection procedure (combining three ways of picking chromosomes); the process of selecting parents (chromosomes) for
creating offspring for the next generation
7.1 Select the best solution as the first chromosome for next generation,Z(1) = Zbest
7.2 For each of the other existing old chromosomes, calculate the normalized fitness value Prob(n) = ∑FV ; Calculate also
(n)
N
n=1
FV (n)
the accumulated normalized fitness value, which is the sum of the individual fitness value plus the fitness values of all the
previous chromosomes.
Generate a random variate r1 ← U (0, 1) and pick the first chromosome whose accumulated normalized fitness value is
greater than or equal to r1. Repeat this procedure until we pick n1 chromosomes.
7.3 Generate N − 1 − n1 new chromosomes as in the initial generation process (to avoid premature convergence).
Step 8 Crossover (one-cut point crossover); analogous to reproduction crossover; more than one parent is selected and one or more
off-springs are produced using the genetic material of the parents (see Fig. A1 below for an illustrative example)
Form N/2 pairs of chromosomes. For each pair of chromosomes, e.g.

( )
Z(1) V(1)(1) ⋅ ⋅ ⋅ V(nw + nr )(1) and
22
Fig. A1. An illustrative example of crossover.
( )
Z (2) V(1)(2) ⋅ ⋅ ⋅ V(nw + nr )(2)
Generate random number r2 ← U(0, 1); ifr2 < CrossRate then undergo the following crossover; Otherwise no crossover.
Set V(s)new (1) = V(s)(1) andV(s)new (2) = V(s)(2) (s = 1,…, nw + nr );
Generate random number representing the crossover point x1 ← U (1, nw + nr )
Set V(s)new (1) = V(s)(2) , and V(s)new (2) = V(s)(1) (s = x1 + 1,…,nw + nr ); The values of V(s) to the right of the crossover point are
swapped between the two parent chromosomes.
Weight mapping crossover (avoiding the same priority after crossover)
Sortn(.) ← sorting V(s)(n) , the right segment of the border (n = 1,2; s = x1 + 1,…, nw + nr );
IfV(x1 + k)new (1) = Sort2(m) then V(x1 + k)new (1) ← Sort1(m) (k, m = 1,…, I + J- x1);
IfV(x1 + k)new (2) = Sort1(m) then V(x1 + k)new (2) ← Sort2(m) (k, m = 1,…, I + J- x1);
Set V(s)(1) = V(s)new (1) andV(s)(2) = V(s)new (2) (s = 1,…, nw + nr );
Step 9: Mutation (swap mutation); small and random tweak in the chromosome to maintain and introduce diversity in the popu
lation;
For each chromosome Z(n) = (V(1)(n) ⋅ ⋅ ⋅ V(I + J)(n) )
Generate r3 ← U(0, 1); if r3 < MutRate then carry out the following mutation; Otherwise no mutation.
Set V(s)new (n) = V(s)(n) (s = 1, 2, ⋯, nw + nr )
Generate y1 ← U(1, nw + nr ) and y2 ← U(1, nw + nr )
Set V(y2 )(n) = V(y1 )new (n) and V(y1 )(n) = V(y2 )new (n) ; with this mutation, we select two elements at random and swap the
positions of these two elements.
Step 10: Set g = g + 1. Go to Step 2.; go to next generation
Based on the result of some preliminary experiments, we set the value of population size, crossover rate, mutation rate as N = 100,
G = 1000, CrossRate = 0.8, and MutRate = 0.2, respectively. As for the stopping criterion, we stop the algorithm when there is no
solution improvement found in 150 consecuitve generations.
Appendix 5. The effect of holding cost on cost reduction
See Table A1.
23
A. Darmawan et al.
Table A1
Comparisons for the selected instances with different holding cost (hrj ).
No Arj , FillRatemin
j
σrj Loi Capi ; Mi , F0i , Fij ; Cost reduction (in %) with hrj setting
Awi Lij Vi g0i , gij
30 retailers 150 retailers
Total cost Inventory cost Total cost Inventory cost
U(0.08, U(0.3, U(0.6, U(0.08, U(0.3, U(0.6, U(0.08, U(0.3, U(0.6, U(0.08, U(0.3, U(0.6,
0.09) 0.4) 0.8) 0.09) 0.4) 0.8) 0.09) 0.4) 0.8) 0.09) 0.4) 0.8)
1 Low Low Low High High Low 0.57 0.81 1.42 6.62 6.76 6.18 1.02 1.65 2.57 9.25 9.63 9.87
2 Low Low Low High High High 0.52 1.12 1.36 6.14 6.20 6.67 0.90 2.58 3.48 7.58 8.51 7.96
3 Low Low High Low High High 0.69 0.71 1.10 7.12 6.97 7.39 1.11 1.56 2.62 10.58 9.71 10.33
4 Low Low High High High Low 0.87 1.21 1.36 8.08 7.98 7.74 1.27 2.50 2.75 12.26 11.76 12.20
5 Low Low High High High High 0.54 0.74 1.18 6.59 6.77 6.72 0.91 1.71 2.64 7.66 8.25 9.52
6 Low High Low Low High High 0.65 0.92 1.84 6.80 7.22 8.55 1.06 2.09 2.17 10.21 11.05 9.99
7 Low High Low High High High 0.78 0.84 0.90 7.26 7.41 7.85 1.16 1.22 2.17 11.52 10.38 11.80
8 Low High High Low High High 0.75 0.89 1.34 7.17 7.11 7.68 1.14 1.46 3.46 11.32 10.03 10.78
9 Low Low Low Low High High 0.84 0.96 1.02 7.85 7.31 7.21 1.16 2.01 3.10 11.64 11.21 12.11
10 Low Low High Low High Low 0.87 1.71 1.74 7.93 8.03 9.01 1.21 1.97 2.75 12.11 10.24 11.61
11 Low High Low Low Low Low 1.01 1.73 2.91 9.26 8.74 9.80 1.47 3.20 4.37 14.36 12.93 11.61
24
12 Low High Low High Low Low 0.98 1.90 2.96 8.91 9.33 9.34 1.43 3.63 3.73 13.35 11.16 11.06
13 Low High High Low Medium Low 1.01 1.46 1.86 9.04 9.76 8.89 1.45 3.86 3.93 14.20 12.10 11.26
14 Low High High High Low High 0.97 1.65 2.14 8.83 9.24 9.14 1.36 3.81 3.98 13.14 12.35 13.74
15 High High High High Medium Low 1.02 2.43 3.12 9.35 10.31 9.60 1.57 3.56 4.23 15.44 14.70 13.36
16 Low High High Low Medium Low 0.99 2.16 2.66 8.99 8.44 9.06 1.44 2.81 4.99 14.03 13.31 13.56
17 High Low Low Low Medium Low 1.05 1.87 2.44 9.50 9.74 9.88 1.64 3.95 4.45 15.44 17.39 15.22
18 High High Low High Medium Low 0.97 1.56 1.96 8.09 10.36 10.02 1.32 2.61 3.04 12.80 10.75 12.11
19 High High High Low High Low 0.98 1.85 2.48 8.98 9.19 8.98 1.43 3.96 4.53 13.79 11.23 12.38
20 High Low Low High High Low 1.02 2.00 3.20 9.29 9.09 10.06 1.54 3.32 4.72 15.02 13.57 12.95
21 Low Low Low Low Low Low 1.05 2.46 5.83 9.62 8.95 9.27 1.75 3.88 4.50 15.67 15.06 14.63
22 High Low Low Low Low Low 1.28 2.43 2.96 13.04 12.75 13.97 2.28 4.31 4.98 20.75 18.30 19.53

23 High Low Low High Low Low 1.16 3.40 3.52 10.62 9.94 9.86 2.04 5.75 6.92 16.65 19.49 20.65
24 High Low High Low Low Low 1.06 2.83 5.66 10.52 10.74 9.79 1.91 4.31 5.88 16.27 18.10 20.98
25 High Low High High Low Low 1.14 2.90 3.05 10.67 10.22 10.64 2.04 5.28 5.52 16.66 15.61 17.63
26 High High Low Low Low Low 1.83 2.73 4.72 15.28 12.50 13.64 2.54 3.82 5.30 25.49 23.03 24.04
27 High High Low High Low Low 1.25 2.50 3.82 11.24 10.30 10.55 2.17 6.21 7.61 20.66 18.42 20.16
28 High High High Low Low Low 1.60 2.82 3.85 15.16 14.28 14.43 2.45 5.18 6.65 21.70 23.98 25.03
29 High High High High Low Low 1.23 2.92 4.06 10.88 11.35 10.47 2.07 5.86 7.12 19.70 20.02 16.16
30 Low High High Low Low Low 1.05 2.96 3.55 9.86 10.40 10.42 1.75 4.57 5.71 16.11 19.06 15.37
Average 0.99 1.88 2.67 9.29 9.25 9.43 1.55 3.42 4.33 14.51 14.04 14.25
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Supply Chain Network Design With Coordinated Inventory Control

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Transportation Research Part E 145 (2021) 102168

Contents lists available at ScienceDirect

Transportation Research Part E

Supply chain network design with coordinated inventory control

Manatkar et al. 2 WH + RT Normal distribution CSL No Particle swarm optimization,

*WH: warehouse, RT: retailer, CSL: cycle service level.

3. Problem description and model formulation

3.1. Problem description

3.2. Model formulation

Indices and sets:

(continued on next page)

Other (consequential) variables:

3.2.1. Strategy 1: SCND with coordinated inventory control (CIC)

μij = μrj Yij ∀j ∈ J (3)

μwi ≤ Xi Capi ∀i ∈ I (6)

μij ≥ 0 ∀i ∈ I, j ∈ J; Qwi > 0; Rwi ≥ 0 ∀i ∈ I; Qrj > 0; Rrj ≥ 0 ∀j ∈ J (8)

Yij binary ∀i ∈ I, j ∈ J (9)

Inventory holding costs

1. Calculate induced backorder cost, bi

2. Calculate lead-time demand 4. Calculate lead-time demand

Fig. 1. The coordinated inventory solution for warehouses and retailers.

Reorder point at the warehouses and retailers

3.2.2. Strategy 2: SCND with non-coordinated inventory control (NCIC)

Fig. 2. A network example.

Warehouse Retailer Warehouse Retailer

4.1. Genetic algorithm

Description of the GA heuristic used in this paper

Number of retailers Low 30

Fig. 4. The convergence of GA heuristic (an example of cost evolution).

NCIC, 30 retailers 662.27 321.88 9.28%

Total cost Inventory Transportation Opening warehouse Number of warehouses

Transportation Research Part E 145 (2021) 102168

Costs comparison results

Solution with the NCIC strategy

Savings Solution with the CIC strategy

Opening WH Transportation Inventory

Different location Same Location

Different flows Same flows

Ordering Holding Fill Std. dev. of Transportation Warehouse Transportation

Appendix 1. The derivation of the expected inventory level at the warehouse

G’ (x) = ϕ(x) − 1; G(∞) = 0

Appendix 2. The coordinated inventory control

are five steps:

1. Induced backorder cost at warehouse i

100Qrj brj gb = max(− 1.2, − 2(brj /hrj )− 0.25

2. Lead-time demand at warehouse i

where the probability of retailer j orders at most n times during Li is

3. Reorder point and the expected delay at warehouse i

The minimizing Rwi is found by solving

The expected delay because of backorders at warehouse i is given by

4. Lead-time demand at retailer j

L’ij = Lij + E(Delayi ) (A2.8)

5. Reorder point at retailer j

Appendix 3. Priority-based encoding

Input: μrj : mean demand at retailer j j = 1, 2, …, J

Appendix 4. The algorithmic specification of GA

n Index for chromosome (n = 1,…,N)

The necessary steps of our GA are the following.

Form N/2 pairs of chromosomes. For each pair of chromosomes, e.g.

Fig. A1. An illustrative example of crossover.

Appendix 5. The effect of holding cost on cost reduction

See Table A1.