Integrated Location and Inventory Decision Problem in a Three-Tier Supply Chain Network

Abstract

This paper considers a three-tier distribution network with one manufacturer, multiple warehouses and multiple retailers. The demand at the retailers is constant and shortages are not allowed. The problem is to determine location of the plant, number and location of warehouses, allocation of retailers to these warehouses and inventory policy for the warehouses and the retailers. The objective is to minimize long run average total costs. We consider a tradeoff between location costs, transportation costs and inventory holding costs.

This work falls under the class of integrated location inventory problem in a three-tier supply chain. Previous work has considered a single warehouse with multiple retailers where the location of the warehouse and inventory policy for the network is determined simultaneously. However the multiple warehouse multiple retailer integrated location inventory problem in a three-tier supply chain network has not been studied. We develop a math formulation and a heuristic solution procedure for this problem. The solution gives lower cost over the one warehouse multiple retailer problem.

Keywords: Supply Chain Management, Integrated Location Inventory Problem, Three-Tier Supply Chain, Cost Minimization, Heuristic Solution, Performance Management

JEL Classification: M11, C61