A Facility Location And Inventory Optimization Joint Problem On A Distribution Network With Ordering Policy Of Two Echelon Inventory

Distribution network is an important tie to connect suppliers and retailers. As Chineselogistics is taking off, one important method to cut off logistics cost which keeps high inChina is to optimize distribution network and lower distribution cost. An economic,efficient and effective distribution network is also a symbol of a company’s competitivestrength. The first important step to construct a distribution network is to locatedistribution centers, while inventory cost is also of great influence for its quantity andoptimization space. As companies are growing larger, they must face optimizations onmulti-echelon inventory and ordering policies.This article studied a joint problem of facility location and inventory optimizationon a distribution network with two-echelon inventory and ordering policy, includingthree parts as facility location problem, retailer assignment and inventory optimization,of strategy and tactical levels. We located distribution centers, assigned retailers’demand to them and made ordering policy for two-echelon inventory to make the lowestcost summed by fixed facility, transportation and inventory cost.Retailers’ demands are considered to be normally distributed with lead time.Inventory is held by Retailers and distribution centers. We consider ordering inventorycost, holding cost of average cost and safety cost to make economic ordering quantityfor each echelon inventory. Distribution centers can be located to some optimalpositions with some fixed cost. We are required to decide distribution centers’ number,positions, capacities and assignments of retailers’ demands.We optimized multi-echelon inventory under independent or joint decision policies.After constructing a mathematical model, we applied an algorithm combiningLagrangian relaxation and greedy manners. Then we made some improvements on thealgorithm like Lagrange multipliers evaluating method. After that, by changing differentunit cost, we analyzed how the network construction changes and concluded how thenetwork restrains the increase of total cost.