Designing two-echelon supply networks

A modern distribution network design model needs to deal with the trade-offs between a variety of factors, including 1) location and associated (fixed) operating cost of Distribution Centers (DCs) as well as their contribution to total transportation cost; and 2) holding and fixed ordering costs at DCs and retail outlets, in order to minimize the costs of managing the cycle stocks. In addition, network design models should account for factors such as 3) stockout costs, by setting appropriate levels of safety stocks; or 4) capacity issues in DCs, such as throughputcapacity dependent operating costs, througput capacity constraints, and congestion costs at the DCs. The difficulty of making such trade-offs is compounded by the fact that even finding the optimal echelon inventory policy in a fixed and uncapacitated distribution network is a hard problem. In this paper, we propose a generic modeling framework to address these issues that continues and extends a recent stream of research aimed at integrating insights from modern inventory theory into the supply chain network design problem. Our approach is flexible and general enough to incorporate a variety of important side constraints into the problem.