Title page for ETD etd-12012004-080758

Type of Document Master's Thesis
Author Hodgdon, Tammy Jo
URN etd-12012004-080758
Title A Combined Inventory-Location Model for Distribution Network Design
Degree Master of Science
Department Industrial and Systems Engineering
Advisory Committee
Advisor Name Title
Dejax, Pierre Committee Co-Chair
Meller, Russell D. Committee Co-Chair
Bish, Ebru K. Committee Member
Dauzere-Peres, Stephane Committee Member
  • Facility Location
  • Multi-Echelon Inventory
  • DC Network Design
Date of Defense 2004-11-15
Availability unrestricted
Two important areas of decision-making in distribution system design involve facility loca-

tion and inventory policy determination. Facility location analyzes questions such as how

many facilities should be opened, where they should be located, and which customers should

be assigned to which DCs. Inventory policy determination involves more tactical decisions

such as the order quantities and frequencies at each level or echelon in the network. It is

believed that these two decisions can influence each other significantly. Including a multi-

echelon inventory policy decision in a location analysis allows a user to capitalize on the

strengths that each DC has to offer (e.g., lower labor rates, land costs, etc.). Likewise, when

the locations of two facilities are known, a multi-echelon inventory policy can be designed

better to incorporate the exact lead times and fixed costs between the facilities at each

level of the system. Despite this, the two problems are typically solved independently. This

research addresses these problems together and investigates different heuristic methods for

solving a combined inventory-location model. We begin by presenting the background and

formulation for each problem. These formulations are then combined to show how the two

problems can be mathematically formulated together. Rather than solve the problem ex-

actly, two heuristic methods using different philosophies are tested. We apply these heuristic

methods to the combined inventory-location problem to determine how much we can im-

prove distribution network design solutions and what type of heuristic methodology is most

effective in gaining these improvements. Our results show that the combined inventory-

location model is capable of improving on the solutions obtained by a location model with

a fixed inventory policy. The improvement based on the data sets tested in this research

was approximately $60,000. However, in cases where the inventory costs are a larger portion

of the total cost, the improvement made by the inventory-location model increased to over

$1,000,000. We also found that our second heuristic method tested provided statistically

significant improved results over our first heuristic method. Moreover, the second heuristic

method typically ran 67% faster. The improved results, although small in a relative sense

(the average improvement was 0.18%), would still represent a large absolute improvement in

supply chain costs. As much as $174,000 was saved in the data sets tested for this research.

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