Multiproduct integrated production–distribution systems

In many firms the goals of the production staff are in conflict with those of the marketing staff. Often the resolution of the conflicting goals is to require a stockpile of finished goods (FG) to hold large amounts of inventory. The two functional areas thus are buffered. It is our opinion that an integrated view of the entire production–distribution system may generate significant savings by trading off the costs associated with the whole, rather than minimizing production and distribution costs separately. In this paper we develop a model of an integrated production–distribution system composed of a single station model of a factory, a stockpile of finished goods, and a single retailer. The concepts and solution methodology, however, show promise for more complex networks. Multiple products with stochastic, independent demand are produced at the factory, stored at FG, and distributed to the retailer where demand is met or backlogged. In addition, FG may order an expedite batch of a particular product if its stock level decreases to a specified expedite reorder point. Expedite batches have nonpreemptive priority over normal replenishment batches. We approximate the distributions of key random variables to compute costs and service levels for all products across the supply chain. We find that our approximations are often quite accurate. Our limited tests of the performance of the near-optimization algorithm indicate that it provides solutions very close to the optimal. We also provide results that yield insight into the behaviour of this integrated system.