Incorporating inventory control decisions into a strategic distribution network design model with stochastic demand

In this paper, we propose a simultaneous approach to incorporate inventory control decisions – such as economic order quantity and safety stock decisions – into typical facility location models, which are used to solve the distribution network design problem. A simultaneous model is developed considering a stochastic demand, modeling also the risk pooling phenomenon. We present a non-linear-mixed-integer model and a heuristic solution approach, based on Lagrangian relaxation and the sub-gradient method. In a numerical application, we found that the potential cost reduction, compared to the traditional approach, increases when the holding costs and/or the variability of demand are higher.