Strategic design of distribution systems with economies of scale in transportation

We formulate and analyze a strategic design model for multi-product multi-echelon distribution systems where there are significant economies of scale in the transportation movements. The key design decisions considered are: the number and locations of distribution centers (DCs) in the system, the number and locations of consolidation centers (CCs), the inventory levels of the various products to be held at the distribution centers, and the routing of shipments (through a consolidation center or direct) between plants and distribution centers. A heuristic solution method is developed that can efficiently find near-optimal solutions. The quality of solutions to a series of test problems is evaluated – by comparison to exact solutions created by enumeration in small tests, and by comparison to lower bounds developed for larger test problems. In the problems for which exact solutions are available, the heuristic solution is within 1% of optimal. The computational procedure appears to hold substantial promise for effective solution of large distribution system design problems.