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), (2) total transportation costs, and (3) storage holding and replenishment costs at DCs and retail outlets. In addition, network design models should account for factors such as (4) stockouts, by setting appropriate levels of safety stocks, or (5) capacity concerns, which may affect operating costs in the form of congestion costs. The difficulty of making such trade-offs is compounded by the fact that even finding the optimal two-echelon inventory policy in a fixed and uncapacitated distribution network is already 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 domain. Our approach is flexible and general enough to incorporate a variety of important side constraints into the problem.