The two-warehouse material location selection problem

Companies often require additional warehouse space due to increased demand and often the option of building a warehouse is not feasible due to a high investment cost. As a result excess inventory that cannot be stored in owned warehouses is transferred to third‐party warehouses for which the company pays rent, as well as incurs labor and transportation costs for storing items and moving items back to the production site. In this situation, the company ends up with two warehouses – owned and rented. This research introduces the material location selection problem that allocates materials to these two warehouses while minimizing the total storage and transportation costs. Four material location models/policies, each with different decision restrictions, are proposed to solve the problem from different material handling perspectives. The four models are analyzed and contrasted with each other based on data derived from a real industrial scenario. The case results show a cost savings opportunity between 20–40% due to reassigning materials between the rented and owned warehouses.