Location modeling problem with risk pooling for probabilistic demand

Background In the real world, a company will meet a lot of obstacles when optimizing its supply chain, since there are so many uncertainties lying in the supply chain. For example, the demand is uncertain and fluctuating all the time. The inventory policy will largely influence the profit of the supply chain. Description of Problem In our project, we assume that there is a company producing its products in Pennsylvania and selling its products also in Pennsylvania area. They have decided the location of their factory and they also know their 16 customers location. The problems they are facing are that they dont know how many distribution centers they should build and how they should coordinate the supply and demand since demand is changing( they carry inventory which also need to be minimized). First, we assume that the company build only one distribution center and they know the three potential locations, thus we need to find out the best one, in order to minimize the cost and meet the customers demand. Second, we define several regional distribution centers and fix the number, then decide which potential locations are suitable to build distribution centers. At last, by comparing this two results, we make the conclusion that which is better. Distribution of customers and factory The first thing we should do is to choose the locations of customers and factory. We assume that our whole market is inside the state of Pennsylvania, and there are totally four main customer regions and one factory in our model, each region has 4 retailers to fulfill the demand of customers. Considering the potential of consumption and population, we choose the cities in the figure 1 as below:

Figure 1 Distribution of customers and factory customer factory

Region Customer

West Erie Warren Pittsburg Penn Hills

Table 1 Middle Altoona State College Johntown Harrisburg

Northeast Wilkes-Barre Scranton Allentown Bethlehem

Southeast Reading Lancaster York Philadelphia

Solving methodology: Initial parameters and assumptions

Let I be the set of retailers, J be the potential distribution sites, firm pays fixed cost for opening each DC, operating cost and a holding cost for inventory .Dcs are assumed to follow EOQ policy. Goal is to choose set of Dcs to serve the customers to minimize the total cost( Location,Inventory,transportation). Let S be the set of demands for a given scenario or time period s=1,2,3.....10,11,12 Given 1) Customer regions 2) Factory location 3) Fixed capacity of warehouse and distribution centre and demand at customer level changes Costs affected by network structure. a) Operation costs (given per ton includes activities like picking, material handling) b) Investment costs for locating each of the distribution centre and warehouses c) Transportation cost from distribution centres to location and also from factory to distribution centres d) Holding cost for inventory at each ware house. Cost independent of period: Transportation Demand at customer level varies from one period to other up to end of a fixed time horizon of 12 periods that means there is a set of mean demand at each customer site for a given period which varies, so it need to be modeled as multi period mixed integer programming problem. The complexity in the problem is that since demand varies there could be left over inventory that is responsible for inventory costs which will be carried to next period with different set of demands and also since, the network design changes with change in set of demand at customer level. We need to optimize the location-distribution model to minimize the total cost (including location, transport, inventory costs) Decision variable Xj= 1 if we open dc j 0 otherwise Yijs= 1 if retailer I assigned by distributer j for period s 0 The location problem is independent of time period while assigning the retailers to distribution centers and inventory decision ( following EOQ is timeperiod dependent) The above optimisation is considered for two cases

Case 1: Given there is only one distribution centre possible ( like a central DC)out of possible locations , we need to solve to decide upon optimal location of the DC and optimal distribution strategy. This is similar to Location- distribution model, but we will be considering the probabilistic demand instead of deterministic. The demand data can be simulated for various scenarios and solve using the location-distribution algorithm and also minimizing the average inventory in the system. Case 2: Now, a distribution centre will be fixed in number to 3( Given 4 possible locations). like regional DC and the optimal location of those Dc and optimal distribution strategy will be found using location-distribution model to meet the probabilistic demand is considered. The customers to which a given warehouse can supply is restricted. Conclusion: Since we use varying demands we can observe how the central warehouse system can reduce the total average inventory in system( Risk pooling). We can compare the cost of running these different cases for Pennsylvania region for a given location of factory and customer regions.