Inventory Considerations in Network Design

Network design is a cornerstone of logistics management. It is traditionally used to determine the number and location of warehouses that optimize the joint transportation and fixed warehousing cost. We propose a network design model that enables managers to include inventory cost simultaneously with transportation and fixed warehouse cost in the optimization process. The proposed model treats inventory cost as a discrete function of the number of warehouses. The research also includes an illustration of the application of the proposed model using data obtained from a national retailer based in the Midwest. Results show that savings can be substantial and that the proposed model might also be used to define different configurations for C items than for A and B items.