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1 Introduction
point out the interaction between the inventory and location models. A recent line of
work, including the research by Teo and Shu (2004), Atamtürk et al. (2012), Miranda and
Garrido (2006), Ozsen et al. (2008), Romeijn et al. (2007), Shahabi et al. (2014), Snyder
et al. (2007) and Tancrez et al. (2012).
Facility location and inventory decisions are associated through the transportation
costs in the system. Facility location choices have an effect on transportation, and, thus,
on replenishment costs which, thusly, influence the optimal inventory policy. On the
other hand, the inventory policy directs the recurrence of shipments to replenish
inventory, which, thusly, influences the number of deliveries, and, subsequently, the
transportation costs, between facilities. Subsequently, facility location and inventory
decisions are related because of the economies of scale intrinsic in transportation and
replenishment costs. Therefore, for enhanced supply chain cost performance, it is
necessary to optimise these problems simultaneously in an integrated manner.
According to Liao et al. (2011), in recent global competition, two strategies for
supply chain design have emerged: efficiency and responsiveness. Efficiency seeks to
reduce operational costs; responsiveness, on the other hand, is designed to respond
quickly to satisfy customer demands. Responsiveness is considered an important
performance metric to the supply chain in a fast changing market environment. A
company with a sensitive supply chain can meet market demand in shorter lead times and
respond quickly to customer needs. However, most of the mentioned paper only consider
single criterion in designing supply chain network, such as cost minimisation or profit
maximisation. It is not always desirable to reduce the costs if this results in a degraded
level of customer service. Thus, it is necessary to establish a multi-objective network
design problem.
Four strategic planning areas in design of supply network are presented by Ballou and
Masters (1993), as shown in Figure 1. According to this figure, facility location,
inventory, and distributions decisions are represent efficiency and customer
responsiveness represents responsiveness of the supply chain network. The purpose of
this paper is to study the joint inventory location problem in three-level supply chain
networks which considers all of the four aforementioned strategic planning areas. The
problem is formulated as a mixed-integer nonlinear programming (MINLP) model. The
model is solved by GAMS solver and proposed heuristic algorithm. The ε-constraint
method is used as solution approach to tackle the multi-objective problem when using
GAMS.
This paper incorporates four noteworthy innovative aspects rarely considered in the
literature of inventory location problem:
1 bi-objective inventory location problem which considers customer service level as a
second objective
2 multiple sourcing is allowed at each supply chain layer
3 capacity planning in factory and DCs is considered.
4 propose a hybrid genetic algorithm (GA) to design large size supply chain network.
The objective of capacity planning is to find an optimal capacity expansion program and
DCs location that minimises total capacity investment and DCs operating costs.
4 H. Iranmanesh and A. Kazemi
Figure 1 Four strategic planning issues in distribution network design (see online version
for colours)
Customer Agile
Responsiveness (Responsiveness)
Facility Location
Decision
Lean
(Efficiency)
Inventory Distribution
Decision Decision
2 Problem formulation
In this section, a MINLP model is presented to design the three-layer supply chain
network including the impact of inventor management system. The considered problem
deals with the distribution of a single product from a single factory to a set of customers
through a set of DCs that can be located at various predetermined sites. The objective is
to determine:
1 the location of DCs
2 their capacity
2.1 Indices
j Index for DCs (j = 1,…,J).
k Index for customers (k = 1,…,K).
r Index for capacity levels available to the potential DCs (r = 1,…,R).
f Index for capacity levels available to the factory (f = 1,…,F).
Dk Demand of customer k.
j
j
Qj
+ ∑∑ TC
j k
jk Y jk
(1)
+ ∑ j
1 HC j Q j
2
6 H. Iranmanesh and A. Kazemi
Min Z 2 : ∑ LS
k
k (2)
Subject to:
∑ X ≤ ∑ Cap U
j
j
f
f f
(3)
Xj = ∑Y k
jk ∀j (4)
∑V
r
r
j ≤1 ∀j (5)
∑U
f
f
=1 (6)
Xj ≤M ∑V
r
k
r
∀j (7)
Dk − ∑Y j
jk ≤ LS k ∀k (8)
Qj ≤ ∑ Ca V
r
r
j
r
j ∀j (9)
Q j , X j , Y jk , LS k ≥ 0 ∀j , k (10)
V jr , U f = 0 or 1 ∀r , j (11)
The objective function given in (1) is to minimise the sum of the production cost, location
cost of DC, making factor with selected capacity level, ordering cost, transportation cost,
and inventory holding cost. The second objective function given in (2) is to minimise the
total lost sales.
Constraint (3) ensures that factory capacity is respected. Constraint (4) is the flow
conservation constraint at factory, DCs and customers. Constraints (5) and (6) guarantee
that the DCs and the factory, respectively, can be assigned at most one capacity level.
Constraint (7) guarantees the transportation only to open DCs. The lost sale at each
customer is determined in Constraint (8). Constraint (9) states that the order quantity for
candidate DC at j cannot exceed the DC capacity. Finally, constraints (10) and (11) state
the types of model decision variables.
3 Proposed HGA
Supply chain network design is to provide an optimal platform for efficient and effective
SCM. This is an important and strategic operations management problem in SCM. The
design task involves the choice of facilities (plants and DCs to be opened and the
distribution network design to satisfy the customer demand with minimum cost. It
belongs to a production-distribution and facility location-allocation problem. Solution
approaches for these problems are optimisation algorithms within the framework of
A bi-objective location inventory model for three-layer supply chain 7
Benders’ decomposition (Geoffrion and Graves, 1974b; Cohen and Moon, 1991),
heuristics based on branch-and-bound (Ro and Tcha, 1984), and Lagrangian relaxation
(Jayaraman and Pirkul, 2001). However, these techniques consume extensive amounts of
time and effort in finding optimal solutions for realistically sized problems. The problem
under consideration can be reduced to the well-known p-median problem which is known
to be NP-hard (Kariv and Hakimi, 1979). Therefore, researchers have utilised heuristic
and meta-heuristic approaches to solve this problem.
Syarif et al. (2002) have developed a spanning tree-based GA approach for the
multi-source, single-product, multi-stage SCN design problem. Jayaraman and Ross
(2003) have also proposed a heuristic approach based on simulated annealing for the
designing of distribution network and management in supply chain environment. Yeh
(2005) has proposed a memetic algorithm (MA) which is a combination of GA, greedy
heuristic, and local search methods for the same problem. The author has extensively
investigated the performance of the MA on the randomly generated problems.
Due to the limitations involved in exhaustive enumeration, branch and bound and
mathematical modelling for solving large sized problems, researchers started developing
heuristics. Even though these heuristics did not guarantee optimal solutions, they gave
feasible solutions within a reasonable computational time (Sawik, 2000). A heuristic
method is a procedure that is likely to find a good feasible solution but leaves no
guarantee of its quality or whether it is optimal or not (Hillier et al., 1990). All the
possible solutions are not considered, since that would require an infinite amount of time,
but rather a part of the solution space with solutions that might or might not be optimal.
The solution space is searched smarter, discarding those parts that certainly not will
contain good solutions and focusing more on those parts that could include a good one.
Nevertheless, a well-designed heuristic method can often provide a near-optimal solution,
or indicate that no optimal solution exists. The method should also be efficient enough, so
that it can deal with large problems within a reasonable time.
The problem with ordinary heuristic methods is that for every problem given, a
procedure must be designed to fit and to solve the problem (Glover and Kochenberger,
2003; Hillier et al., 1990). However, in recent years another type of procedure has been
developed, the meta-heuristic that consists of both a general structure and strategy
guidelines to adjust to the specific problem given. This approach is very timesaving and
meta-heuristics have become an important tool for solving a wide range of practical
problems. Furthermore, ordinary heuristics often are local improvement procedures, i.e.
they try to improve the current solution within the local neighbourhood of that solution.
This means that for every iteration, the method will find a solution near the current one
and accept it if it is better, converging towards the local optimum within the
neighbourhood of the starting solution. The drawback of this approach is that if the given
problem consists of multiple local optima, the procedure applied will converge to one
local optimum and then stop.
The GA is a stochastic search technique based on the mechanism of natural selection
and biological evolution (Holland, 1975). In GA, search starts with a set of feasible
solutions (population) and iteratively replaces the current population by a new
population. The population is made up of individuals called chromosomes. Each
chromosome of population is evaluated using some measure of fitness function. Based on
the value of the fitness functions, a set of chromosomes is selected for breeding. In
particular, the fitter chromosomes have higher probabilities of being selected. In order to
create a new generation, new chromosomes, referred to as off spring, are formed by
8 H. Iranmanesh and A. Kazemi
genetic operators such as crossover and mutation. According to the fitness value, parents
and offspring are selected, while rejecting some of them so as to keep the population size
constant for a new generation. This process is repeated until a specified stopping
condition is reached (Gen and Cheng, 2000).
In this section, a hybrid meta-heuristic algorithm is presented to solve large scale
supply chain networks. Let consider the amount of Uf and V jr are fixed, then we can
obtain the optimal amount of Qj by differentiating the new objective function in terms of
Qj [equation (12)] according to the equation (13):
Xj
Min Z1 : ∑ PCX + ∑ TC
j
j
j
j
Qj
+ ∑∑ TC
j k
jk Y jk + ∑ 1 2 HC Q
j
j j (12)
2TC j X j
Q*j = (13)
Hj
Note that the equation (13) corresponds to the same outcome of the classical EOQ
model. Thus, we can replace the second and forth terms in the equation (12) by the
equation (14):
2TC j X j ⋅ H j (14)
It is worth mentioning that the equation (14) represent the optimal cost of the EOQ
model.
So by determining the amount of Uf and V jr the Model I can be decreased to
Model II. Therefore in the proposed algorithm, first the amount of DCs location and
capacity level of factory and DCs is determined using GA. GA is an optimisation
technique inspired by the process of evolution of living organisms. It is based on the
concept of natural selection and the survival of the fittest. In GA, initial and feasible
solutions are generated in the form of chromosomes. Each chromosome has a fitness
value that shows the quality of that chromosome.
Genetic operators evolve the population to the next generation. Basic operators are
selection, crossover and mutation. The literature on GAs includes a quite large number of
papers; for some references describing in detail the GA approach and its application
see Gen and Cheng (2000). Assuming the population size is POP, and then POP
chromosomes are generated randomly as the initial population. In order to represent the
solution, a 1 × J array is created such that each cell is corresponded to a random number
between 0 and 1. For example the following vector is possible chromosome, with length
equal to the 4, which is the number of DC candidate locations (Figure 2).
Figure 2 Sample chromosome to represent selected DCs (see online version for colours)
1 0 1 0
This chromosome shows that DC candidate in location 1 and 3 are selected. Another
chromosome is used to show the capacity level of DCs. The chromosome consists of J
parts and the length of each part is r (capacity levels available to the potential DCs).
Likewise for represent the capacity level of factory a chromosome with size f is used.
A bi-objective location inventory model for three-layer supply chain 9
Figure 3 shows the sample chromosome for the network with four candidate locations
and three capacity levels for DCs and four capacity levels for factory.
Figure 3 Sample chromosomes to represent capacity levels (see online version for colours)
0 1 0 0 1 0 0 0 0 0 0 1 0 0 0 0
Therefore in the considered problem a chromosome consists of three segments. The first
segment is used to select candidate DC locations, the second segment is used to select
capacity level in the factory and the third one is used to determine the capacity levels of
selected DCs. The single point cross over and swap mutation is used as the GA operators
in each segment.
After determining these variables by each chromosome, the problem can be
formulated according to the Model II, which is relatively easier to solve. This problem
can be modelled as follows:
Model II
Min Z1 : ∑ PCX
j
j + 2TC j X j ⋅ H j + ∑∑ TC
j k
jk Y jk (15)
Min Z 2 : ∑ LS
k
k (16)
Subject to:
∑Xj
j ≤ Ca f (17)
Xj = ∑Y k
jk ∀j (18)
Xj ≤M ∑V
r
r
j ∀j (19)
Dk − ∑Y j
jk ≤ LS k ∀k (20)
X j , Y jk ≥ 0 (21)
LS k ≥ 0 (22)
This model can easily solved by GAMS solver and to handle the bi-objective structure
the ε-constraint method can be used. After solving this model, two objective functions are
obtained (Z1, Z2) for each chromosome. In the ε-constraint method, introduced by Haimes
et al. (1971), all but one objective are converted into constraints by setting an upper or
lower bound to each of them, and only one objective is to be optimised. Applying the
ε-constraint method to the proposed bi-objective model, we only use z1 as the objective
function, while z2 is transformed into constraint with ε according to equation (23).
10 H. Iranmanesh and A. Kazemi
ε=μ ∑D k
k (23)
Min Z1 : ∑ PCX
j
j + 2TC j X j ⋅ H j + ∑∑ TC
j k
jk Y jk (24)
Subject to:
∑X
j
j ≤ Ca f (25)
Xj = ∑Y k
jk ∀j (26)
Xj ≤M ∑V
r
r
j ∀j (27)
Dk − ∑Y j
jk ≤ LS k ∀k (28)
∑ LS
k
k ≤ε (29)
X j , Y jk , LSk ≥ 0 ∀j , k (30)
Then the proposed HGA is an iterative algorithm which includes two stages:
1 Use GA to obtain variables V jr , U f .
2 Use the GAMS solver to solve the Model II to obtain Xj, Yjk, LSk. The quantity of
order size is obtained by equation (13).
4 Numerical example
In this part, to illustrate validity of the proposed model a numerical example is considered
with four candidate locations for DCs and 5. The production cost for each unit is equal to
50$. The model is coded in GAMS Software on a PC including two Intel® CoreTM2 and
2 GB RAM. The best parameter values for the proposed algorithm which are selected
through pilot experiments are given in Table 1.
Table 1 Parameter values used in the proposed GA
F1 F2 F3
f
Ca 2,000 3,000 4,000
f
FC 4,000 5,500 6,000
Table 3 Per unit holding cost and fixed cost of placing an order for candidate DC in j
J1 J2 J3 J4
Hj 2 4 3 2
TCj 500 800 400 1100
K1 K2 K3 K4 K5 K6
Dk 300 700 800 700 600 200
Ca rj r1 r2 r3
Table 6 Fixed cost for locating a DC at candidate place j with capacity level r
FC rj r1 r2 r3
TC jk K1 K2 K3 K4 K5 K6
After solving the model by μ = 0.15, these results are obtained: total cost equal to
155,476.1, factory with capacity level 3, DC1 with capacity level 2 and DC4 with
capacity level 3 are selected. Quantity of transportation and amount of lost sales are
presented in Table 8 to Table 11.
Table 8 Quantity of product transported from factory to selected DCs
J1 J2 J3 J4
2,305 0 0 180
K1 K2 K3 K4 K5 K6
J1 0 700 800 700 105 0
J4 300 0 0 0 0 200
J1 J2 J3 J4
400 0 0 180
K1 K2 K3 K4 K5 K6
0 0 0 0 495 0
5 Computational experiments
This section gives computational experiments on the performance of the proposed model
and HGA. This algorithm is coded in MATLAB 7 and executed on a PC including two
Intel® CoreTM2 and 2 GB RAM.
Table 12 Parameters of considered problem in experiments
The parameters of the problems in ten different classes are given in Table 11. The
problems are described by providing the number of customers (|K|), the number of
candidate DCs (|J|), the number of capacity levels available to potential DCs (|R|), and the
number of capacity levels available to the factory (|F|). Each class of problems contains
20 randomly generated problem instances. To investigate the solution quality of the
HGA, the solution of each problem instance is obtained by GAMS. The last column of
Table 12 reports the average CPU times for the GAMS. As is seen in Figure 4, the
solutions of the first five problems are obtained in a short time by GAMS.
Figure 4 CPU time for each problem class (see online version for colours)
16000
14000
12000
10000
CPU Time
8000
6000
4000
2000
0
S1 S2 S3 S4 S5 S6 S7 S8 S9 S10
Problem class
% gap
Problem class
Average Maximum
S1 0.01 0.68
S2 0.84 2.38
S3 0.93 2.25
S4 1.23 2.73
S5 1.89 2.45
S6 2.97 3.86
S7 2.84 3.95
S8 3.23 4.35
S9 3.82 5.25
S10 3.88 5.43
Average 2.16 3.33
In Table 13, we have reported the summary of results for ten classes of problems with
20 instances in each class. As performance measures, we have used the average
percentage gap and maximum percentage gap between proposed HGA solution and the
14 H. Iranmanesh and A. Kazemi
solution obtained by GAMS. The gap is defined as 100 × (HGA solution value – GAMS
solution value)/GAMS solution value. When the HGA approaches are compared with
respect to average gap over all ten classes of the problems, it is seen that the HGA
exhibits the best performance with the average gap of 2.16%. As seen in Table 13, while
the maximum gap between the optimum solution and the HGA is less than 4%.
6 Conclusions
This paper studied three-layer supply chain network design consisting of a factory, DCs
and customers while integrating inventory management system. The problem is
formulated as a bi-objective MINLP model and solved using GAMS solver and proposed
HGA. The main contributions of the paper which are rarely considered in the literature
are:
1 bi-objective inventory location problem which considers customer service level as a
second objective
2 multiple sourcing is allowed at each supply chain layer
3 capacity planning in factory and DCs is considered
4 propose a HGA to design large size.
The ε-constraint method is used as solution approach to tackle the multi-objective
problem when using GAMS.
There are various directions of research for extending the current work. One possible
extension could be considering multiple products. Another extension could be relaxing
the assumption that lead times are negligible. Also the proposed algorithm to optimise the
model can be improved.
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