Tradeoffs between Customer Service and Cost in an Integrated Supply Chain Design Framework

In designing a supply chain, firms are often faced with the competing demands of improved customer service and reduced cost. We develop a model that incorporates fixed distribution center location costs, working and safety stock inventory costs at the distribution centers, fixed and variable transport costs from a plant to the distribution centers and delivery costs to customers. Service is measured by the fraction of all demands that are located within an exogenously specified service standard. The non-linear model simultaneously determines distribution center locations, the assignment of demands to distribution centers and the inventory policy at the distribution centers to optimize the cost and service objectives. We use the weighting method to find all supported points on the tradeoff curve. We also propose a heuristic solution approach based on genetic algorithms that can generate optimal or close-to-optimal solutions in a much shorter time comparing with the weighting method. Our results suggest that significant service improvements can be achieved relative to the minimum cost solution at a relatively incremental cost.