Research Reports from the Department of Operations
Document Type
Report
Publication Date
11-1-1984
Abstract
DISPLAN is a large-scale computer model used for the strategic planning of physical supply and distribution networks. This planning may involve determining the number, size, and location of plants, warehouses, inventories, terminals, and similar facilities. Although several mathematical models address this problem, a unique feature of DISPLAN is its handling of nonlinear inventory costs. The proper economic analysis of network designs requires balancing all relevant costs to achieve the minimum cost configuration of facilities. These costs include facility inbound and outbound transportation costs, facility fixed costs, warehouse storage and handling costs, order processing costs, and inventory carrying costs. Accurately describing these costs is crucial since they are a significant factor in determining the number of facilities in a network. Many solution methods overlook inventory carrying costs or treat them as a linear function of the number of facilities in the network. However, if a company's inventory policy is based on the concept of the economic order quantity, the relationship between the number of facilities and the total inventory in the network is nonlinear, commonly referred to as the inventory consolidation effect. An inaccurate representation of this effect through linear approximation can lead to an incorrect number of facilities in the network. The methodology of DISPLAN is a heuristic procedure that uses a 3-dimensional transportation algorithm of linear programming in an iterative fashion to converge on the minimum-cost network configuration, subject to facility capacity and customer service constraints. Warehouse fixed costs and inventory costs are recomputed on a per-unit basis after each iteration, once the warehouse throughput has been established. These per-unit costs are then added to the per-unit transportation, handling, and order processing costs of the linear programming algorithm. The revised problem is re-solved, and the process is repeated until the optimal number, location, and size of warehouses are determined. Because of the nonlinear inventory cost curve, the procedure may terminate at a local optimum on the total cost curve. The stopping rule, which ends the procedure when the change in total costs between successive iterations is less than a given percentage, is not absolute. Additional iterations may be computed to help ensure that the global optimum is achieved. Finally, a reconsideration routine is included in the computational procedure for cases where fixed costs are a high proportion of total costs. The main heuristic may leave too many warehouses in the network, and this routine explores a reduced number of warehouses to ensure that a substantial cost-saving opportunity is not overlooked. The DISPLAN methodology has been applied to many network configuration problems in a variety of industries, including retailing, manufacturing, and spare parts distribution. The method has demonstrated modest computer running times that scale linearly with problem size.
Keywords
Operations research, Supply chain management, Business logistics--Planning, Inventory control--Mathematical models, Industrial management, Heuristic algorithms
Publication Title
Journal of Operations Management, vol. 5 no. 1 November 1984 ; Technical Memorandums from the Department of Operations, School of Management, Case Western Reserve University
Issue
Technical memorandum no. 483
Rights
This work is in the public domain and may be freely downloaded for personal or academic use
Recommended Citation
Ballou, Ronald H., "DISPLAN: A Multiproduct Plant/Warehouse Location Model with Nonlinear Inventory Costs" (1984). Research Reports from the Department of Operations. 155.
https://commons.case.edu/wsom-ops-reports/155