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CHAPTER 1

INTRODUCTION

A supply chain is a facilities and distribution options that performs the functions of

procurement of materials, transformation of these materials in to intermediate and finished

products, and the distribution of these finished products, and the distribution of these finished

products to customers.A supply network deals with distribution of goods/products from

source to customers. Supply chains exist in both service and manufacturing organizations,

although the complexity of the chain may vary greatly from industry to industry and firm to

firm. Traditionally, marketing, distribution, planning, manufacturing and the purchasing

organizations along the supply chain operated independently. These organizations have their

own objectives and these are often conflicting. The result of these factors is that there is not a

single, integrated plan for the organization. So clearly, there is a need for a mechanism

through which these different functions can be integrated together. Supply chain management

is a strategy through which such integration can be achieved.

Supply chain management is typically viewed to lie between fully integrated firms,

where the entire material flow is owned by a single firm, where each channel member

operates independently. Therefore coordination between the various players in the chain is

key in its effective management, which can be achieved by efficient location and routing

decisions.

1.1 DECISION PHASES IN A SUPPLY CHAIN

A Supply chain needs three phases to build. These phases are strategy or design

phase, planning phase, and operation phase.

(1) Supply chain strategy or design.

In this phase, we must consider how to structure the supply chain. Location, capacities

of production and warehousing facilities will be considered in this phase too.

(2) Supply chain planning

In this phase, companies define a set of operating policies that govern short-term

operations. They collect data and produce market and inventory level forecast. And they

decide whether they need subcontract some of manufacturing or not in this phase.

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(3) Supply chain operation

In this phase, companies make decisions regarding individual customer orders. Then,

they allocate individual orders to inventory or production. And they also manage shipments,

delivery and schedules of trucks.

Figure 1.1 Decision Phases in Supply chain Management

This study focuses on mathematical modeling of the problem by integrating the

strategic decision of locating warehouses and tactical decision of vehicle routing. This

integrated approach takes the advantages of integrating warehouses location, allocation of

customers to the warehouses and vehicle routing decisions, which was dealt separately in

conventional models.

1.2 WAREHOUSE

A warehouse is a commercial building for storage of goods. Warehouses are used by

manufacturers, importers, exporters, wholesalers,transport businesses, customs, etc. They are

usually large plain buildings in industrial areas of cities and towns and villages. They usually

have loading docks to load and unload goods from transportation facilities, the vehicles.

Warehouse allow transport optimization along the supply chain, and allow companies to

work with an optimal inventory regarding service quality. For example, at the terminal point

of a transport system it is necessary to stockpile produce until a full load can be transported.

Warehouses can also be used to store the unloaded goods from the vessel.

Strategic

level

Tactical level

Operational level

Long term

decisions

Medium term

decisions

Daily operations

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1.2.1 Importance of Warehousing Location

To support the companys customer policy.

To maintain a source of supply without interruptions.

To achieve transport economies.

To provide timely deliveries for the customers.

To ensure least logistics cost for the desired level of customer service.

1.2.2 Warehousing Strategy

The very first strategy is concerned with deciding the number of warehouses that

needs to be employed.

The second one is to identify the type of the warehouse.

This project deals with the very first strategy of locating the warehouse by considering the

cost incurred as our major criteria.

1.2.3 Need for Warehouse Location Model

Warehouse location is another typical integer-programming problem. Each possible

warehouse has a fixed maintenance cost and a maximum capacity specifying how many

stores it can support. In addition, each store can be supplied by only one warehouse and the

supply cost to the store differs according to the warehouse selected. Locating these facilities

is crucial for companies. These locations will determine what distance will be covered to

arrive to the client. Consequently they will determine load transporting costs. In some cases

when there are thousands of clients these costs can be very high, but if facilities are well

located those costs can be reduced.

1.3 VEHICLE ROUTING PROBLEM

The challenging strategy in the field of supply chain management and logistics

industry is to optimize the product delivery from suppliers to customers thus satisfying

constraints. Such problems are known as Vehicle Routing Problems (VRP), in which the

vehicles leave the depot, serve customers assigned and upon completion of their routes return

to the depot. The classical vehicle routing problem (VRP) aims to find a set of routes at a

minimal cost ( finding the shortest path, minimizing the number of vehicles, etc.) beginning

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and ending the route at the depot, so that the known demand of all nodes are fulfilled. Each

node is visited only once, by only one vehicle, and each vehicle has a limited capacity. Some

formulations also present constraints on the maximum travelling time. The VRPSD is a

variation of the classical VRP, where each customer can be served by more than one vehicle.

Thus, for the VRPSD, besides the delivery routes, the amount to be delivered to each

customer in each vehicle must also be determined. The option of splitting a demand makes it

possible to service a customer whose demand exceeds the vehicle capacity. Splitting may also

allow decreasing costs. The vehicle routing problem with time windows and split deliveries

(VRPTWSD) is an extension of the VRPSD, adding to it the time window restraints. The

VRPTWSD is NP-hard, since it is a combination of the vehicle routing problem with time

windows (VRPTW) and the vehicle routing problem with split delivery (VRPSD), and that

makes a strong point for applying heuristics and meta-heuristic in order to solve the problem.

1.4 COMBINED WAREHOUSE LOCATION AND ROUTING MODEL

The phrase location-routing problem is misleading, as location-routing is not a

single well-defined problem like the Weber problem or the travelling salesman problem. It

can be thought of as a set of problems within location theory. However, it is preferable to

think of the LRP (Location Routing Problem) as an approach to modelling and solving

location problems. Location/routing problems are essentially strategic decisions concerning

facility location, our aim is to solve a facility location problem (the master problem), but

in order to achieve this we simultaneously need to solve a vehicle routing problem (the

subproblem). Location-routing problems are clearly related to both the classical location

problem and the vehicle routing problem. In fact, both of the latter problems can be viewed as

special cases of the LRP. If we require all customers to be directly linked to a depot, the LRP

becomes a standard location problem. If on the other hand, the depot locations are fixed, the

LRP reduces to a VRP.

From a practical viewpoint, location-routing forms part of distribution management, while

from a mathematical point of view, it can usually be modelled as a combinatorial

optimisation problem.

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1.5 APPLICATIONS OF LOCATION-ROUTING

Operational Research is primarily an applications-oriented discipline. Therefore, we

thought it important to highlight practical applications of location-routing. It also shows the

size of the largest instances solved, in terms of the number of potential facilities and number

of customers. Practical problems with hundreds of possible depot locations and thousands of

customers can be solved. Most of the paper focuses on distribution of consumer goods or

parcels, there are also some applications in health, military and communications. Operational

Research is all too often applied only in the affluent countries of Western Europe and North

America, thus it is pleasing to see that LRP has also been applied in developing countries.

Application-oriented papers account for about a fifth of the LRP literature. The above

observations show that LRP is really applicable in practice and is not just a purely academic

construct.

1.6 PROBLEM OBJECTIVE

To propose an integrated approach, for solving the warehouse location and routing

problem under the distribution and transportation system of a supply chain. Upon solving the

integrated warehouse location and routing problem, the decisions regarding the installation of

warehouse at potential sites, allocation of customer demand points to the warehouse installed

at the potential sites available, the vehicle routings for vehicles that provide shipment from

the warehouse to its customer demand points allotted can be made from the solutions

obtained from the proposed model. The objective of the proposed model is to minimize the

total cost incurred in installing and operating the warehouses for stocking products and

vehicles for transporting the products from the warehouses to the customer demand points.

The main goal of the following work is to give a MILP model for the integrated warehouse

location routing problem so that it can be solved using exact methods. As it is a NP-hard

problem, exact heuristics will yield optimal results only up to a certain level, so we also aim

to propose heuristics for higher complexity (larger number of customers).

1.7 ORGANISATION OF THE PROJECT REPORT

This report is organised in the following manner. The literature survey and the

research findings are presented in chapter 2. Chapter 3 gives the problem description and the

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mathematical model formulation. Chapter 4 discusses the development of exact and heuristic

method for solving the integrated location and routing problem. Chapter 5 presents the

conclusion and future scope.