On the effect of inventory policies on distribution network design with several demand classes

Abstract

This paper studies the effect of several inventory policies on the design of a distribution network for fast-moving items able to provide differentiated service levels in terms of product availability for several demand classes. We consider the distribution network design problem when the global round-up, single class allocation, local separate stock, local round-up, and critical level inventory policies are used. We show how to formulate these problems as conic quadratic mixed-integer problems and prove that the critical level policy provides the lowest cost distribution network design. Further results and a computational study show how these different models compare in practice.