Warehouse location with production, inventory, and distribution decisions: a case study in the lube oil industry

In this paper, a supply chain management problem from a real case study is modeled and solved. A company in Pakistan wanted to outsource part of its warehousing activity to a third party logistics (3PL) provider. Consequently, the company had to decide on where to rent space in the 3PL warehouses. Knowing that such a strategic decision is affected by tactical and operational decisions, the problem is presented as a facility location problem integrating production, inventory, and distribution decisions. The problem is formulated as a mixed integer linear programming model which minimizes the total cost composed of location, distribution, production, and inventory costs. Several constraints specific to the situation and policy of the company were considered. A thorough analysis was done on the results obtained with respect to formulation efficiency, sensitivity analysis, and distribution of costs. In addition to the solution of the company problem, a set of 1215 problem instances was generated by varying five types of relevant costs in a full factorial manner. The solution of the generated problems always suggests to open in the same two locations and the integrality gaps averaged 0.062 % with a maximum of 0.102 %. On average, the major components of the total cost are production cost (96.6 %), transportation costs (2.7 %), and inventory holding costs (0.38 %). The total warehouse opening cost accounted for less than 0.05 % of the total costs.