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Discrete Optimization
c,*
IIM Calcutta, D.H. Road, Joka P.O., Kolkata 700 104, India
IIM Bangalore, Bannerghatta Road, Bangalore 560 076, India
Prairie View A&M University, Prairie View, TX 77446-0638, USA
b
Abstract
The central sales tax (CST) in India results in a dierential sales tax structure. This contributes signicantly to
distribution network decisions that build logistics ineciencies in rms operating in India. In this paper, we develop a
model for determining distribution centres (DCs) locations considering the impact of CST. A non-linear mixed integerprogramming problem that is formulated initially is approximated to a mixed integer-programming problem. Using a
numeric example, the eect of CST rates and product variety on DC locations is studied and found to be having impact.
It is felt that the Indian Government proposal to switch over from the present sales tax regime to value added tax (VAT)
regime would signicantly contribute to reducing the logistics ineciencies of Indian rms.
2003 Published by Elsevier B.V.
Keywords: Distribution centres; Location; India; Logistics management; Non-linear mixed integer programming; Taris
1. Introduction
The increase in competition and the swings in
the economy in the last few years are compelling
rms to cut costs and improve customer service.
With induction of technology and best manufacturing practices in the last few years, the scope for
improving eciency within the factory premises
*
192
193
194
Minimize
TCA
2
4 yk F z
X
X s
hi 1 lk
yjk r2ij
i
(
lk
ujk
hi lij dk djk
)
ti lij yjk 5
si lij
Subject to
yk yjk P 0 8j; k;
X
yjk 1 8j;
2
3
4
q
P
P P
P
The terms F k yk , z i hi k 1 lk j yjk r2ij ,
P P
P P
P P P
P
i hi
k lk
j yjk lij ,
i si
k dk
j yjk lij ,
i si
j
P P P
P
d
y
l
and
t
y
l
in
the
objeck jk jk ij
i i
k
j6k jk ij
tive function, denoted by (1), respectively describe
the DC xed, average safety stock inventory,
average transit inventory, average transport,
average extra transport and average additional
sales tax costs per period. The constraint denoted
by (4) indicates that all the variables in the
model are binary variables. The constraint denoted by (2) indicates that yjk can take value of 1
only if yk is equal to 1. The constraint denoted by
(3) indicates that only one DC serves a demand
point.
This formulation is a non-linear mixed integerprogramming problem (NLMIP) owing to the
average safety stock inventory cost term in the
objective function. As there are n demand points
and as the optimal number of DCs could vary
from 1 to n, it can be seen that subject to constraints denotedP
by (2) and (3), the problem is one
n
n
of evaluating
combinations of yjk .
r1 nCr r
Hence, as n increases the number of combinations
of yjk to be evaluated increases exponentially.
Thus, the NLMIP formulation is analytically
complex to solve for a large value of n.
Decision variables
yk
1, if a DC is located at demand point k; 0,
otherwise;
yjk
1, if demand point j is served by DC k; 0,
otherwise.
yk ; yjk 2 0; 1:
195
Subject to
yk yjk P 0 8j; k;
X
yjk 1 8j;
6
7
"(
)
p X
F z 1 lk
hi rik yk
(
z
p X X
1 lk
hi
cjk rij
lk
hi lij dk djk
ujk
X
i
)
ti lij yjk
si lij
yk ; yjk 2 0; 1:
3. Findings
AMIP as proposed in Section 2 is validated by a
numeric example in this section. In addition, we
also attempt to understand the impact of the important parameters on the DC location decision
through a series of sensitivity analyses using realistic parameter values. The example is based on the
data provided by a consumer durables manufacturer of India. Although, this rm has a national
presence, only the northern region data is used for
simplicity in presentation of results. In this example, the period is considered to be a week.
In the northern region, the rm presently markets 47 products through six demand points
Delhi, Kanpur, Jullunder, Jaipur, Faridabad and
Dehra Dun. Each of these demand points belongs
to dierent states and union territories. For these
six demand points, j 1; . . . ; 6,P
it is observed that
the total sales in value terms
i Vi lij as well as
summations of weekly
demand
standard deviaP
tions in value terms i Vi rij are respectively in the
proportion 0.40:0.16:0.16:0.16:0.08:0.04, where Vi
is the cost of product i. The DCs that serve these
demand points are served by a Central Warehouse
located at Bangalore in South India. In reality, the
xed cost per period of installing (apportioned)
and operating a DC (F ), the inventory service level
considered for all DCs (z), the inventory carrying
rate per week and unit cost of transportation per
kilometre for each product for this rm are respectively 2500 Indian Rupees per week, 95%,
196
Table 1
Demand point specic data
dk (km)
lk (week)
Delhi
Kanpur
Jullunder
Jaipur
Faridabad
Dehra Dun
2050
1
1855
1
2415
1
2000
1
2020
1
2240
1
Delhi
Kanpur
Jullunder
Jaipur
Faridabad
Dehra Dun
0
480
375
260
30
235
480
0
855
520
450
575
375
855
0
635
405
365
260
520
635
0
290
495
30
450
405
290
0
260
235
575
365
495
260
0
Delhi
Kanpur
Jullunder
Jaipur
Faridabad
Dehra Dun
0
1
1
1
1
1
1
0
1
1
1
1
1
1
0
1
1
1
1
1
1
0
1
1
1
1
1
1
0
1
1
1
1
1
1
0
Table 2
Distances matrix (djk values in km)
Delhi
Kanpur
Jullunder
Jaipur
Faridabad
Dehra Dun
Table 3
CST applicability matrix (ujk values)
Delhi
Kanpur
Jullunder
Jaipur
Faridabad
Dehra Dun
Table 4
Additional safety stock inventory proportionality matrix (cjk values)
Demand point j
1
2
3
4
5
6
DC k
Delhi
Kanpur
Jullunder
Jaipur
Faridabad
Dehra Dun
0.000
0.158
0.158
0.158
0.158
0.158
0.399
0.000
0.399
0.399
0.399
0.399
0.399
0.399
0.000
0.399
0.399
0.399
0.399
0.399
0.399
0.000
0.399
0.399
0.451
0.451
0.451
0.451
0.000
0.451
0.474
0.474
0.474
0.474
0.474
0.000
197
Using simulation we carryout separate sensitivity analyses of dierent parameters with the
CST rate. For each sensitivity analysis, only one
parameter is varied at a time, keeping the other
parameters at a central level. The levels used for
each parameter were such that the range covered a
wide variety of industries. The parameter values
for the rm in the numeric example are used as the
central levels for the parameters that were being
considered in the sensitivity analyses. For each
simulation, the optimal solutions (least total cost
per week and optimal number of DCs) are determined for both NLMIP (using our software code)
and AMIP (using GAMS 2.25). The results are
as shown in Tables 610.
The dierent parameters considered for sensitivity analysis with respect to CST rate are DC
xed cost (Table 6), DC service level (Table 7),
unit transportation cost per km (Table 8), product
variety (Table 9) and demand distribution among
the demand points (Table 10). The results in Tables 610 are represented graphically in Fig. 1ad
(sensitivity of total cost per week) and Fig. 2ad
(sensitivity of number of DCs).
Referring to Fig. 1ad, the total cost per week
increases with increase in parameter value for all
four parameters. It is also seen that for a particular
parameter value, in all four gures, the cost increases as the CST rate increases from 0% to 4%.
Except one simulation (F 4000 in Table 6), the
Table 5
Optimal solutions for the real-life situation
Case
t (%)
3
4
4
10
2
2
2
4
3
3
4
4
5
5
TCB
Error
(%)
134,918
134,918
146,408
146,514
0.07
152,507
152,507
152,507
152,507
1, 2, 3,
4, 5, 6
1, 3, 5,
6
1
1
TCA
6
6
Demand points served are described by numbers with 1, 2, 3, 4, 5 and 6 respectively indicating Delhi, Kanpur, Jullunder, Jaipur,
Faridabad and Dehra Dun.
TCA : least total cost per week as per NLMIP (Formulation A).
TCB : least total cost per week as per AMIP (Formulation B).
Error: jTCA TCB j=TCA .
All cost gures are in Indian Rupees.
198
Table 6
CST (t)DC xed cost
Case
1
2
3
4
5
6
7
8
9
10
11
12
t (%)
0
0
0
1
1
1
4
4
4
10
10
10
AMIP
NLMIP
Error (%)
No. of DCs
TCB
No. of DCs
TCA
1000
2500
4000
1000
2500
4000
1000
2500
4000
1000
2500
4000
2
1
1
3
3
2
6
6
5
6
6
6
133,121
134,918
136,418
142,014
146,514
150,121
143,507
152,507
160,754
143,507
152,507
161,507
2
1
1
3
3
2
6
6
5
6
6
6
133,088
134,918
136,418
141,908
146,408
150,088
143,507
152,507
160,646
143,507
152,507
161,507
z (%)
AMIP
0.02
0.00
0.00
0.07
0.07
0.02
0.00
0.00
0.07
0.00
0.00
0.00
Table 7
CST (t)DC service level
Case
1
2
3
4
5
6
7
8
9
10
11
12
t (%)
0
0
0
1
1
1
4
4
4
10
10
10
90.0
95.0
97.7
90.0
95.0
97.7
90.0
95.0
97.7
90.0
95.0
97.7
NLMIP
Error (%)
No. of DCs
TCB
No. of DCs
TCA
1
1
1
3
3
2
6
6
6
6
6
6
132,169
134,918
137,591
142,269
146,514
150,522
146,952
152,507
157,910
146,952
152,507
157,910
1
1
1
3
3
2
6
6
6
6
6
6
132,169
134,918
137,591
142,186
146,408
150,482
146,952
152,507
157,910
146,952
152,507
157,910
0.00
0.00
0.00
0.06
0.07
0.03
0.00
0.00
0.00
0.00
0.00
0.00
199
Table 8
CST (t)DC unit transportation cost (per km)
Case
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
t (%)
0
0
0
0
1
1
1
1
4
4
4
4
10
10
10
10
s (%)
AMIP
NLMIP
Error (%)
No. of DCs
TCB
No. of DCs
TCA
0.001
0.002
0.003
0.004
0.001
0.002
0.003
0.004
0.001
0.002
0.003
0.004
0.001
0.002
0.003
0.004
1
1
2
2
2
3
3
3
6
6
6
6
6
6
6
6
79,278
134,918
189,426
242,731
93,816
146,514
198,579
250,644
100,647
152,507
204,367
256,227
100,647
152,507
204,367
256,227
1
1
2
2
2
3
3
3
6
6
6
6
6
6
6
6
79,278
134,918
189,393
242,698
93,783
146,408
198,473
250,538
100,647
152,507
204,367
256,227
100,647
152,507
204,367
256,227
AMIP
0.00
0.00
0.02
0.01
0.04
0.07
0.05
0.04
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Table 9
CST (t)product variety
Case
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
t (%)
0
0
0
0
1
1
1
1
4
4
4
4
10
10
10
10
10
47
70
100
10
47
70
100
10
47
70
100
10
47
70
100
NLMIP
Error (%)
No. of DCs
TCB
No. of DCs
TCA
1
1
1
1
3
3
2
2
6
6
6
6
6
6
6
6
132,602
134,918
137,637
142,673
142,936
146,514
150,581
156,988
147,826
152,507
158,004
168,182
147,826
152,507
158,004
168,182
1
1
1
1
3
3
2
2
6
6
6
6
6
6
6
6
132,602
134,918
137,637
142,673
142,850
146,408
150,541
156,935
147,826
152,507
158,004
168,182
147,826
152,507
158,004
168,182
0.00
0.00
0.00
0.00
0.06
0.07
0.03
0.03
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
200
Table 10
CST (t)demand distribution across demand points
Case
1
2
3
4
5
6
7
8
t (%)
0
0
1
1
4
4
10
10
Demand
distribution
AMIP
No. of DCs
TCB
No. of DCs
NLMIP
TCA
Error (%)
Varied
Equal
Varied
Equal
Varied
Equal
Varied
Equal
1
1
3
3
6
6
6
6
134,918
134,430
146,514
151,233
152,507
153,621
152,507
153,621
1
1
3
3
6
6
6
6
134,918
134,430
146,408
150,691
152,507
153,621
152,507
153,621
0.00
0.00
0.07
0.36
0.00
0.00
0.00
0.00
170000
150000
130000
0
1000
2000
3000
4000
5000
170000
150000
130000
85.0
(a)
t = 0%
t = 1%
t = 4%
90.0
95.0
100.0
DC Service Level %
(b)
t = 0%
t = 1%
t = 4%
t = 10%
170000
270000
220000
170000
120000
70000
0.000
0.001
0.002
0.003
0.004
t = 0%
t = 1%
t = 4%
130000
0
0.005
s%
(c)
150000
20
(d)
t = 10%
40
60
80
100
Product Variety
t = 0%
t = 1%
t = 4%
t = 10%
Fig. 1. (a) Sensitivity with xed cost; (b) sensitivity with service level; (c) sensitivity with unit transportation cost (per km); and
(d) sensitivity with product variety.
6
4
2
0
0
0
1000
2000
3000
4000
5000
85.0
90.0
t = 1%
t = 4%
(b)
t = 10%
6
4
2
0
0.000
95.0
100.0
DC Service Level %
Number of DCs
Number of DCs
(a)
t = 0%
t = 1%
t = 4%
t = 10%
6
4
2
0
0.001
0.002
0.003
0.004
0.005
10
20
30
t = 0%
t = 1%
40
50
60
70
80
90 100
Product Variety
s%
(c)
201
Number of DCs
Number of DCs
t = 4%
t = 10%
(d)
t = 0%
t = 1%
t = 4%
t = 10%
Fig. 2. (a) Sensitivity with xed cost; (b) sensitivity with service level; (c) sensitivity with unit transportation cost (per km); and
(d) sensitivity with product variety.
202
and the optimal number of DCs decreases or remains same. For CST of 4% and above, it is seen
that the high sales tax, incurred when a demand
point is served by a DC located in some other
demand point, becomes the dominant cost, which
forces a DC at all demand points.
203
X
i
si lij ujk
X
i
ti lij :
A:1
204
A:3
Vi lim :
A:5
It is obvious that dm2 has to be less than or equal
to the sum of d12 and dm1 . It can be seen that the
term (u12 um1 um2 ) is always greater than equal
to zero. When demand points 1, 2 and m are in
dierent states, u12 , um1 and um2 are equal to one.
Hence, u12 um1 um2 1. When demand
points 1 and 2 belong to one state and demand
point m to another state, u12 is equal to 0 while um1
and um2 are equal to one. Hence, u12 um1
um2 0. When demand points 1 and m belong
to one state and demand point 2 to another state,
um1 is equal to 0 while u12 and um2 are equal to
one. Hence, u12 um1 um2 0. When demand
points 2 and m belong to one state and demand
point 1 to another state, um2 is equal to 0 while
u12 and um1 are equal to one. Hence, u12
um1 um2 2. When demand points 1, 2 and m
are in same state, u12 , um1 and um2 are equal to zero.
Hence, u12 um1 um2 0. Thus, u12 um1
um2 is never less than 0. Combining (A.2) and
(A.5)
TCm1 TCm2 > 0
A:6
for j k:
References
[1] G. Raghuram, N. Rangaraj, Logistics and Supply Chain
Management: Cases and Concepts, Macmillan India Limited, 2000.
205