The impact of inventory holding costs on the strategic design of supply chains

Authors

DOI:

https://doi.org/10.17533/udea.redin.20200692

Keywords:

Network analysis, inventories, optimization, simulation models

Abstract


The explicit consideration of inventory holding costs for the strategic design of supply chains has not been sufficiently addressed in scientific literature. A possible cause is that usually supply chain optimization models are deterministic and linear or mixed-integer linear, while forecasting methods and inventory control systems are stochastic and non-linear. It is clear, however, that inventory costs might have a significant impact on optimal supply chain configuration and on distribution systems expansion or contraction. This article presents a practical strategy that considers an item-by-item inventory control system by means of a Monte Carlo simulation model as a starting point to include inventory holding costs in a supply chain optimization model. Three strategies to include inventory costs in the objective function were analyzed: The Square Root Law (SRL), the potential functions that relate average inventory with warehouse throughput, and the estimation of average inventories by simulation. The results suggest that the SRL should not be used unless unusual assumptions hold and that potential functions are a very good approximation to consider inventory costs for supply chain configuration. 

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Author Biographies

Liliana Bolaños Zúñiga, Gobernación del Meta

Industrial Engineer, M.Sc. Candidate

Carlos Julio Vidal Holguin, Universidad del Valle

Professor, School Indistrial Engineering

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Published

2020-06-18

How to Cite

Bolaños Zúñiga, L., & Vidal Holguin, C. J. (2020). The impact of inventory holding costs on the strategic design of supply chains. Revista Facultad De Ingeniería Universidad De Antioquia, (101), 45–54. https://doi.org/10.17533/udea.redin.20200692