In this research We introduce a new distribution center (DC) location model that incorporates working inventory and safety stock inventory costs at the distribution centers. In addition, the model incorporates transport costs from the suppliers to the DCs that explicitly reflect economies of scale through the use of a fixed cost term.
The model was formulated as a non-linear integer-programming problem. The algorithms were tested on the problems with 15 retailers and 5 distribution centers. We uses SOLVER of Excel for modeling, solution and sensitivity analysis of the results.
Finally, the sensitivity of the results to changes in key parameters including the fixed cost of placing orders was discussed. Significant reductions in these costs might be expected from e-commerce technologies. The model suggests that as these costs decrease, it is optimal to locate additional facilities.