A two echelon location-routing model with considering Value-at-Risk measure

Abstract In this paper, we present a distribution network design problem in supply chain system which optimizes location, and routing decisions. We propose a two-stage supply chain model which involves determining simultaneously the best sites for the distribution centers and determining capacity for distribution centers and the best strategy for distributing the product from the suppliers to the distribution centers and from distribution centers to the customers and the routes of the vehicles. Each customer’s demand is uncertain and follows a normal distribution. For the first time in the location-routing problem, we introduce a new solution methodology that adopts from the finance literature, to optimize the Value-at-Risk (VaR) measure in our problem. A heuristic method is developed for solving the problem. The heuristic method is decomposed into two phases: distribution center location-allocation phase, and routing phase. First of all, an initial solution is determined, then a Tabu search algorithm is used to improve the initial solution for each phase separately and alternatively.