OPTIMAL DESIGN OF MULTI‐PRODUCT MULTI‐ECHELON INVENTORY SYSTEMS*

Large scale inventory distribution systems typically comprise a hierarchy of retail stores and warehouses. This paper presents a model for finding the optimal design of such systems. Given the maximum number of facilities under consideration and their locations, the problem is to determine which facilities to include in the system and which products to stock at each in order to minimize the cost of the system. Demand for the products may be deterministic or stochastic. To use the model it is necessary to know the optimal inventory policies for the multi-echelon systems under consideration; however, an important feature of this work is that any multi-echelon model may be used in tandem with this design model. Included is an example to illustrate the model and the two points which are the basis for its formulation: first, there is generally no single design which is best for all products; second, the design which is optimal for a given product is not necessarily the best design to use for that product when trying to minimize the cost of the entire system.