Sequential versus integrated optimization: Production, location, inventory control, and distribution

Traditionally, a typical approach towards supply chain planning has been the sequential one. By ignoring the links between decisions, this approach leads to each department of a company making its own decisions, regardless of what others are doing, and overlooking the synergy of a global strategy. However, companies have realized that significant improvements can occur by exploiting an integrated approach, where various decisions are simultaneously taken into consideration and jointly optimized. Motivated by a real case, in this paper we consider a production-distribution system that deals with location, production, inventory, and distribution decisions. The objective is to minimize total costs while satisfying demands within a delivery time window. To solve the problem sequentially, we exploit several commonly used procedures based on separately solving each part of the problem. The integrated problem is solved both by an exact method and a matheuristic approach. Our extensive computational experiments and analysis compare solution costs obtained from the two approaches, highlight the value of an integrated approach, and provide interesting managerial insights into the benefits of integration.