Supply Chain Network Design with the Presence of the Bullwhip Effect

Supply chain network design (SCND) is a systematic approach to determining the location and capacity of facilities (suppliers, production plants, and warehouses) within the supply chain, deciding how to source demand through the network, selecting transportation modes, and deploying inventory at various stocking points. Although the SCND literature is growing, most studies tend to oversimplify the persisting self-centered approach observed in many supply chains. One notable simplification is neglecting the bullwhip effect's presence within the supply chain network. Given that the bullwhip effect influences the inventory levels maintained within a supply chain and the interdependent nature of inventory and network structure, disregarding the bullwhip effect can lead to suboptimal network designs. In this study, we integrate facility location-allocation and inventory control decisions, accounting for the amplifying replenishment order variabilities as they move up the supply chain. Since embedding the bullwhip effect increases the complexity of the optimization problem, we employ linearization and approximation techniques in our solution approach. Through a numerical experiment, we assess how the bullwhip effect influences network design, considering various design parameters. Additionally, through a simulation study, we explore how incorporating the bullwhip effect may affect the resilience of a supply chain network when facing supply disruptions.