Design of Robust Distribution Networks Run by fourth Party Logistics Service Providers

We consider a fourth party logistics service provider (LSP), who faces the problem of distributing different products from suppliers to consumers having no control on supply and demand. In a fourth party set-up, the operations of transport and storage are run as a black box for a fixed price. Within certain boundaries with respect to variability in supply and demand, the LSP is bound to meet certain performance thresholds as determined in a Service Level Agreement (SLA). In this case, the incentive for an LSP is to reduce its operational costs, within the limits set by the SLA. The objective is to find an efficient network topology on a tactical level, which still satisfies the service level agreements on the operational level. We develop an optimization method, which constructs a tactical network topology based on the operational decisions resulting from a given MPC policy. Experiments suggest that such a topology typically requires only a small fraction of all possible links. As expected, the found topology is sensitive to changes in supply and demand averages. Interestingly, the found topology appears to be robust to changes in second order moments of supply and demand distributions.