Extending the Inventory Routing Problem to Support Integrated Decision‐Making in an Urban Distribution Network

ABSTRACT Two‐echelon distribution systems with an intermediate urban consolidation centre are one of the key innovations proposed in city logistics. We focus on a business‐to‐business context in which urban retailers are delivered by suppliers via such a city hub. Specifically, we investigate the benefits of simultaneously optimising routing decisions from the Urban Consolidation Center and inventory decisions at the retailers. For this, we extend the classical Inventory Routing Problem (IRP) to an urban setting, considering complexities like time windows, heterogeneous vehicles, and multiple trips per vehicle per day. We propose a two‐phase matheuristic solution algorithm, and compare its results to a baseline approach in which inventory and routing decisions are made sequentially. Computational results demonstrate that the integrated approach consistently outperforms the traditional sequential approach. A detailed analysis of instance characteristics influencing the outcome of these scenarios highlights the impact of variables such as the number of retailers and suppliers, and holding costs. A sensitivity analysis identifies critical factors affecting the implementation of the integrated scenario, emphasising the importance of retailer storage capacity, order costs, and retailer participation. The findings highlight the overall potential benefits of integration, including cost savings, improved resource utilisation, and positive impacts on all stakeholders involved.