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ABSTRACTThis paper proposes models of Indonesian multi-echelon LPG distribution system by opening new facilities (new echelon) taking into account the current facilities and investigates the implications of the proposed models to distribution components such as transportation, inventory and shortage decisions. The objectives are to determine the optimum location and allocation of LPG facilities and investigate the relation between distribution costs such as transportation, inventory cost and location decisions in Indonesian multi-echelon LPG supply chain. Capacitated fixed-charged facility location-allocation problem is used to determine the optimal solution of the proposed model. The output of the optimal solutions reported that the costs associated to the proposed distribution are lower than the associated costs in the existing distribution system. It is noted that there is US$ 106.57 million saving per year of total cost by applying the proposed distribution system. In the sensitivity analysis, it is indicated that the trade-offs between facility locations and distribution costs are exist. Results report that as the number of facility increases, total transportation and inventory cost also increase.Keywords: Facility Location; Allocation; Inventory; Transportation.(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONIn 2007, the Indonesian government initiates a program called "Zero-Kero" that aims to remove all the subsidised energy used which was kerosene and convert it into Liquefied Petroleum Gas (LPG). It means that all energy use by households, commercials, and industries needs to be converted to LPG. This conversion program was caused by the increasing trend of oil worldwide that forced the government to spend more money to subsidise the domestics use of kerosene. For example, in 2006, the government spent more than US$2.51 billion on the annual subsidy for kerosene use (Pertamina 2007). This program was estimated to reduce the amount of subsidy to US$1.7 billion annually or US$0.81 million lower than subsidising the kerosene program (Budiarto 2009). LPG supply chain in Indonesia is divided into four echelons (Figure 1). In the Indonesian LPG network, PERTAMINA manages the LPG supply chain from the first echelon (refineries) to the fourth echelon (end-customers) of distribution system. It is also included the LPG transporters in each echelon, the storage facilities and the LPG stocks. As the conversion program was ruled, it is projected that, in early 2011, the LPG consumption reaches 4.1 million metric tonnes per year or, 42 million LPG cylinders will be demanded by LPG users to LPG distribution channels by the end of 2011 (Akbar 2008). The current Indonesian LPG distribution system indicates that there is LPG shortage and scarcity at the consumers' end despite there is an excessive LPG production. Pertamina ( 2007) reported that it produces 0.4 million metric tonnes (annually) of LPG higher than the actual demand, however, in fact the shortage and scarcity still occurs. For example, the Indonesian Government reported that in September 2008, January 2009 and January 2012, the level of LPG's stocks were in a critical level which increase the price of LPG by 10 - 30 per cent of normal price. Therefore, the current problem of satisfying demand with supply rests not on the level of production but on the efficient distribution system of LPG from the existing refineries to the end consumers. The purpose of this research is to develop and suggest efficientIn term of combining transportation and inventory decisions into location-allocation in multiechelon distribution system, prior research proved that these components need to be considered in modeling distribution fa is that there is high-dependency eamong facility location, inventory and transportation de spi,n1s9e8le9c,tNinogzficakcilaintyd lTocuartniqounissta,re20m0o1rae, sSihgennifiacnadn tQwi,h2e0n0t7h)e. sTtrhuectiumrpeloicfastiuopnpsl yofchthaiisn isnyvsotelvmem physical distributionare multi-echelon andmulti hierarchysystem. …

international journal of business and society

AN INVESTIGATION OF THE RELATIONSHIP BETWEEN FACILITY LOCATION DECISIONS, SERVICE LEVEL AND DISTRIBUTION COSTS: A PROPOSED MODEL FOR INDONESIAN LPG SUPPLY CHAIN