An integrated location–transportation problem under value-added tax issues in pharmaceutical distribution planning

This paper focuses on a medium-term distribution plan for a pharmaceutical network, considering distribution center (DC) location and transportation decisions. The problem is characterized by low DC opening costs due to outsourced warehousing services. Therefore, transportation costs have a higher impact on location decisions and should be carefully evaluated. In addition, medicines vary widely in sales price and volume, demand behavior, and physical characteristics, which affects the distribution planning. This paper proposes a multi-product, multi-period, and multi-modal mathematical model integrating network design and distribution planning decisions, such as product flow, transportation modes, type of freight shipping, fleet sizing, and escorting services for high-value cargo. The mathematical formulation takes into consideration realistic features such as value-added tax, whose rate varies among locations. A Local Branching matheuristic taking advantage of the hierarchical problem structure is introduced. The result of tests using real-life data demonstrate the model’s effectiveness to support the trade-off between the location and transportation problem, corroborating the relevance of making these decisions simultaneously. A comparison of the results with a company shows opportunities to reduce overall logistics costs plus the total amount of chargeable taxes. Regarding computational running times, the proposed matheuristic outperformed CPLEX in 75% of instances. •Focus on the medium-term distribution planning for multiple high-value products.•A location–transportation problem considering value-added tax issues is addressed.•We deal with issues such as freight types, cargo insurance, and escorting decisions.•The study was motivated by a real case of a global pharmaceutical company in Brazil.•The problem is solved using a Local Branching based heuristic.