Location-allocation modelling with inventory and transportation decisions: A case study of Indonesian petroleum gas distribution

Purpose: Between 2008 and 2010 the demand for liquefied petroleum gas (LPG) in Indonesia has almost doubled from 2.6 million metric tonnes to 5.5 million metric tonnes (Potens and Partners, 2011). Pertamina Inc., a state-owned oil and gas company, is the largest oil refinery and liquefied petroleum gas (LPG) distribution organisation in Indonesia. The company's annual reports suggest that on an average it produces 0.4 million metric tonnes (annually) higher than the actual demand (Pertamina, 2007). In spite of surplus production, shortage still occurs at the consumers' end. For example, the Indonesian Government reported that in 2008 and 2009 the level of LPG stocks in the distribution channels were at a critical level which lead to the increase of price by 10 - 30 per cent of the 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 efficient LPG distribution systems taking into account inventory and transportation decisions which will improve the customer service and minimise the overall distribution cost.