European Journal of Operational Research76 (1994)387-392 387

North-Holland

Application of facility location modeling

constructs to vendor selection problems
John Current a,* Charles Weber b
a Faculty of Management Science, College of Business, The Ohio State University, Columbus,
OH 43210, USA
b Institute for Defense Analyses, 1801 N. Beauregard St., Alexandria, VA 22311, USA

Received February 1991

Abstract: The selection of vendors, and the determination of order quantities to be placed with those
vendors are important decisions in distribution planning. To date, there have been few mathematical
programming approaches to analyze such decisions. In this paper, we demonstrate that vendor selection
problems may be formulated within the mathematical constructs of facility location modeling. As a
consequence, it is expected that the extensive literature devoted to formulating and solving facility
location problems may be utilized in formulating and solving specific vendor selection problems.

Keywords: Vendor selection; Location modeling

I. I n t r o d u c t i o n of this total. Over 80% of the manufacturing

The selection of vendors, and the determina-
tion of order quantities to be placed with those
vendors are important decisions in distribution
planning. These decisions (henceforth referred to
as the vendor selection problem) may have signif-
icant impact on the competitiveness of a firm, as
purchases from vendors account for a large per-
centage of total costs for many firms. For exam-
ple, the cost of components and parts purchased
from outside vendors may total more than 50% of
sales for large automotive manufacturers and
purchased material and services represent up to
80% of total product costs for high technology
firms (Burton, 1988). Total purchases of services
and goods from all industries totalled approxi-
mately $4.211 trillion in 1982. The manufacturing
sector accounted for approximately $1.2 trillion
* Corresponding author.
sector's purchases were for materials and sup-
plies (Heberling, 1990).
A recent review of vendor selection criteria
and methods (Weber et al., 1991) identified only
10 articles which have proposed mathematical
programming techniques to analyze vendor selec-
tion decisions. This is somewhat surprising, given
the complexity and financial importance of such
decisions. In this article, we demonstrate that
vendor selection problems may be formulated
within the constructs of facility location models.
Vendor selection problems are application spe-
cific with the actual mathematical formulation of
a specific problem highly dependent upon the
particulars of the problem at hand. Consequently,
we do not attempt to formulate and 'solve' a
general vendor selection problem per se. Rather,
our intention is to demonstrate the similarities
between vendor selection problems and facility
location problems. As a consequence, it is ex-

0377-2217/94/$07.00 © 1994 - Elsevier ScienceB.V. All rights reserved

SSDI 0377-2217(94)00026-9
388 J. Current, Ch. Weber / Modeling constructs to vendor selection problems
pected that vendor selection analysts will be able
to draw upon the extensive literature that exists
for formulating and solving facility location prob-
lems when analyzing their vendor selection prob-
lems.
The facility location literature is extensive. A
recent bibliography on location analysis includes
approximately 1500 titles (Domschke and Drexl,
1985) and at least twelve survey articles (Aikens,
1985; Brandeau and Chiu, 1989; Current et al.,
1990; Erkut and Neuman, 1989; Francis et al.,
1983; Krarup and Pruzan, 1979, 1983; Leonardi,
1981; ReVelle et al., 1983; Scott, 1970; Tansel et
al., 1983a,b) have been published on the topic.
Continued interest in location modeling is evi-
dent with the recent publication of six books on
the topic (Ghosh and McLafferty, 1987; Ghosh
and Rushton, 1987; Berry and Parr, 1988; Love et
al., 1988; Hurter and Martinich, 1989, Louveaux
et aI., 1989). This literature not only formulates
models for general and specific problems, but
also develops efficient techniques for solving
them. This latter effort is necessary due to the
fact that most of these problems belong to the
class of problems known as NP-complete (Garey
and Johnson, 1979).
The advantages to be gained by utilizing the
developments presented in this literature have
led researchers in other non-facility related areas
to formulate their problems within the constructs
of facility location models. Applications of facility
location models to non-facility problems include:
positioning of political party platforms (Ginsberg
et al., 1987); metallurgical grade assignment
(Vasco et al., 1989); ingot size selection (Vasco et
al., 1988); medical diagnosis (Reggia et al., 1983);
data base managment (Pirkul, 1986); archaelogi-
cal settlement analysis (Bell and Church, 1985);
apparel sizing (Tryfos, 1986); production lot siz-
ing (Van Oudheusden and Singh, 1988); and flex-
ible manufacturing system tool selection (Daskin
et al., 1990).
To demonstrate the applicability of facility lo-
cation models to vendor selection problems, we
concentrate on three of the most basic and stud-
ied facility location problems. In the next three
sections, we show how the Simple Plant Location
Problem (Balinski, 1965), the p-Median Location
Problem (Hakimi, 1965) and the Set Covering
Location Problem (Toregas and ReVelle, 1972)
may be viewed as vendor selection problems. In
addition, we discuss some of the extensions of
these basic models that may be relevent to vari-
ous vendor selection problems.
2. Simple Plant Location Problem
The Simple Plant Location Problem (SPLP)
(Balinski, 1965) may be formulated as follows:
[P1]
Minimize z = E EcijXij + EfjYj (1)
i j j
Subject to
~]X/j = 1 for all i ~ I, (2)
J
Xij<_~Yj forall i ~ I , j ~ J , (3)
Yj~(0,1) for a l l j ~ J , (4)
Xij>_O f o r a l l i ~ I , j ~ J , (5)
In the context of the vendor selection problem,
we define:
Xij = fraction of item i's demand purchased from
vendor j.
1 if vendor j is selected,
YJ = 0, otherwise.
Cij = Cost of purchasing all of item i from vendor
j.
I = The set of items to be purchased.
J = The set of potential vendors.
= The fixed costs associated with employing
vendor j.
The objective function, (1), minimizes the total
cost of purchasing the items. The first set of
terms represent the actual purchase costs of the
items and the second set of terms represent the
fixed costs associated with utilizing the vendors.
These fixed costs might include contract set-up
costs, expediting costs, internal processing costs,
or other costs which are independent of purchase
volume. Constraint set (2) ensures that the total
demand for each item will be satisfied. Constraint
set (3) requires that a vendor be employed before
a purchase order is placed with that vendor.
Constraint set (4) reflects the binary nature of
employing a vendor or not, and constraint set (5)
prohibits negative orders. Note, Xij is not de-
fined if vendor j cannot supply item i.
 J. Current, Ch. Weber / Modeling constructs to ventor selection problems
One major assumption of this formulation is
that the vendors are uncapacitated. That is, each
vendor is capable of supplying the entire demand
for each item. Obviously, this is not always true.
In facility location problems, the SPLP makes a
similar assumption. That is, each facility is as-
sumed to be able to service the entire demand.
To address possible limitations resulting from this
capacity assumption in facility location problems,
Davis and Ray (1969) formulated the capacitated
facility location problem. That model and various
modifications of it can be applied to vendor selec-
tion problems where the individual vendors have
capacity limitations.
Certainly, this formulation makes other as-
sumptions regarding the vendor selection prob-
lem. For example, it is assumed that the objective
of the purchasing manager is to minimize total
cost. As Weber et al. (1991) demonstrate, this is
only one objective in vendor selection problems.
As that article points out, an important objective
for firms employing a Just-In-Time manufactur-
ing strategy is to minimize late deliveries. If such
were the case, the objective function of [P1] could
be rewritten as
Minimize z = E Eaic;jXij + Ef~Y~
i j j the previous formulation.
where;
a/ = Quantity of item i to be ordered.
c'ij = % of orders of item i delivered late by
vendor j.
X/r, Y~, and fj are defined as before.
Other objectives could be modeled similarly by
redefining the parameters in the objective func-
tion. Again, the intention here is not to provide a
facility location analogue for every vendor selec-
tion problem but rather to demonstrate the po-
tential for applying facility location research to
vendor selection problems.
3. p-Median Location Problem
The SPLP formulation of the vendor selection
problem assumes that the distribution system
planner is indifferent to the number of vendors
employed. For various reasons (Weber, 1990),
this may not be the case. The p-Median Location
Problem (PMLP) (Hakimi, 1965) may be appro-
389
priate in situations where the specific number of
vendors to be employed is important. The PMLP
may be formulated as follows:
[P2]
Minimize z = • E aicijXij (6)
i j
subject to
~Xii=l for a l l i e I , (7)
J
Xij<YJ. forallieI, jeJ, (8)
EYj = p (9)
J
Yj ~ (0, 1) for all j ~ J , (10)
Xij ~ (0, 1) for all i ~ I , j ~ J, (11)
where p is the number of vendors to be employed
and all other variables, parameters and sets are
defined as before.
The binary restrictions on the X/Fvariables
(i.e., constraint set (11)) can be replaced with
X/j > O if individual items may be purchased
from more than one vendor as was assumed in
The objective function, (6), minimizes the total
cost of the items to be purchased. If there is a
fixed charge associated with employing a vendor,
as was assumed in [P1], then the terms EjfjYj
may be included in (6). Constraint sets (7), (8),
and (10) perform the same functions that con-
straint sets (2), (3) and (4) performed in [P1].
Constraint (9) ensures that exactly p vendors will
be employed. Again, the assumption is made that
the vendors are uncapacitated. Mulvey and Beck
(1984), for example, have demonstrated how this
assumption may be relaxed in the p-median prob-
lem. [P2] may be used to analyze the tradeoffs
between total cost and the number of vendors to
be selected by varying the value of p. Again, the
objective function coefficients may be defined
differently to accomodate other objectives.
4. Set Covering Location Problem
The Set Covering Location Problem (Toregas
and ReVelle, 1972) offers another approach to
390 J. Current, Ch. Weber / Modeling constructs to vendor selection problems
consider the number of vendors selected. It may
be formulated as follows:
[P3]
Minimize Z = Y'. Yj
J Just as the basic vendor selection scenarios
subject to
Yj > 1 for all i ~ I,
j~N/
YjE(0,1) forallj~J,
where N/ is the set of vendors that can supply
item i and Yj is defined as before.
The functional, (12), minimizes the total num-
ber of vendors employed. Constraint set (13) en-
sures that each item will be supplied by at least
one vendor and constraint set (14) serves the
same function as does constraint set (4) in [P1].
Several assumptions are made in this formula-
tion. First, it is assumed that the purchasing
managers objective is to minimize the number of
vendors employed. This is a valid assumption in
many vendor selection scenarios, especially in
Just-In-Time manufacturing systems (Ansari and
Modarress, 1986; Burton, 1988; Hahn et al., 1983).
Second, it is assumed that total cost is not the
primary concern, or that all vendors charge the
same price. Third, it is assumed that the vendors
are uncapacitated. Again, articles in the facility
location literature suggest ways in which possible
limitations arising from these assumptions may be
overcome. For example, modifications to the lo-
cation covering models presented in Church et al.
(1991) may be modified to address difficulties
arising from the second assumption and Current
and Storbeck (1988) address capacitated covering
models.
5. Summary and conclusions
In this article, we have demonstrated that ven-
dor selection problems can be formulated within
the mathematical constructs of facility location
models. Given the application specific nature of
vendor selection problems, it is impossible to
formulate a single vendor selection model which
is appropriate for all possible scenarios (Weber,
1990). This fact is also true of facility location
models and is a primary reason for the wealth of
research that has been addressed to formulating
and solving such problems. The location models
presented here are the most basic ones but they
have served as building blocks for the formulation
(12) of models for more complex siting scenarios.
presented here have analogues in the facility lo-
cation literature, so may more complex scenarios.
(13) For example, if one item is purchased from a
particular vendor, it may be necessary or desir-
(14) able to purchase related items from another spe-
cific vendor(s) for reasons related to component
compatibility or geographic location. Hierarchical
location models (e.g. Moore and ReVelle, 1982;
Weaver and Church, 1991) have analogous re-
quirements. Or it may be desirable to select ven-
dors in such a way that vendors contracted to
supply certain items can also supply additional
items in case those items cannot be delivered by
their primary vendor. The backup models in the
facility location literature address similar con-
cerns (e.g. Hogan and ReVelle, 1986; Daskin et
al., 1988). The interactive facility location litera-
ture (e.g. O'Kelly, 1986) may yield insights into
vendor selection problems where vendors interact
to supply component parts. Vendor selection
problems are also frequently multiobjective in
nature (Weber et al., 1991). There is a growing
literature addressing multiobjective location mod-
eling (Current et al., 1990).
In general, it is not beneficial to structure a
difficult problem (i.e. vendor selection) in terms
of another difficult problem (i.e. facility location).
However, given the extensive literature devoted
to formulating and solving facility location prob-
lems, this appears to be a fruitful way to ap-
proach such problems. This conjecture is sup-
ported by other research that has formulated
apparently non-related problems as facility loca-
tion problems.
It is not the intention of this article to present
a facility location modeling analogue for every
potential vendor selection problem, or to imply
that there exists a perfect facility location model-
ing analogue for every vendor selection problem.
Certainly, given the variety of constraints that
may be associated with vendor selection prob-
lems, such analogues do not exist for every ven-
dor selection problem. Rather, it is intended to
demonstrate that vendor selection problems may
 J. Current, Ch. Weber / Modeling constructs to ventor selection problems
be formulated within an existing, much studied,
context with the expectation that the insights
gained from facility location research may be
utilized in formulating and efficiently solving ven-
dor selection problems. Even in problems where
perfect analogues do not exist, the facility loca-
tion literature may still yield important insights,
For example, many difficult mathematical pro-
gramming problems are solved by algorithms em-
ploying Lagrangian relaxation techniques (Fisher,
1981). It may be possible to formulate a difficult
vendor selection problem in such a way that the
relaxed version of the problem is similar to a
facility location problem for which there exists an
efficient solution algorithm.
Acknowledgement
The authors wish to express their gratitude to
the National Association of Purchasing Managers
for partially funding this research under its Doc-
toral Grant program.
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